Plane Data, Inc. - Aircraft Consulting and Appraising

December 2010 Newsletter

Market Summary

The news this month appears to be in the piston twin market which shows some very positive signs according to JetNet.  As always, JetNet reports on only a very limited number of piston twins so this information should be viewed in that light but overall inventories showed a healthy decrease over the previous month of almost 5%.  Part of this improvement is due to the decreasing number of aircraft coming on the market and as expected there was an increase in asking prices for this segment.  However, November showed a decrease in the overall number of transactions from the previous month and there were no reported foreclosures.  Generally, this is a very positive picture compared to previous months.

In the turbine market, JetNet reports that business jet inventories decreased slightly (less than 1%) from October and the overall activity(aircraft being sold or removed from the market) was also lower than October.  Asking prices were essentially flat compared to the previous month and there were only two foreclosures. 

Turbo prop inventories showed a slight increase over October (less than 1%) and asking prices decreased slightly.

An assessment of the turbine market was also released by AMSTAT.  AMSTAT provided an interesting take on the turbine market based on their analysis of sales activity.  According to AMSTAT, age of the aircraft is a large factor in the decision to sell.  The full article states that there is more churn in aircraft more than 10 years old.  It is an interesting observation but understanding "why" this churn occurs may be a more interesting exercise.  In summary, AMSTAT sees that a larger percentage of the older aircraft are on the market and over the past year there has been more churn there when compared to younger business jets.  Each situation is unique to be sure but my observation has been that older aircraft in many cases have older (read outdated) avionics or the upgrade to Reduced Vertical Separation Minimums (RVSM) may have been avoided thereby decreasing the aircraft's utility and marketability as well as increasing its cost of operation due to the restriction of lower altitudes.  Older aircraft also tend to be more expensive to maintain or they may be coming up on big ticket items such as engine overhauls or key inspections.  If your bank finances older turbine aircraft it becomes more important to understand the current maintenance status of that specific aircraft and what inspections are coming up or overdue.  This is true not only at the beginning of the loan but throughout the aircraft's life.

Of course, each make and model is different and unique.  Any attempt to attach a broad overview to a specific make or model would be incorrect as some of these aircraft are doing better in the market than others.  If you have a specific question about the trend for a specific make, model or year, you will need to call 800-895-1382 for additional information.

Is Your Aircraft Documentation Missing Something Important?

Most banks would not think of completing an aircraft loan without a title search.  The impacts of having an unsatisfied lien on the title or a "cloud" of some sort can kill the purchase of the aircraft or significantly delay the related financing even though everything else is in order.  Over the years I've had the opportunity to see many title searches from different title companies and I've found that there are title searches and then there are title searches.  Given a specific aircraft, a title search provided by two different title companies can produce different results even though they were completed a few days apart.  Just because you have a piece of paper saying there are no liens on the aircraft (or only one known lien) does not mean that all is in order.  Is the bank's customer providing the title search or is the bank requesting their own search from their own trusted source?  Is the bank's customer in a "rush" to complete the deal?  Ever wonder why the bank should work so hard to cut corners just to meet an artificial timeframe and is this rush really in the bank's best interest?  Is this type of situation in the customer's best interests?  In many cases cutting corners and rushing through the process puts the bank at unnecessary risk as we will see.

The owner/broker/dealer typically believes that all is in order with the title (and the aircraft overall) but this is not always going to be the case.  The seller wants to sell the aircraft "AS IS, WHERE IS" because this is an easy condition to satisfy.  However, when purchasing an aircraft "as is, where is", this situation also means that the buyer (the bank's customer as well as the bank) is also taking on the responsibility to address title issues (and any other issues) down the line - if any exist.  Banks may try to address this situation in their policy through the use of title insurance but I have never seen owners or banks purchase title insurance as a requirement of the loan itself.  In an effort to make things "easy" for the banker, many buyers or brokers/dealers will provide a title search showing that everything is in order but the bank needs to be asking a few questions before simply accepting that piece of paper at face value - or any documentation provided by someone financially connected to the deal. 

It is important to know when this title search was performed.  Title searches that are more than two weeks old could have liens or clouds filed and recorded in the past few days if something contentious has occurred such as unpaid fuel bills or an unpaid mechanic's invoice.  It doesn't take much to cloud a title or file a lien.  The next question that should be asked is in regards to the thoroughness of the search and what title company is involved?  Over the years I have used and worked with various title companies and I keep coming back to one particular company over and over because of the service my clients and I receive and the way in which this company performs their duties.  The company I use is Insured Aircraft Title Services.  I have found that Insured Aircraft Title Services tends to identify and address issues other title companies seem to overlook and these issues are important when purchasing or financing an aircraft.  Not long ago I was involved in an aircraft purchase highlighting this very issue - again.  The seller had a recent title search from a well known company and my client was using Insured Aircraft Title Services as the escrow agent in this particular deal.  Our title search identified a cloud on the title from several years back.  The cloud was simple enough to remove but the search from the other title company did not highlight this cloud whatsoever and I have to presume that both title examiners were looking at the same FAA file.  What is more disturbing is that the previous owner (and his bank) purchased and financed this aircraft and both parties appeared to be unaware of the cloud or any issues with the title.  As I indicated, this wasn't a difficult situation to address and Insured Aircraft Title Services obtained the necessary paperwork to complete the deal.  However, there could have easily been an unsatisfied lien to deal with.  If the bank is attempting to save the customer a few dollars by avoiding their own title search and accepting a customer provided document, it may place the bank at undue and unnecessary risk which can far outweigh the savings to the customer.  But there is also the issue of the "rush" to complete the deal and in a effort to save time much of the paperwork (the title search, the "appraisal", etc.) are provided by someone financially connected to the deal.  Is this really wise?

The rush to conclude the deal and shortcut paperwork goes back to the bank's policy regarding aircraft financing.  It may be left up to the loan officer in the field to make the decision regarding what documentation to accept and what not to accept and most loan officers in the field are ill equipped to understand the difference in title searches, what they contain or the difference between a web based print out and a formal appraisal report.  After all, an appraisal is an appraisal and a title search is a title search to most loan officers.  But it is important to understand the bank's overall objectives.  Is the bank only interested in cutting the check and doing the deal or are they interested in helping their customer and managing their risk?  The answer to this question will result in two very different approaches by the bank.  For example, banks that are only focused in doing the deal tend to accept just about anything for documentation and this includes numbers on the back of envelopes intended to substitute for "appraisals" along with out dated title searches showing the results the seller or buyer wants the bank to see.  After all, who is to say that the documents being provided were not simply manufactured (albeit fraudulently)  by the person providing them?  Accepting customer provided documents makes the bank more competitive and speeds up the lending process to be sure but this type of approach also helped to create "toxic aircraft assets" on the bank's balance sheet and there is no real reason for this type of situation to occur.  Addressing the toxic aircraft assets now is probably costing the bank more than it would have cost to obtain the proper documentation at the outset. 

Other banks tend to follow their policy and obtain documentation from trusted sources.  These banks have a proven process that works and they follow this process religiously.  These banks obtain title searches at the beginning of the loan, request an on-site examination of the aircraft and its records as part of the appraisal process and they continue to monitor the aircraft's condition and value throughout the life of the loan.  The initial loan is executed as quickly as possible but the bank realizes that it takes as long as it takes to get the paperwork right.  The bank manages its risk by asking the right questions and obtaining accurate information at the very beginning of the process and these banks also manage the customer's expectations.  In some cases, these banks found that their customer was not buying the aircraft they thought they were buying - nor was the bank financing the aircraft they thought they were financing.  If the process is followed, the end result is very few surprises and fewer toxic assets.

Save time and save money but only deal with trusted resources for the bank's aircraft documentation.  You may not like the results of the research from time to time but you can rely on it.

A Question for the Appraiser:  (Typical questions asked about aircraft appraisals, evaluation methods and the appraisal process )

Q:  What is the difference between a "bluebook" value and an appraised value?

A:  The term "bluebook" in this response is intended to be a generic term and applies to the various publications and on line resources.  It is not intended to represent a specific publication or resource. 

This question indicates that one answer could be or should be more accurate or more correct than another but this is simply not the case.  In one specific situation, both numbers could be very close and in others the two numbers could be very different.  The source data used to arrive at a number is one issue but there are others to consider.  These other factors can influence the final result to a larger extent than the source data.

The data itself is important, of course, and whatever data is used it should be reflective of actual selling prices in the marketplace at the time in question.  For example, if there is a need to obtain a current evaluation of an aircraft then data from one or two months ago will introduce some degree of error.  The data being used should also be reflective of a specific aircraft's configuration.  In other words, the sales data for a very low time, well equipped aircraft with fresh engines will be different that a similar aircraft with factory equipment, run out engines, missing logs and damage history.  At this point it should be noted that the National Aircraft Appraisers Association (NAAA) is the ONLY organization that collects actual selling prices of aircraft (compared to opinions or estimates of what aircraft should or might sell for) and this information is only made available to NAAA members.

The person who calculates the value is a factor.  It is important to understand what background this individual has in evaluating aircraft and how they are connected to the deal.  Individuals who have a financial state in the deal and who have very little training or experience evaluating aircraft will introduce more error than someone who is disconnected from the deal and who has more training/experience.

The value points under consideration impact the final result.  As mentioned earlier, damage history and/or missing log books, an example, have an impact on the aircraft's overall value.  If these items are omitted or ignored then errors are introduced into the overall evaluation.  Some value points effect others.  Damage that has not been repaired properly or major damage events influence the grading of the airframe itself and very few evaluators consider the condition of the airframe (airframe condition is NOT the condition of the paint) and publications do not address or evaluate the condition of the airframe which is a major value point.

The reliability of the process being used is a factor.  If the process being used cannot be referenced against any other market data then it is somewhat meaningless.  If the process works once but fails in other situations (for whatever reason) then it is unreliable. 

There is also the question of - what constitutes an "appraisal"?  The basic definition of an appraisal is that it is an opinion of value but this is a very loose definition that allows a number on a napkin to be equivalent to report based an onsite examination of the aircraft and records.  Both could be considered to be "appraisals" and both could have the same opinion of value but the way in which these numbers were derived speak to the creditability and reliability of the result on a consistent basis.