Are Aircraft Buyers Getting the Information They Really Need?

On January 30th at the 2018 Corporate Jet Investor conference in London, Guardian Jet’s Don Dwyer presented, "Are buyers getting the information they really need?"

Read the transcript:

[Don]: I want to start with a recap, and build on a theme that I heard from Chad Anderson and Brian Proctor yesterday.

In my presentation last year, I started with a recap of 2016 and the 126 models that my company measures. Of those that we track and analyze, there were 1,647 transactions. (Now, that’ll be a little different than NBAA deliveries or NARA numbers because they don’t track the same airplanes. But the percentages are very close).

There were 572 brokers in those 1,647 transactions. My point, at the time, is that in the brokerage community, there are no barriers to entry.

As Brian Proctor said yesterday, the guy that cuts his hair has more stringent requirements to be a hair cutter than to be a broker. We have incredibly varying levels of competence in those 572 brokers. Competence in technical, contractual, regulatory issues, financial acumen and ethics.

This year, we had 1,573 transactions. So while most people say it was a great year (it was for my company), but in the models that we measure, there were slightly fewer transactions. The good news is there were 482 brokers, so it’s coming down.

We said last year that we wanted the bottom number to grow, and the one on the right to go down. So at least the one on the rights going down.

It’s even more prevalent in the in the light jet business, which I think it’s a more serious problem. There were 408 transactions and 220 brokers. By the way, this talk is not about aligning yourself with a big brokerage.

I’ll talk about our company just a little bit. We’re not the biggest guys in the game, but at 60 transactions were one of them. We buy more than we sell. Last year, out of the 60 transactions, 36 were purchases. About half of those were new airplanes. So we have some weight in the in the community.

So this year, there were 457 transactions. A good year. Transactions went up and there were only 164 brokers.

I looked at how did that happen. I think the easiest way to explain it was I think a lot of you know Cyrus. Cyrus Sigari at JetAviva is rolling up a couple companies and putting some together. But what he really did was go out and embrace the community to that he sells to—the light jet community.

He puts on events. He’s at every Citation jet pilots association event. He really went out and embraced that community, which is something I think we all need to do. So we’re going in the right direction and moving toward in that space, I think, one of the better models for brokerage.

I’ll get on with what Al asked me to talk about and the question was are customers being served by the brokerage community? I will tell you across those 572 brokers, it’s impossible that they’re all served really well.

Is there too much data in business aviation aircraft sales? The next thing he asked me is there’s too much data. And the answer to that is emphatically no.

We have a we consulting business along with along with a brokerage. We crunch a lot of data, and I am regularly criticized for providing too much pricing information to my customers.

Let’s think about that. I provide pricing information to my customers. I tell people what airplanes are worth what the markets are doing because that informs them and they make better decisions because of the data.

At the end of this month, we’ll have six full time researchers so we have a lot of data. But I get criticized for showing it to my customers I am NOT giving this out to anybody that I don’t have an exclusive brokerage with.

So is there too much data? No.

I’m not sharing it with your customers, but the reason I get criticized is people will say, "Well it’s harder for us to make money when they know what these airplanes are worth."

I’m sorry but that’s just old school. That’s an old model that’s not gonna work for much longer.

Is there not enough insight in aircraft sales? The other question Al asked me is, "Is there enough insight?"

I will tell you that depends. I think across those 572 brokers yeah probably not but there’s a lot of insight being gleaned from the data. Today that the better brokers, in this room and around the world, are of providing.

Oh, Simon Burroughs I don’t think Simon’s here great young broker here smaller business believe me I love the smaller businesses they’re serving their customers well.

Simon said to me, "data is the new oil."

And I thought that was really interesting. He went on to talk about the insights that he was gleaning from the data, and helping his customers. A really, really great approach, but I think it depends on who your broker is if you are getting the insight.

There’s what it boils down to. I think everybody does a little of both.

There are deal-centric brokerages and there are customer-centric brokerages.

There’s a lot of people out there just turning deals. There is nothing wrong with that if you are buying or selling an airplane. There’s nothing wrong with being a great broker that just goes out and execute transactions flawlessly.

Deal-centric Broker

What does it take to be a good deal-centric broker? Well you’ve to have transactional expertise.

• Valuation

You’ve got to understand the value of airplanes. That’s why I have all these researchers. Valuation is the cornerstone of every good brokerage. Most brokerages aren’t covering 126 models from the PC-12 to the G650.I think I did a dozen "like jet" deals last year. It’s about half a dozen probably. Most of our businesses the super midsize and above. But wherever you are—and most brokerages tend to focus on a smaller segment than we are—you’ve got to be good at valuations.

• Technical

You’ve got to be strong technically. These are complicated airplanes.

• Regulatory

Today you’ve got to be good at the regulatory issues because, one, its going to affect valuations. But, two, it really affects your customers experience when, in a year, they have to change things and invest money in their airplane that they may not get back when they sell it. So understanding regulatory issues is important.

• Contractual

So we say it differently than Brian said yesterday. I love how he said he wanted a standardized contract. I thought that was really, really good. And I know you know one of our guys is on the board and NARA with them. And I love the idea of the standardized contract. It’s hard to pull off in this environment.The way we say it is we are looking for industry standards. We want to negotiate like demons on the commercial issues in the transaction, but then when we go to contract. We want it to move fast, and we want to go to industry standard. We are not trying to gain advantage in the contracting process. I think somebody that’s a good deal-centric broker has to do that.

By the way, there’s times that I’m a deal-centric guy. Somebody comes to me and says, "I just want you to sell my airplane. Stop with the data. I don’t need a fleet plan. Please sell my airplane." So this is what I need to be good at.

Customer-centric Broker

Being customer-centric is different. The expectation of the customer.

Getting lifetime customers. The reason we do it is because—and this is not an idle claim. The first time I heard my brother say it, I said "Should we say that?" And then he brought up all the examples where we do it and anecdotally. I can tell you stories all day long where, over the life of the asset, when you buy, how long you own it, how you equip it, looking for opportunities in the markets, understanding when to sell, and what what’s available from the OEMs in the used marketplace. We save people millions of dollars over the life of the asset. So does every good broker. I’m looking at Brad Harris. Brad has done that time and time again.

What is the expectation of a customer-centric brokerage customer? It’s very different from, "Go get me the next CJ or go sell my 450."

• Transparency

Their expectation is transparency. And this is a hard one for this industry without any regulation.I love what’s going on at NARA. A great thing I heard yesterday, which I hadn’t heard about, was the thrust to be an international organization. With no borders on the regulations, there’s no reason NARA isn’t international. Bravo Johnny for pushing that.Transparency is a big deal in our industry. Our customers are engaged with us to be their advocate.I saw something yesterday in Brian’s presentation that really stuck with me. The expectation of our customer group is there’s hidden money in the deals. That somebody’s making money they don’t know about. The expectation.

To me, that’s extraordinary and wrong. And, by the way, this happens in every industry. And it eventually filters down to the transparent businesses. When in the maturity of an industry, this is coming.To be customer-centric, you have to have expertise in a total cost of ownership. Not only do I have to be good at valuation, technical, regulatory and contractual (what the deal-centric broker has to do), but now I’ve got to be good at a lot of things: residual values, financial instruments, capital planning and market trends.

• Residual Values

There’s a couple of great residual value stories. If we looked at the 10 years prior to 2008 (and that includes 4 years of irrational exuberance), the top 10 models that we sell lost an average of 1.5% over a 10-year period. You bought an airplane in in 1997, you sold it 10 years later. The 10 models lost an average of 1.5%.The same period for us now, it’s double figures. So that’s a sea change in the business.But what performed really well? The G650. I bought a G650 at $59.5M. It’s now 5 years later, I got 1500 hours on the airplane, and I go sell it for $46M or 47M. Do the math. It’s not double digits.The new introductions—the Phenom 300—the only airplane I know that’s really pre-2008 in its residual value reduction, it’s like 3 or 4 percent a year. Well that should affect my buying decision.I still like the Lear 75. It’s a great airplane. It competes with the 800. Eight seats. It does a lot of things well. It’s bulletproof, but boy that if I’m looking at the total cost of ownership. That 3-4 percent a year matters.

• Financial Instruments

I’ve got to understand financial instruments. There’s a few people here (thank you for their sponsorship of this) from Global Jet.We just did a deal with Global Jet where we represented the buyer and seller. That’s something we’re doing all lot more now. Something I don’t love to do is represent both sides of the deal. (By the way, you think transparency is important? Represent both sides of a deal).Well, the guys at Global Jet were brilliant because we had a customer that had leases with more than one financial institution. The guys at Global said, "Okay they want out, but you have another customer. Can we get them into a lease?" And now we got three big companies, and a little one, working together.We saved the buyer millions who bought the best airplane in the world. And we saved the seller millions because getting out of a lease can be incredibly restrictive. So understanding financial instruments is more important today. There’s a whole discussion on leasing buying financing, etc., that’s different. But you’ve got to be great at that to be a customer-centric broker.

• Capital planning

We just love capital planning. We think that whether you own a CJ2 or whether you’re Walmart who owns more than one airplane, you really ought to be smart about the capital you have invested.How long should you own these airplanes? How should you prepare the airplane? Should you be on an engine program? And, by the way there’s never an easy answer to that question because it depends on the model and time, and a lot going on. In that discussion, you ought to be good at capital planning.For every Walmart fleet plan we do—every annual plan we do with these large customers—I probably do 10 "I fly 100 hours a year. Should I own my own airplane and charter it? Should I get a fractional? Should I just keep chartering?"That’s just capital planning. If you’re really involved with your customer, and really always put his best interest at heart, you’ve got to be good at that.

• Market Trends

??????? Of course, you’ve got to understand market trends. That’s what I love about our researchers because they’re living in these markets. Believe me, I’d love to tell you I’m the smart guy in the business. I’m not. These are the guys that live in these markets that tell us what’s going on.So, go back to that 452 brokers—this cottage industry—with no regulation, that anyone can enter, regardless of their ethics. I am so tired of brokers sending me emails that say, "I’m looking for an off-market G550."

"I’ve got three airplanes on the market today. Why are you looking for an off-market?"It’s because they’re trying to make money in the middle. I get it. I’m sensitive to it. I understand that everybody’s got to make money, and sometimes you don’t have control of the customer, so I understand it.

But I’m seeing more off market airplanes today coming across the desk than what’s in a listing service. Well they’re on the market. There’s no real such thing as an airplane for sale that’s off market. I’m sure there’s a good reason to do it, but I haven’t figured it out.But, anyways, if we if we think across that spectrum of brokers…

Jay Mesinger is at the top of those 572. Brad is at the top of those. Johnny is at the top of those. Chad. These guys are all at the top. Joel McCarthy. Great broker.

Move your customer to the better brokers. You owe it to your customers.

I think that you should expect more for your customer and demand more of your broker than a lot of the people in the industry are currently getting.

Thank you.

[Question]: Do you think we should be publishing transaction prices?

[Don]: That’s a great question. Of course, it’s a leveler. In the real estate market, you can go down to the town hall and you figure it out. Should we publish it? You know, I spend a lot of money to get it, and other people aren’t. I’m not anxious to publish what I have, except to my customers. So it is probably a bigger issue than my capitalistic nature, but I don’t know that it would be a bad thing. I mean I think it’s a leveler.

It’s a little difficult when you publish prices and Brian or Chad alluded to this yesterday. They said they said you can make mistakes when you only hear the price you hear about a G550 that sold for $15 million. You don’t necessarily know, was it damaged? Was it up to regulatory compliance? Was it horrid looking? I’m afraid that we live in such thinly traded markets.

It’s an interesting thing about the markets right now. There’s more of G550s than GVs. We really looked hard at the last 6 months of sales and pricing. The six months previous in October when I looked at it, there were 24 sales of G550s; there were two in the GV market in 6 months. That’s levelled out a little bit since then. I’m afraid that those are really thinly traded markets. So, somebody could make a leap if they look at a $9M GV and not really understand what that means. That’s probably where the danger in it is.

[Question] To follow up, let’s say there’s a white tail goes off at a $16M discount. I think everybody in the industry finds out about it. You were talking about valuation. So would everybody at the banks have the same perfect information?

[Don] That’s a great question. I probably buy more new airplanes than anybody in the world we’re buying 18-20 new airplanes a year, year in and year out. I hear about pricing that I can’t get. I hear about $35M Globals and I hear about Challengers for unbelievable numbers. And I can’t get ‘em. I think I’m OK at getting the lowest number I can get.

If it was published, it would protect the person that over pays. We’re very sensitive to the vagaries in the marketplace. If there’s a bunch of whitetails by a manufacturer, and I know I’m gonna pay "X" they sell them all out because they sold them all at "X." Well now they want a $1M more. Well it’s not really good service to buy one of those for my customer because the guy that bought it for a $1M less—he’s the one setting the resale price.

There’s probably some merit to it, but you know people engage us for that and I don’t know… I love the idea of transparency, but I want to make sure people are educated. And that’s harder in this world where there’s a lot of information flow in this world. There’s a lot of people understanding what’s for sale and what’s not for sale and you know it, but man it’s in the weeds. Is it a good buy? Is it a good sales price? You’ve got to have the time and energy and resources and people to dive down in the weeds to understand the pricing.

[Question]: What defines a broker?

[Don]: We’re a broker. We’re representing customers and transactions. I think we wear a couple hats as some other companies do. I think we’d probably marry them better than most but we’re a consultancy first. I spend my energy on consulting. As a matter of fact, our sales guys they’re charged with customer creation. They’re charged with bringing in new customers, and we sell the airplanes internally. The easiest thing in a brokerage is to sell the airplane. Getting the customer to let you give you an exclusive listing is the hardest part.

[Question]: Will you disclose pricing information.

[Don]: That’s a really good question.

We distribute pricing information to our customer base, but there are customers that don’t want to say what they spent on an airplane. And of course we won’t distribute that there’s an interesting thing of how do you find these prices it’s and I hate to say it it’s horse-trading.

First of all, the Blue Book and vRef are fabulous. They are they are stunning in how close they are. They’re measuring a lot of models. We kind of take it a step further, and we work with everybody and try and understand what’s happened in a very short, acute period of time. But yeah, I don’t think people would like to see their name published.

The GE flight department closure was sort of the tip of the iceberg. We’re seeing a lot of companies shrink their flight departments. There’s a lot of scrutiny around should they go to EJM, should we go to FlexJet, NetJets, and it’s all related to the optics, which I think that question addresses.

[Alasdair]: Brilliant. Thank you very much, Don. Thank you.