What is under that thin veneer?
by Jay Mesinger

Have you ever watched the construction of aircraft furniture? It looks rich and heavy with deep wood tones and powerful grain. Start to take it apart and you realize that the deep wood is only as thick as a sliver; it is just a very thin veneer that gives an impression of great depth.

That thin veneer also describes the depth of the current exploding aircraft marketplace. As I have mentioned in previous articles, the segmentation of today’s marketplace creates a far more complex environment than ever before. The new aircraft market used to pull up or push down the entire marketplace below it. Today, however, there is only a very thin segment lying directly below the surface of the new market that is affected by the long backlog of the new aircraft market. This segment is defined as like-new, low-time, current production aircraft.

If you are buying or selling an aircraft that fits in that thin space, you will experience a wild ride. If you are buying, hopefully your broker is positioned to get the first call. They should be communicating regularly with the segment of the market that most often deals in the type of plane for which you are looking.

As a seller, just because it looks easy and the prices paid have never been higher, the process only begins with the offer. Getting the deal across the finish line is still complex and filled with landmines. Additionally, overseas buyers and de-registration issues make these transactions more difficult than ever.

In fact, lately we have had the privilege of marketing several of these like-new aircraft, and one of our biggest challenges is to set a price. It seems that as one aircraft sells, the relationship to the sales price of the last sale is not at all tied to the sales price of the next sale. These are totally uncharted waters. The price is often just about availability. We recently put an aircraft on the market, didn’t even have specifications complete, and on day one, we received four full-price offers.

Conversely, as a buyer we have been very skillful in positioning ourselves to get the advance, first call. Keep in mind that this first call only gives your buyer the opportunity to bid. It does not give any price advantage or assurance of success. If you are working with a buyer, the best advice to give them is to be ready to move at lightning speed and to pay top dollar - in some cases asking price, or in rare cases, above ask.

If you have a buyer that feels that waiting to buy is better because the market is crazy and buying now will be too costly, I would say that two out of three of the last comments are correct. The market is crazy, the prices paid today for that like-new aircraft will be higher than ever, but waiting for a softer market is the part that is not correct. So far, over the last twelve months, those that have taken a ‘wait-and-see’ attitude will find themselves paying more, not less.

There are some other important points in buying or selling today. As sellers in a demand-rich, supply-short environment, many are not content with what has been the traditional method of contracting. Traditionally, a deposit is put down and remains refundable until after the pre-buy inspection is complete and the buyer is presented with a list of items discovered during the inspection. At that point, in the sole and absolute discretion of the buyer, the aircraft is accepted or rejected.

The deposit is deemed non-refundable and the deal binding only after the requested items to be corrected are agreed upon. Of course, the seller must correct the items agreed to and the aircraft must be free and clear of encumbrances prior to closing. The definition of that deal is soft-soft. The buyer is not obligated to buy and the seller is not obligated to fix or sell.

This is very loose and allows for continued contemplation on both sides. Sellers fear that they will take a precious commodity off of the market for over a month just to find themselves without a deal. Buyers fear that the seller may get a better offer during this process and just refuse to fix items. More and more often, sellers are demanding a hard deal; one which describes the condition of the aircraft and indicates that the buyer’s deposit is nonrefundable from day one, with the only outs being major damage or corrosion, or that the aircraft is not as represented, equipment or time wise. The buyer must buy.

The seller is also bound in this type of transaction and cannot decide to not correct items found that meet the requirements of the contract. This is a hard-hard deal. Frankly, as a buyer or seller in this marketplace everyone gets a better shot at completing the deal.

If, as a buyer, you are really not sure if buying is the end result, do not get into a hard-hard deal. If selling for sure is not your goal, then this is not the deal for you as a seller either. If locking up the sale from both perspectives is the goal, the hard-hard deal creates winners on both sides.

I realize that this article only deals with a very thin segment of the marketplace. Next month’s article will dig down to the next layer of the market. This next segment is not as thin and not as active from an immediate and high price standpoint. So what is under that thin veneer? Everything else!