Residual value of a business jet: what eats the capital

A conversation about an aircraft is usually built around the purchase price and the cost of keeping it. The third figure stays off-stage, although in money terms it is comparable with the first two: what the aircraft will be worth in five years.

How the value behaves

A new business jet loses a noticeable part of its price in the first three years. After that the fall flattens out, and an aircraft ten years old depreciates slowly.

Hence the practical consequence for the calculation: buying an aircraft aged 8–12 years transfers the bulk of the depreciation to the previous owner. You pay for the remaining life.

The other side of it is that the cost of upkeep rises with age, and at some point the saving at entry is consumed by maintenance.

What moves residual value up

An active engine programme. An aircraft with coverage sells for more, and the difference usually exceeds the sum of the payments accumulated. The buyer is paying for a risk that has been removed.

Continuity of documentation. Logbooks without gaps, service bulletins complied with, confirmed provenance of components. Every gap turns into a discount at the next sale.

Current avionics. Equipment requirements change, and an aircraft that cannot be released into the airspace you need without a retrofit loses part of its buyer pool.

Liquidity of the type. Average days on market for a model is an open figure. For the Challenger 350 it is 72 days, for the Challenger 300 it is 165. A factor of two means that exiting the asset takes two and a half months on one type and five and a half on the other.

What drags it down

Idleness. An aircraft that has stood unused for two years needs recommissioning, and sometimes replacement of items that have run out calendar life. A buyer sees this and prices it in.

Non-standard finish. A vivid bespoke cabin narrows the circle of buyers. A neutral finish sells faster.

A history of aviation occurrences. Even a properly documented repair reduces the price. An undocumented one makes the aircraft hard to sell at all.

A rare type. A small production run means few buyers, a long search and a weak negotiating position.

How to calculate it

Total cost of ownership over a period is calculated like this: purchase price minus expected sale price, plus all expenses across the years of ownership, plus the cost of the money committed to the purchase.

That last figure is often left out, although on a sum of ten million dollars, against a return of 15 per cent a year in the core business, the opportunity cost over five years is comparable with the aircraft itself.

What follows from this

A decision to buy an aircraft is a decision to freeze capital for a period set by the liquidity of the type. Before calculating the cost of the flying hour, it is worth looking at two numbers: the average days on market for the model and the spread of prices within it.

The first shows how quickly you will exit the asset. The second shows how far the condition of the particular aircraft moves the price, and therefore how much attention the documents deserve.

Buying, selling and arranging finance for aircraft sit together in my work, and the difference between a new aircraft and a used one shows up first of all in the timeline of the deal: a new aircraft takes around a year and a half from contract to handover, while a deal on the secondary market fits into roughly two months. When a purchase does not line up with a client's own objectives, I talk them out of it: frozen capital comes back more slowly than it looks at entry.