News From the NAAA

From Brian Jacobson, Operations Director at the National Aircraft Appraisers Association:

In the middle of summer vacations the market has slowed somewhat but is still fairly active.  There are some buyers for piston aircraft but they only take the best of the breed that have upgraded avionics, low-time engines, and good paint and interior. 

If an aircraft does not have at least a Garmin 430 GPS installed, there is little interest.  However, an aircraft that meets two of the three requirements (e.g. has low-time engine, good paint and interior but needs some avionics) may work for some purchasers. It is definitely a buyer’s market and few buyers are interested in older piston engine aircraft.

There appears to be a large differential between advertised values and sale prices on some makes and models.  Many sellers don’t understand what is going on in the market, and it is taking some time for them to realize that they have overpriced their aircraft. 

What remains to be seen is if the prices continue to decline on the piston engine aircraft if there will be more interest in them.  That has always worked in the past but today’s marketplace is unique.  There is very little interest in twin engine aircraft, and those who are buying are flying away with what even a year ago would have been considered an unheard of deal.

Late model Turbine engine aircraft are still doing well.  There are long lead times for new copies, so many are snapping up any late models that are on the market.  Some will still buy the new aircraft when production reaches them and sell the used aircraft.  Others are settling for the late model used aircraft and will keep them.

Honda To Build VLJ Engines In North Carolina

From Avweb:

Honda Aero (not to be confused with sister subsidiary Honda Aircraft) announced on Tuesday that it will establish its corporate headquarters and a state-of-the-art jet engine manufacturing plant in Burlington, N.C., adjacent to the Burlington-Alamance Regional Airport. The $27 million, 102,400-square-foot facility will include office space, a production plant and an engine test cell. Production will begin in late 2010 with the manufacture of the GE Honda HF120 turbofan engine, which will power both the HondaJet and Spectrum Aeronautical's Freedom twinjet. The plant is expected to turn out about 200 engines per year. "This is a major step forward for our company, as we move to establish the home of our jet engine manufacturing operations here in Burlington," said Honda Aero President and CEO Fumitaka Hasegawa. GE Honda collaboration on the HF120 began in early 2005. The first core test of the HF120 was conducted earlier this year, which is to be followed by full-engine testing by year-end. The HF120 is the most fuel-efficient engine in its class, the company said, and it is expected to surpass the future anticipated emissions standards by as much as 20 percent.

Schumer: FAA's Blakey Should Resign

From Avweb:

The nation's airspace system is a mess, with airports overloaded and travelers plagued by delays, and that's the fault of FAA Administrator Marion Blakey, says New York Sen. Charles Schumer, D-N.Y. On Tuesday he called for Blakey to resign before her term ends on Sept. 30, The Associated Press reports. "She has engaged in a counterproductive fight with the air traffic controllers, cut the number of controllers that are needed, and they sometimes lash back," Schumer said. Delays have been particularly bad at New York's three major airports -- Newark, Kennedy and LaGuardia -- with 38 percent of all flights from January to April this year either late or canceled, according to the AP. The blame "falls clearly in the lap of the FAA and the FAA administrator," said Schumer. "The leadership at the FAA time and again has failed. So now it is time for that leadership to change." Blakey has already made clear she is eager to pursue other opportunities and is not interested in serving another term, according to The Wall Street Journal. However, her tenure could be extended until a replacement is named, which might not happen until after the next president takes office. The FAA said on Wednesday that the agency has taken "aggressive action to enhance safety and address delays in the New York area."

Alouette Helicopters Declared Illegal Immigrants by the FAA

From Avweb:

When Joe Altizer's employer (Marpat Aviation of Logan, West Virginia) bought three French-built Alouette helicopters, they'd all been flying previously in the U.S. All three came certified in the standard category and with current airworthiness certificates. A couple of weeks ago, FAA inspectors, accompanied by state troopers, visited Altizer's hangar and grounded the helicopters, resulting in the layoff of two pilots and a very uncertain future for the company.

The FAA says the absence of a piece of paperwork called a Certificate of Airworthiness for Export, which should have been with the aircraft when they were originally certified in the U.S., means they aren't eligible for that certification, and inspectors are tracking down all the Alouettes in the U.S. to possibly ground them as well. What's frustrating Altizer and other Alouette operators is the FAA doesn't seem to have a solution for a bureaucratic error of their own making and it's the current aircraft owners who are paying the price.

Does it Matter WHO Evaluates and Documents Your Collateral?

I was participating in an aviation forum recently and saw one of the subscribers post an opinion about using an on-line service to provide aircraft appraisals at a cost of $25.  I visited the website and saw that they have 20 aircraft types supported and they do provide "appraisals".  The person subscribing for this service provides the details and they will run the "appraisal" and provide the subscriber with a report.  The person submitting the comment indicated that this service worked well for him and the figures seemed to be accurate.  Needless to say I had a different professional opinion and pointed out a few problems with this type of service.  Of course we did not agree but I explained that once ANY individual or company holds themselves out to the public as providing Professional Appraisal Services then they have entered a different arena and should be held to a different standard than the typical broker who is simply looking up a number in a book and providing an evaluation.

The first concern had to do with the impartiality of the subscriber of the service (the person providing the details about the aircraft in this case).  Whether buying or selling, we all have our biases and these come through when collecting details about the aircraft in question.  I have seen some appraisers (not NAAA members) base their reports SOLELY on a sales brochure which most likely does not highlight any negatives associated with the aircraft such as damage history, missing log books, missing maintenance records, etc. which impact the final value of the aircraft.  Those blemishes are always left up to the buyer to find and confirm.  Most individuals who collect data simply do not have the knowledge, skills and ability to do this.  Furthermore, whoever collects the data should be completely disconnected from the aircraft and/or the deal. 

The second concern dealt with the data itself in that it is unclear what their data is based on and how the final result was determined.  A professional appraiser should never have a problem identifying where their data comes from and justifying their final results.  At this point I will say that the NAAA is the ONLY organization in North America that tracks actual selling prices of aircraft - and they have been do so for over 20 years.  The NAAA data comes primarily from the banking industry.

The last concern dealt with the ethics of the appraiser.  Ethics are important because it helps the public understand the "rules and guidelines" the appraiser will follow throughout the process.  An ethical organization will also have a peer review process established in the event ethical behavior is called into question.  Is ethical behavior important?  Let me attempt to put this into perspective.  I certainly don't place aircraft appraisers on the educational/training or "life and death" scale of doctors but it helps me illustrate the point that none of us would feel comfortable with a doctor who was unethical or who made a diagnosis based on a telephone conversation.  Nor would we be comfortable with a surgeon giving directions to their patient over the phone about how to perform the operation.  In the event this type of behavior did occur, how (under what process) would this doctor be removed from practice if no ethics or peer review was in place (legal issues aside)?  If the doctor's fees were really low would this type of service be a bargain?  I heard a sound bite from a popular TV medical series and the main character was told that it was impossible to made a diagnosis over the phone.  The doctor said, "Of course you can (make a diagnosis over the phone) if you don't give a damn about the patient."

Banks who are serious about aircraft financing and leasing deserve more that just a number on a sheet of paper or a report based on a sales brochure alone with multiple disclaimers indicating that the aircraft and log books were never examined.  They deserve the full efforts of a trained professional who adheres to published ethics and who physically examines the aircraft and related documents.  Then again, if you don't give a damn about the aircraft then it really doesn't matter.

Risk Management - Undervaluing Aircraft

Most of the time I write about the problems associated with overvaluing aircraft and this seems to be a common approach when banks rely on their internal resources or the selling broker/dealer.  Unfortunately, there is just too much incentive (and very little oversight) for the evaluator to "smith" the numbers so that the deal will go through.  However, it is just as wrong to undervalue an aircraft and doing so can impact the bank's lending decisions.  Here is one case that illustrates how an aircraft can be grossly undervalued.

A client recently asked me to appraise his '79 A36 Bonanza.  It had just come out of the paint shop and had a recent overhaul with a turbo normalizing system installed.  The aircraft's avionics had also been extensively upgraded in the past.  His biggest problem (from a value standpoint) was the missing airframe log books.  I went through the normal appraisal process and the final appraised value was in the $250K range which was well outside of the normal range of sales figures for this particular year, make and model.  This did not surprise me as the aircraft was heavily modified and the avionics were well above "average" for this type of aircraft thereby making it exceptional;  however the owner was concerned that I had overvalued the aircraft and I explained that the deduction for missing log books had been overshadowed by the upgrades (mods and avionics).  I also explained that if he had to liquidate this asset immediately for some reason he would be looking at a figure closer to $200K or so but under normal market conditions I felt comfortable with the appraised value meaning that it would sell close to this figure in about 90 -120 days.

A few weeks later, the owner sent me an email from an aircraft broker he had used in the past to purchase aircraft and he passed along the broker's evaluation from the Bluebook Price Digest. The broker had placed the value of this aircraft at about the $160K level (about 34% less than my appraised value!) and of course the owner wanted to know who was right since there was a significant gap between these two opinions.  I started by explaining that the Bluebook (by its own disclaimer) clearly states that the information it provides is intended to be a general guide only and cannot be used to appraise a specific aircraft as there are too many variables involved.  This aircraft represented an excellent example of that shortcoming.  I also pointed out two key problem areas.  The first was the avionics calculations in that the broker had only allowed him an additional $8K for the two GPS units installed in the aircraft (per the Bluebook guidelines) but when the current complement of avionics equipment was compared to the standard avionics suite listed in the Bluebook (their starting point for any evaluation), the difference was more in the range of $36K.  The second area dealt with the extensive modifications.  The broker did not provide ANY credit for the extensive modifications the aircraft just underwent and these were in the range of $60K.  Of course the Bluebook does not address missing log books at all but the broker had deducted 10% of the final value with no justification or reference provided.

The motives and objectives of the evaluating broker were not known and I have never dealt with this particular individual but on the surface it appears that the evaluation was a very quick analysis that was woefully inadequate.  Had a customer purchased this aircraft and the bank relied on such a superficial evaluation, the deal would have most likely fallen through due to the difference in value.  It also raises the question that if the buyer had submitted a report from a broker showing its actual market value (which was well beyond the norm) would they have accepted it without question?  The bottom line is that it pays to know and understand the facts about the collateral you are lending against and not rely on results from general guides or the selling broker.  There are too many details that simply cannot be determined without proper field research and the use of an experienced, trained professional who is impartial to the deal and who can help take your aircraft financing efforts to the next level.