Do Refurbished Airplanes Hurt the OEMs?
When I was researching last week’s story on aircraft refurb business, I heard all kinds of comments, but everyone—well, almost everyone—agreed that new aircraft prices have made flying unreachable for all but the very wealthy. When someone of the stature of Jack Pelton flatout calls airplane prices exorbitant, you have a five-alarm fire.
And by the way, no one I talked to last week thought that the manufacturers can do much in the short term about escalating prices if they hope to remain solvent. If you believe that cutting prices would expand the market, they would have to discount so much that no manufacturer could survive long enough to enjoy the higher volume.
So we have this groundswell of refurb activity and it looks like it definitely has legs. There’s an ocean of low-cost, high-value airframes out there that basically perform as well as modern aircraft do. They go as fast, carry as much—and sometimes carry more given how portly modern airplanes have become—and burn the same amount of fuel. The only exceptions are the diesel conversions and that’s where Redbird is going with its Redhawk project. That’s still a tiny market.
So since these older airframes can be readily upgraded to nearly state-of-the-art status and perform for half the price of new, that’s a good thing, right? Evidently, the market thinks so, because refurb is hot. But is there a downside? Does an expanding refurb market potentially damage the development of new GA aircraft? John Armstrong, who’s had success putting together shared arrangements for access to new Diamond aircraft, thinks so. He told me the longer older airframes remain in the fleet—fixed up or not—the longer it will take to replace them with safer, newer aircraft that he likes to call “magic carpets.”
Basically, the DiamondShare program is a multiple access arrangement that has, at its core, a buyer who takes delivery on a new DA40XLS. DiamondShare then does the legwork to recruit “members” who, for a fixed payment, share access to the aircraft at a price typically around $1000 a month. DiamondShare offers tax and insurance support, training and other services. It’s not a partnership, nor is it a club. Armstrong describes the program as leveraging the aircraft’s excess capacity—basically potential hours of availability the owner isn’t using—to offset costs the owner would otherwise bear entirely on his own. “Would you pay $1000 a month to have access to this magic carpet?” comes the sales pitch from Armstrong. (You pay for your own gas.)
The answer for me might very well be yes, if I had compelling need for a DA42 with a glass panel. But since I can’t justify that kind of money for just boring holes in the sky and it’s not practical for regular business travel, I have a position in CubShare instead. But when I used one of several Mooneys for regular business travel, the grand a month was about the cost, on an annualized basis. But that included the gas. Nonetheless, the value was there, in my view, and it would be for the Diamond, too.
But I’m skeptical that any amount of refurb activity would impact the likelihood of buyers opting for new instead. Buyers of new airplanes have to suppress the gag reflex when they see a $400,000 sticker and/or be creative enough to instantly realize how they can leverage that number to make it affordable while calculating how much depreciation they’re willing to eat. I think buyers of new piston airplanes—and there aren’t but about 500 of them a year in the U.S.—look at this from the top down while those of us seeing the value in used airplanes look from the bottom up. How high are we willing to go to hit the magic price/value point? I suspect it’s in the $70,000 to $100,000 range, which is where a lot of used aircraft transactions settle. And that’s why nicely executed refurbs up to, say, $150,000, are likely to be increasingly attractive.
Do buyers care that the airframe may in fact be 30 years old? Some do, says Premier Aircraft’s Jeff Owen. But for many, not enough to spend five or six times as much for an airplane that has only marginal additional capability and maybe not even that if the refurb has a nice Aspen glass panel. Yes, the OEMs may lose a few sales to spruced up recent models, more so in the TAA-type aircraft than a tarted up mid-1980s Saratoga. But they’ll live and die not selling against refurbs, but finding those lucky 500 who can write a check for a half mil.