Latest / VREF | The Truth About the Aviation Market / The Jet That’s Worth More Dead Than Alive | EP 49
Transcript
- Addison: Welcome back to the truth about the market. I'm Jason Zilberbrand. I'm president of VRef. Every week we pull back the curtain on what's really happening in the aviation marketplace, what aircraft are actually worth, what they're actually going to cost you to own, and the things that glossy listing sheets won't tell you. No spin, no sales pitch, just the truth about the market. And today's episode comes straight from the mailbag. And it might be the single most important question a used aircraft buyer can ask. It touches engines, lawsuits, orphaned airplanes, and the one number nobody wants to talk about, what your airplane will be worth when it's time to get out. If you're anywhere near the market for an out of production business jet, a citation, a hawker, a learjet, do not skip this one. This one comes from Paul Bordeaux, Chief Pilot at Hargrove Engineers and Constructors down in Mobile, Alabama. Paul wrote in, I just wanted to make a suggestion for a podcast topic, factors that affect assessing future demand for a given aircraft type, particularly out-of-production business jets. As a buyer in the market for a used aircraft, citation Bravo, CJ2, Hawkers, Learjets, etc. How do I properly weight the consideration of future demand in deciding what type to pursue? Well, Paul, first off, thank you. Because this is exactly the right question, and almost nobody asks it before they buy. Everybody asks what the airplane is worth today, but almost nobody asks what it's going to be worth in five years from now, and what has to still be true for them to want it. So let's get into it. And to do that, we have to start with the engines. Because on an older jet, the engines are the story. So let's talk about the engines and old aircraft. As business jets hit a certain age threshold, and typically that's about 15 years, two things happen. One, you get what I call an inverted value. And two, the engines become worth more than the airframe, even in a part-out situation. And you got to let that sink in for a second. Because the two things hanging off the back or under the wings are worth more than the entire rest of the airplane. The airframe, the interior, the avionics, all of it. So how does an airplane get to that point? Well, typically an aircraft gets purchased new and it's automatically on roll enrolled on what we refer to as an engine maintenance program. And guys, there's a slew of them. MSP if it's Honeywell, ESP if it's Pratt and Whitney. Rolls-Royce Corporate Care, if it's Rolls, then Textron's got a tap program, and then there's the independence like JSSI. The mechanics are the same everywhere. You pay an hourly rate for every hour you fly, and at the end of that term, there's money there. When a scheduled event hits, an overhaul, a hot section, the program pays for it. When a service bolton comes out, the program pays for it. And it makes a lot of financial sense. Not because you're hedging What it's going to cost to maintain the aircraft, you're not beating the house, guys. The house always prices the risk correctly, but because you're budgeting properly, so there are no surprises. See, that's what an engine program is. It's about no surprises, a flat line budget. When you pay a little bit at a drip at a time, it's a lot more palatable than writing a $1,2 million check the day the event happens. Ask anybody. Who's had a hot section come do off program, what that phone call felt like. And so here's the key. Here's the thing that makes programs so powerful on an aging airplane. As the aircraft ages on a program, you get to treat those engines as if they're zero time. And you do that forever. The airframe gets older every year, the paint fades, the interior wears, the avionics fall behind in technology, but the engines on a full program, they're Financially frozen in time. That's why the value inverts. That's why on a 20-year-old jet, the program status of the engines is the first question every broker, every appraiser, and every smart buyer asks. Okay, let me give you the picture in dollars. Because inverted value sounds academic until you see it. Take a jet that sold new for twelve or thirteen million bucks. Twenty years later, the market says it's worth a million and a half dollars. Two overhauled engines off that airplane, or even the program equity sitting behind them, can be worth more than that entire number, which means that the airframe on paper is worth nothing or less than nothing once you net out what it needs. That's why it's an inverted value. The airplane has become a delivery mechanism for its own engines. So take an aircraft that's 15, 20, 25 years old and still on a 100% program. That's the key phrase. 100%. It's gotta be 100%, not just for the schedule maintenance, but for the life-limited components too. Let me explain what those are, because this is where buyers get hurt, really hurt. Big surprises. A turbine engine is made up of a bunch of parts, and those parts have life limits. They're referred to as life-limited components. You'll also see them written out as the acronym LLP. Each one of those carries a very high cycle count. 15,000 cycles, 30,000 cycles, and a cycle is a takeoff to a landing. One trip around the pattern, one cycle. One four hour leg to the coast, also one cycle. So your mission profile, where you live, how you operate the aircraft, that's what dictates how many cycles you consume for every hour you fly. Short hops, quick trips, You're eating more cycles than the hours you're consuming. Super long flights, way more hours and cycles. Two identical airplanes with identical total time can have wildly different lives left in them depending on how they were flown. So why does any of this matter? Well, because an engine overall happens when the cycles remaining inside those components can't make it to the next event. A hot section. If it's a Honeywell engine, they call it a midlife or an MPI. So you got Two big events, you're essentially prepaying for every hour you fly. And whether you hit them on schedule or early depends entirely on those cycles. Now, here's the reason the whole industry works this way. Because without programs, the aftermarket, the pre-owned used aircraft market, they would have a very tough time moving any of these aircraft at all. A 20-year-old jet with run out engines and no program is close to unfinanceable and close to uninsurable. At any sensible number. But here's the thing: that's exactly what's happening out there. People are buying this stuff every day. They don't understand what they're buying or how much they're paying for. Basically, a lot of nothing. One more thing on programs while we're here: transferability. See, when that airplane sells, the program it follows the airplane. That's the point. That's why enrollment protects resale value. But read the fine print because programs come in all sorts of flavors. Some cover everything, cradle to grave, some are prorated, some have buy-in gaps, transfer fees, carve outs on life limited components, which remember are the most expensive part of the engine. A programmed airplane where the program doesn't cover life limited components is not the same animal as 100% coverage, and the market absolutely prices the difference, or at least the smart money does. So let me walk you through what a lot of nothing looks like. And By the way, if you're not sure where a specific airplane sits on that curve, that's literally what we built VREF to answer. Before you get emotionally attached to a tail number, pull the V Rev value, look at the engine program status, see what the number does with and without it. It takes five minutes, but it's the cheapest insurance in aviation. Okay, back to the airplane. When you have a 15 or 20-year-old aircraft, Everything inside of it is obviously 15 or 20 years old, which means you're dealing with 15 to 20 year old technology. And that means you're also dealing with a pilot problem. Because the pilots who know these airplanes aren't the latest and greatest out of training and replacements aren't readily available. See, the older the aircraft, the fewer capable pilots there'll be. Because people don't want to get typed on an old fair airframe that doesn't have a big market behind it. And honestly, it makes sense. If you're a young professional pilot, are you spending your typewriting money on a dying fleet? I don't think so. So, to stay ahead of the bell curve, you have to make a massive investment into any aging aircraft. And you do that through retrofitting the avionics. ADSB was the warm-up. Fans, CPDLC, data link, connectivity, LED displays. It gets super expensive, super quick. And here's the problem: there is a threshold. And once you cross it, You will have invested more money into the aircraft than it will ever be worth. Full stop. Guys, I see the appraisals every week. Owners have put a million and a half dollars into panels and paint on a jet and an airplane where the market values are stuck at $900,000. Now, that's not to say there's no aftermarket for these airplanes. Apparently, there always is, despite what a lot of people already know, which is to stay away from this kind of stuff. But somebody always steps up. But look at what they're actually buying. If the engines aren't on a program and the avionics haven't been refurbished, the way to look at that aircraft is very simple. It's a check waiting to be written. Sure, it might be airworthy today. It might fly beautifully. But one little tiny thing, one part, one inspection finding, one AD, can park that aircraft on a ramp indefinitely, and that is exactly what's happening today, all over the country. And here's the twist. It's not just the one off program airplanes getting parked, right? You got a lot of people who did everything right. They paid into the programs, they're finding out these programs, are not paying for what they said they were going to pay for, which is resulting in lawsuits. And that's resulting in honestly some pretty insane things if you stop and think about what's being alleged. And I want to clear about where I'm coming from about this, because this is my background. I built JSSI. I was on the ground, grassroots. I built that company with my family, one aircraft at a time. I know exactly how hourly program businesses work from the inside, what the promises are, what the reserves look like, and what it takes to actually deliver on contract. And I'll tell you the only reason that JSSI made it past our first year in business is we did what we said we were going to do. That was the entire business model. An engine program is a promise, guys. You collect money for years and years and years before you ever have to do anything, before you ever have to perform. The entire product is trust. And I think there's been a massive shift in this industry on exactly that point. The lawsuits absolutely back up what I'm saying. The calls I get from operators every single week back up what I'm saying. They're paying into these programs. And the programs are not making rental engines available. They're not doing the overhauls, they're not doing the hot sections, they're not doing the MPIs or the midlifes per the contract terms. Both sides agreed to. The operator held up their end, the drip every hour, every month for years. And when the event finally hits, the counter's empty. And look, I get it, COVID seriously rattled their cages. It really screwed things up. Labor walked out the door and it didn't come back. Parts pipeline broke, and in my opinion, some of these shops will never fully recover from it. And they have such a massive shortage of labor, such a massive shortage of parts, they can't afford to build the inventory they need to catch up. Now, I'm not saying anybody woke up wanting to fail their customers, but intent doesn't fix your airplane. So what does that really mean for you, the owner or the buyer? It means everybody operating one of these out-of-production aircraft with old technology and old engines is at the mercy of the engine manufacturer. First and foremost, not the airframe OEM, not the broker, the engine manufacturer. And if they decide they can't support your engine, or worse yet, they just don't want to, you're not going to be the first to know. You're going to be the last. So let me make this concrete. Because there's a lawsuit working through the courts right now that is basically this entire episode with a docket number. Standard disclaimer: these are allegations and pending litigation. Pratt will tell their side, and what follows is my read as an appraiser, not a legal conclusion, because I'm not a lawyer. ATI Jet out of El Paso, they operate 24 Learjet 60s. That makes them, good or bad, the largest Lear 60 operator in the world. Starting around 2016, they enrolled that fleet on ESP, which stands for Eagle Service Plan. And these weren't normal ESP contracts, they were gold agreements, which is Pratt and Whitney Canada's program that covers the PW 305A engine that is on the Lear 60. Over the years, they paid more than you guys ready for this? $20 million in hourly fees, north of $30 million in total payments by their math. Part of the deal. And this is the standard across the industry, was rental engines. If a covered engine comes off wing for more than 10 days, the program provides a rental. So your airplane keeps flying. That's the whole reason a charter operator signs up. You're not just buying maintenance, you're buying uptime. And here's what the complaint alleges: Pratt kept a pool of roughly 12 rental engines to support more than 800 Lear 60 engines flying worldwide. 12. Twelve motors for that entire fleet. And according to the complaint, Pratt's own internal analysis said industry practice calls for rental availability at 4 to 8% of the installed fleet. Call it 32 engines at the low end. ATI says they lost hundreds of days of charter revenue with airplanes that were just sitting on the ramp waiting for engines that they already paid to have available. And they're now asking the court to tear up. Their January 2025 settlement, they say they were fraudulently induced into terminate more than a dozen ESP contracts and award them damages. And before anybody says this is a one-off, Pratt's parent is getting squeezed from every direction right now. Airbus filed a damages claim this spring over engine delivery failures on the commercial side. ATI Airways is chasing 150 million euros with airplanes parked in Naples. The support strain is not a Learjet quirk. It's systemic. Now, think about what this does to values. Every Lear 60 listing you're see you're ever seeing says engines on ESP gold. It's like gold, the gold bar standard, right? You don't see anything else. That enrollment is priced into the airplane. It is the value on an aging Learjet. So what's the enrollment worth now if the program can't give you a rental engine? That's not a rhetorical question, guys. There are twenty-four airplanes in El Paso finding out the answer in federal court. So, where's the sweet spot? And I think that's really the question that Paul asked, and it's a really smart one. When you're looking at buying a pre owned aircraft that's out of production, here's the homework. There's no shortcut on this. First, how many aircraft are in operation? And I'm not talking about a guess. You have to know how many. How many were actually built? And then this is the part everybody skips. How many are getting removed from the market every single year? Through part-outs, or because parts and support dried up. Production runs, survivors, attrition rate. Those three numbers tell you the big picture. A fleet losing 3% a year is a countdown clock, guys. And you can do the math on where it is when you want to sell. Second, you gotta call operators. Get these guys on the phone. You cannot rely on the vendors. They're not going to tell you the truth. They're selling you something. But if you're looking to buy a Lear 60 is a good example, call other people who operate them and have for a long time. Ask them the challenges they're facing and the ones they see coming. Ask them what's on back order and what they can't get. Ask them what their last unscheduled event cost and how long the airplane sat. And what you're going to find if you're new to this game. Is that each aircraft is basically its own niche market, its own little economy. You have to know where parts are going to fail and how often. And then you either build yourself a surplus or you know exactly where to get them before you need them. And don't assume this is only an orphan airplane problem, because I got a call last week from a woman in South America looking for brakes for a citation Mustang. A Mustang, people, that's not an exotic airplane. And she couldn't find them anywhere. And she called me of all people. So yeah. There's a lot going on out there right now. This, by the way, is exactly the work we do on the appraisal side of VRef every day. Fleet counts, attrition rates, program status, retrofit exposure, all of it rolled into what an airplane is actually worth and what it'll cost you to keep. And if you're serious about a specific airframe, talk to an accredited appraiser before you wire a deposit. Don't do it after. Whether that's us or somebody else, get the homework done by somebody who isn't. Being paid on the closing. So let's get back to the sweet spot where you really want to be. If the airplane's out of production, here's the checklist. A, how many were made, how many still remain, and where they live. The last one is equally important and nobody thinks about it. Are most of the surviving fleet based outside your region? Or are they in your backyard? Because fleet concentration is parts availability. It's mechanic familiarity, it's your future buyer pool, then service facilities. Where are they? Who owns them? Are they independent? Or are you still dealing with the manufacturer for everything? And then yes, the big one, the engines. Whose engines are on the plane? Are we talking Honeywell, Pratt, Rolls, Williams? Because there's a big difference between all of them right now. If you're on an engine program and you're on Pratt, and again, this is my opinion based on what's being alleged in these lawsuits and what operators tell me on the phone every week, I'd tell you probably have issues. You might be better off dropping the program and rolling with somebody else if you can find anybody else. I'm not sure there is anybody else for some of these engines. Or you'd self-insure. You become your own program. You take the money you're giving to them and put it in your own account and take the risk yourself. Honestly, I think that's what these lawsuits are telling us people are already being forced to do. Hopefully it gets corrected. If you're looking at an aircraft with Honeywell engines on it, I'd actually say you're probably in the best situation of anybody today. And it's simple math. There are just so many of them out there. There's so many 731s, thousands, decades of history, real third-party competition in the overhaul market. You can get engines regularly. You honestly don't need an engine program on 731 airplane. If you don't want one, you can self-insure and manage the operation pretty well. But here's the last part. Because it applies to every airplane in this episode. Trust me, There will come a day when you can't get what you want on every out of production airplane that day is coming. The entire game is making sure that you've sold the airplane before that day arrives. Guys, don't be the last owner. So let's bring it home for Paul. Because he gave us four candidates. A citation Bravo, a CJ two, Hawkers, and Learjets. Let's run through the engine lens, okay? The CJ two, Williams FJ forty fours. Textron still behind the airframe. Single pilot. Big active fleet. Future demand is probably the strongest of the four. And the market prices it that way. You're paying for safety. The Hawker 800 XP, well, we all know it's an orphaned airframe. And that's real. And parts and support are at serious risk today. But it's got 731s on it. The best supported engine in the business. You get a stand up cabin for the price of a nice King Air. You buy it. To fly it, not to flip it, right? And you fly it until the end. The Bravo, well, Textron airframe support is a plus. Entry price is the cheapest. But those Pratt 530s and it's a 30 year old design. Man, you're buying engines. Make sure you understand the support picture before you fall in love. Cause it's scary. I'm telling you right now, the price of those overhauls is seriously scary. And the Lear 60, well. It's a great flying airplane. And everything we just spent in the last, I don't know, twenty plus minutes talking about. Pratt three fives, single source support that's currently being litigated, an orphaned airframe, and it's thirsty. And of the four, that's the one where future demand should keep you up at night. Paul, the waiting you asked about on an in production airplane, future demand is maybe ten, fifteen percent of the decision. On an out-of-production airplane, make it a third because it doesn't just hit resale. It compounds into your insurance, your financing, your dispatch reliability, and then your exit. Ask one question about any airplane you're considering. Who buys this from me in five to seven years? And what has to still be true for them to still want it? If the answer depends on one engine shop's goodwill, price that in. Or Pick the airplane where you don't have to do it. So that's the episode. I want to thank Paul for a really great question. That was a good one, and I mean it. The mailbag drives the show, guys. So if you got a topic, send it in. If you got value out of today, do me a favor. Subscribe, leave a review, forward this one to the guy in your hangar who's about to buy something old with two engines on the back. I'm Jason Zilberbrand. This has been the truth about the market. The market doesn't care what you paid, it only cares what it's worth. We'll see you next week. And until then, fly safe and stay smart.