One of the questions I get asked frequently by clients is “How do I buy an aircraft at wholesale price?” The short answer in this market is…..you probably don’t. The longer answer is, because of the things you would have to give up in order to do so, you are probably better off not trying to compete with the Aircraft Dealers who do.
The spread between wholesale and retail price is extremely compressed right now. Although the percentages vary widely depending on the make, model & year of the aircraft, in most cases there is about a 10% spread between wholesale and retail. So, on an aircraft that retails for $5.0M, a dealer looking to inventory the aircraft would try to negotiate a price at $4.5M or lower.
The problem is, the number of dealers looking to inventory aircraft has exploded in the last year or two. I cannot say that demand from operators has returned to pre- downturn levels just yet, but it definitely seems as if dealer demand is as strong as ever. Although they may not have the backing of a floorplan credit line from one of the big banks, alternative financing options have taken up the slack and are allowing dealers to move at a frenetic pace.
When word gets out about an aircraft that might be available at wholesale price, an inventory dealer can be on an airplane and in front of the owner immediately. He can have a letter of intent drafted and a deposit in escrow within hours and can offer a quick sale with a limited pre-purchase inspection. He can hand over a purchase agreement that requires little to no lawyer wrangling and offer to close on the aircraft in less than 30 days.
When compared to the timing of a retail transaction, the time savings for a motivated Seller are significant. In a typical retail transaction, the letter of intent takes around two weeks to negotiate and another two to three weeks on the purchase agreement. Add the time for a full blown pre-buy, test flight, negotiating squawks and documentation requirements for most traditional lenders, the closing process ends up taking two to three months and the transaction costs can really add up.
The good news for the buyer is that most Sellers want to maximize their sales price and are willing to spend the extra time needed to get as much as possible for their aircraft. However; the margins are tight and most markets have firmed up quite a bit so an aircraft that can be bought at anything below full retail price should be considered a win in today’s market.
There are a few lessons that most buyers can take from the inventory dealers in order to maximize their chances of getting a good deal:
- Hire a professional that is responsive and active in searching for opportunities.
- Have an industry standard form Letter of Intent ready to issue.
- Be able to move a reasonable deposit into escrow on short notice.
- Have an industry standard form Purchase Agreement ready to issue.
- Have a top 3 list of acceptable pre-purchase inspection locations identified.
- If a visual inspection is required, be ready to travel to the aircraft on short notice.
- Be knowledgeable enough on the market that you can recognize a good value when it surfaces.
- Don’t get hung up on immaterial issues (ex: spending thousands on attorney’s fees arguing about financial responsibility of a $500 squawk).
In order to maximize profitability, an inventory dealer wants to sell an aircraft as quickly as possible. So, he doesn’t need to perform inspections that might be coming due in a year. For the operator who intends on keeping the airplane for any length of time, spending a little time making sure the aircraft is a good fit and will have no surprises down the road is the better course of action.
Toby Smith – Vice President
JB&A Aviation, Inc.
Toby Smith is Vice President of JBA Aviation and has been helping customers buy and sell turbine aircraft for 17 years. He operates a satellite office located at the Atlantic Aviation FBO in Tulsa, Oklahoma