A Current View of “Normal”

Tony Kioussis (00:33):
Welcome to another Asset Insight podcast covering the aircraft ownership life cycle. I am Tony Kioussis, president of Asset Insight and your host. A few months ago, we recorded a podcast with Jay Mesinger, CEO of Mesinger Jet Sales that provided listeners his thoughts about how business aircraft sales were being affected by the COVID-19 crisis, and the value of utilizing an experienced aircraft broker, especially during the pandemic. The podcast was very well received by our listeners and Jay agreed to provide a market update as we enter, what has historically been the fourth quarter transaction frenzy. Let’s start off by talking about who you presently find to be the active buyers. Is it corporations, individuals, first time buyers? What groups are actively seeking to purchase aircraft as we enter the fourth quarter?
Jay Mesinger (01:25):
Tony, when we did this last and because this is all so new, this COVID mess, it was kind of hard to know. In March and April, we got lots of calls from people who probably in some case had too much time on their hands as we all did then. One day, they were calling their aircraft broker, another day they were calling their yacht broker. But the theme that we heard in March and April was I’m never going to fly on a commercial airplane again. In all due respect to those people calling to me in those moments, it was like cheap talk. Starting in June and July and now all the way through, that’s actually translated into real activity, real buying and real desire to not get in that commercial airline. And most of their flying is domestic. Very little international flying is being done.
Jay Mesinger (02:16):
So it’s really translating people are coming into the market. The buying segment now are first time buyers in almost every case and they are getting involved where they had never been involved. And the first time buyer takes this tremendous amount of different effort and patience than a seasoned mature flight department does. There’s a new language to learn, there are new nuances to understand, understanding the expectations and that’s a big piece of a first time buyer’s process. And we take great pains to make sure that the expectations of the buyer are correct. The cost, what it means, the implications, removing fact from fiction and making sure that they know that there are stipulations to how you depreciate an airplane 100% and what you have to do to put it into service and make it work. So there’s a whole lot that goes in extra for the first time buyer.
Jay Mesinger (03:07):
The corporate buyer has almost completely retreated for the moment and they’ll be back. But right now, be it optics of not wanting to get out while they’re in many cases, large layoffs or furloughs and be buying airplanes and flying around. Or whether it’s just the fact that your customer doesn’t want you to come see them. So there’s really no flying going on, and there’s very little if any international flying because it is still so restrictive. So the buying segment right now is really the small corporation and not necessarily the public corporation directed by the principals or the high net worth individuals. Most of the use is like I said, to get from their home in the Hamptons to their home in Aspen. And I don’t want to minimize that but people have no ability to really be able to travel. So as we have matriculated through this, that’s what we’re finding as the buying population. And let me also say that in 46 years, we’ve never been busier.
Jay Mesinger (04:06):
And I don’t mean busy because our phone is ringing more. I mean busy because when it rings, there’s a buyer on the other end. What’s retreated is a corporate buyer. The work we’re doing now is the transition work for the corporations that have been our clients for years, where they’re fulfilling and finishing a transition, where they might’ve gone to the factory two years ago, placed orders for new airplanes. They’re coming due now and so we’re selling the relinquished airplanes to make room for the new ones. But we aren’t really taking the corporate to the market to buy.
Tony Kioussis (04:36):
I recall the 2016 election as being quite disruptive to business aviation. Do you feel this is likely to be the case during this fourth quarter?
Jay Mesinger (04:45):
I don’t think it’s about who wins. I think it’s going to be disruptive. And I think the disruption could last from a month to three months, depending on the severity of the disruption. But I do believe it’s going to have an impact. Every election cycle creates some people who do go to the fence and sit and wait it out. In this case, I think that it’s not just about people that would really rather be on the fence and are using an election cycle as an excuse to do it. I think it’s going to be disruptive.
Tony Kioussis (05:17):
Let’s go into that a little bit more. What do you see at the moment and on the near term horizon, relative to pricing?
Jay Mesinger (05:23):
Well, when we spoke last and I might’ve said this, it bears saying again, because it’s still a reality. The right hand bracket of COVID has not been put in place. And what I mean by that is let’s go back to Hurricane Katrina and I don’t want to minimize for even a moment, the loss of life and the loss of property and the angst and the pain and the suffering that went with that. But that event lasted three days. Now it took much more than three days to get New Orleans back up and growing and get people back in homes and all the things that go with it. But the event took three days. COVID is taking a period that we don’t understand where the right hand bracket is. When will it be over? When will the experiment of reopening our economies, not just domestically, but globally go? And how successful will they be? And how long will they take? How long will it take for a vaccine? And how quick can you get that into play and make a difference in terms of people’s lives, returning back to normal, the businesses lost, the unemployment?
Jay Mesinger (06:23):
So what we really have is a very difficult time, but what it’s done to pricing, it’s probably at this juncture, again not knowing the end bracket, it’s impacted the price of airplanes from pre-COVID to current, anywhere from 5 to 20%. And probably on the average, 10 to 15% pre-COVID pricing versus now, plus by the way, what is a traditional residual loss rate, which is 7 to 10% a year, which is sort of where we were when we went into this. So you have the traditional residual loss rate, and then you’ve got this COVID impact. That 5, 10, 15, even 20% is sustainable. When we went through 2007 and 2008, the price of airplanes went down 50 to 70% overnight.
Jay Mesinger (07:12):
When we went through 2015 to 2017, when the price of oil went from $150 a barrel to $25 a barrel, airplane’s residual loss rate went to 4 or 5, even 6% a quarter, 25% a year, and it lasted for 2 years. That wouldn’t be sustainable. And I don’t mean to minimize if the value of your airplane went down 10% or 15% or 20%, but it’s much more sustainable than if it had gone down 50% overnight. So that’s what I think the effect of COVID has done on pricing. People will say to me, they’ll send me articles that have run lately, clients of mine that show demand is way up. And they’ll say, don’t you think that this high demand is going to mean that prices are going to come back up on planes.
Jay Mesinger (07:56):
I’ve never seen prices come back up on airplanes. The only thing that had some semblance of that was in 2003 through 2007, when the emerging markets went on fire and were just buying planes as fast as they could. And manufacturers couldn’t keep up with it and people were paying premiums on new or near new airplanes. But I think in this case, when people speak to the increased demand and we are seeing it, as I said, a few minutes ago, I’ve not been busier. The increased demand brought on by the high net worth individual coming in as the first time buyer is a wonderful thing. But remember the entire corporate side of our buying has retreated. So you don’t have a huge corporate buying and huge first time buying, creating a demand that outpaces supply.
Jay Mesinger (08:43):
So though there has not been a new run or flood of supply and I think that’s a good thing. People aren’t just selling and dumping. There also haven’t been distressed sellers coming on the market, but the demand of the first time buyer is balanced by the lack of buying of the corporation side. Now, as time goes on and the corporations come back in and the first time buyers come back in, I think what we’ll just have there is a continuation of a more balanced market, as opposed to much more demand than there is supply, which in traditional economics would drive prices up. I think we’re going to be fine. And I’d much rather be in a healthy market anyway, doing anything than in a market that’s sick and has way too much supply or way too many distressed sellers.
Tony Kioussis (09:28):
I share your views on pricing when it comes to recovery of pricing, and people’s wishful thinking that something magical is going to happen. I’ve never seen that in the marketplace with some very specific exceptions. I really don’t think it’s going to happen this time either. I’ve read the paper written by a Mesinger Jet sales entitled, Blueprint For Success During COVID-19. Could you walk the audience through what leads to success in a market like this, whether you’re a buyer or a seller?
Jay Mesinger (09:59):
I did that in March and it was meant to sort of describe a new reality for viewing airplanes, moving airplanes to pre-buys, having the ability to oversee your airplane during a pre-buy or maintenance event. But then what happens to the FAA and how they treat paperwork differently than pre-COVID. And it actually brought about the advent of the virtual tour to be even more important when your photographer shoots the airplanes you have for sale. Because people were not willing, they’re a little bit more willing today than then to travel. And by the way, the seller is no more happy about having strangers come into their hangar to see their planes, or go on board their planes, not knowing are you free of COVID. They’re still taking temperatures, but they’re restricting it, going to a service center, being able to accompany your airplane and be there during the entire pre-buy is very restricted. Some OEMs are less or more restricted than others. All of them have a protocol.
Jay Mesinger (10:55):
And then the FAA was really bottlenecking the process. At the closing window in Oklahoma, you just put your paperwork in a box and twice a day, they’d come out and get the box. And then it would take days to get it through a process to be able to get a timestamp. So you had to wait, especially if you had lending associated with it. Lenders weren’t really going along with the fact that they had to release the lien on the airplane basically four days before it could be put in the new name. And you sort of had a limbo there, which was hard for everybody to understand. The FAA has not changed the box, but they’ve changed the frequency with which they check the box and the timing with which they can get the paperwork turned around now. So that’s settled down a bit.
Jay Mesinger (11:39):
But we still are doing things differently today and it’s impacting how we do it, how we show planes, how we visit with planes, how we move planes and the timing of that. The other thing about that is that, and I didn’t even really understand it when I wrote the paper, as well as I understand it now. The supply chain side of things, getting parts, getting engines overhauled because of the parts that go in the engine. There’s so many things when we write contracts now that cause us or should cause us to elongate what would be a drop dead date to get a transaction finished. Because you just don’t know where the supply side of things will be during this process.
Tony Kioussis (12:17):
Well, let’s talk a little bit more about the supply chain. Is there something more that you want to talk about how buyers and sellers should view it? Because I know the supply chain has been a problem for many industries.
Jay Mesinger (12:33):
I think buyers and sellers have to view it with an added amount of patience for what could be a delay in an airplane being returned to service. I had some engines on an airplane that we were buying for a client and they were being overhauled. Those engines would have been returned to the airplane during the course we were buyers, would have been returned to the airplane during the course of the pre-buy and we would have been had them reinstalled on the airplane we were buying, the original engines, post overhaul. And we would have bought the airplane and closed on the airplane with the engines that we would have expected to be on it, on it.
Jay Mesinger (13:09):
During the course of that, because of supply issues, the engines were delayed almost four months and we had to drastically change the contract to accommodate for us being willing to take the loaners that were supplied and then have to paper all the contingencies that could occur in changing the loaners and putting the new ones back on, all the costs, all the risks, all the damage that could occur. What you might find when they change the engines that you would have found in a pre-buy and would have been a seller responsibility without a lot of extra gyrations and contracting. Those are the kinds of impacts. It’s would you take an airplane with some loner piece of equipment or engine on it, if you get bogged down in a supply side issue? And then how do you paper that in the contract?
Tony Kioussis (14:01):
You spoke earlier about bracketing the right side of this COVID mess. I don’t mean to put you on the spot, but at what point, or perhaps under what conditions do you feel the effects of the COVID-19 pandemic are going to end? Not just with respect to aircraft transactions, but on the business aviation industry in general?
Jay Mesinger (14:21):
When would you be comfortable getting back on our commercial airliner? If you use that as a barometer, when would you be comfortable going back into a restaurant with a capacity and a table next to you and people not wearing masks? When would you be comfortable doing the things that we’re not doing now? I keep trying to figure that out. In fact, I’ve talked about, will there ever be a time that in some circumstances, I might not still wear a mask. I might always wear a mask going on a commercial airliner the day I decide to go back to commercial airliner, to keep me from getting a cold or the flu or the kinds of things that you could get even in the good days. So I think that we’re going to declare normalcy in stages and in degrees and based on different people’s willingness.
Jay Mesinger (15:11):
I live in a college town and I look around this college town and I see the students out partying and having a great time and not social distancing and not wearing masks. And then having daily infection rates go through the roof here in Boulder, and have our college stop in school classes and go back to virtual after they brought all the kids back. So that’s not normal yet. That’s not okay yet. And that’s not the time to wave the flag. Will it be when there is enough vaccine that we are comfortable that it really works? That everybody’s taken it? I have a huge yearning to go travel. Sandra and I travel all over the world all the time. We have some lovely travel partners. We’re not in a position to book a trip yet. I don’t know what it’ll look like, Tony.
Tony Kioussis (16:01):
Yeah. I was having that conversation with a couple of people recently and they said the new normal is here if you look at your mask because it was their contention that we’re going to be wearing masks going forward. I don’t know that there is an answer to it. I just wanted to get your thoughts. Any other words of advice for our listeners based on your company’s reach and your personal experience?
Jay Mesinger (16:23):
I can only give advice as it pertains to the aviation industry. And I would say remain optimistic about what business aviation does for us all, how it moves us safely and efficiently, gets us to places we want to go with people we’d like to be with. I would say, have confidence in our industry to keep its pricing and valuations up, be positive about our industry, be stewards of our industry, and don’t give up on us and we won’t give up on you.
Tony Kioussis (16:53):
This has been another Asset Insight Podcast covering the aircraft ownership life cycle. Please visit our ever growing podcast library at assetinsightpodcast.com, and select from any number of topics discussed with business aviation industry experts. This is Tony Kioussis, and as always, thank you for listening.