Contributed by Doug Kvassay, Aircraft Sales Rep with Duncan Aviation
An example of a 40-year life depreciation schedule for a 1981 Westwind 1
There is a general school of thought that the value of a business aircraft, once purchased, will remain relatively flat over time because it is maintained at a higher standard than most other capital investments; believing the investment in major equipment upgrades and maintenance will slow the business aircraft depreciation process. However, we have all seen prices increase dramatically in good times and fall far below expectations when the economy slows.
For example, in 2010, Duncan Aviation had a 1981 Westwind 1 available for sale. This 30-year-old aircraft was outstanding. Over the course of the previous 17 years, it had been well-maintained, as well as repainted and refurbished by Duncan Aviation. Prior to the last recession in 2008, we would have placed the value of this aircraft in the $1.6 to $1.8 million range. However, as with all aircraft in a recession, the value was deflated and we were faced with an aircraft that would need to be priced in the neighborhood of $750,000 to be competitive.
At the same time the owner thought he was giving the aircraft away, the buyer was thinking he got the “deal of the year.” Both believing values and prices would rebound to pre-recession levels.
Business Aircraft Depreciation Schedule
So what is the expected depreciation path a business aircraft will take? As a general rule, Banks and various financing institutions will value a 10-year-old business aircraft at about 70% of the price when new. But to get a clear picture of aircraft older than that, I did some research of my own by creating a simple 40-year life depreciation schedule with a residual or salvage value. I assumed faster depreciation during the first years, leveling off as the aircraft aged. After overlaying my data with Aircraft Price Digest’s historical pricing for a 1981 WW1, I was surprised how well the lines fit considering the economic variations during the last 30 years.
Pricing dropped during the recession of 1980-1982 and continued down until after the stock market crash in 1987. Prices then moved up until the recession in the early 1990s when they again softened. Prices moved to unprecedented levels during the period of “irrational exuberance” in the mid/late ‘90s until the dotcom crash in 2000. With the graph showing a depreciated value of around $800k at this time, I realized from this study, the Westwind will probably never be worth more than $1 million again.
After using this same model on a number of aircraft of different vintages, two things became apparent:
1. Business aircraft pricing in the secondary market is never level or static. It is always moving up or down, absolutely dependent upon the current state of the economy. And,
2. During good economic times, dramatic price increases for popular models will most likely only be seen for aircraft fewer than than 20 years old. This is reflected in the graph where the price of this aircraft rose very little in the last economic upturn.
The pricing of some popular models, such as Falcons, will, on average, stay a little above this line throughout most of their lives, holding their values better than most. Other aircraft run below the model’s line and you can see they never enjoyed the popularity or pricing support of some of their competition.
Business aircraft have an economic useful life and there are three events that will bring that life to an end as the value of the asset approaches the residual or salvage value. These three things are:
1. Major airframe maintenance
2. Major engine maintenance, if not on a program
3. Damage beyond economical repair
A business aircraft is a sound business investment, but it is still a depreciating asset with a useful life, maybe somewhat longer than most other capital equipment.
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Doug Kvassay is a part of the Duncan Aviation team, which consists of four Aircraft Sales Representatives. He specializes in advanced aircraft aftermarket analysis and managing complex transactions. His aviation career began in 1980.