Strategic Planning for Single
Aircraft or Fleet Replacement
May 1, 2013
NBAA Maintenance
Management Conference
Presented by Barry Justice
Current Market
Pre-Owned Prices Versus Intrinsic Value
Welcome to Historic Fort Worth
2
The Fort Worth STC
3
4
Impossible
Fly to Sun
5
Seems Impossible
Kennedy Vision
Vision
6
Apollo 11 Lunar Landing
Kennedy Vision
7
Space Shuttle
STS – 78 Launch
8
Space Shuttle
Commander Tom Henricks
Currently: Vice President of Marketing at CAAP
STS – 44 (Atlantis): Pilot
STS – 55 (Columbia): Pilot
STS – 70 (Discovery): Commander
STS – 78 (Columbia): Commander
9
Piggyback
Space Shuttle
Lessons
Strategic planning is long range
• Twenty years from identified need until operational vehicle
Although Shuttles are designed to last 40 years, mission
needs, threats and technology will change
• Plan for follow on vehicle before current one is operational
• Designed for upgrades
A method to flight test the orbiter for landing and then
getting them from CA to FL was almost a show stopper
• The guy who thought of putting it on a 747 was laughed at
• He built a scale model and proved it could fly
• The 747 was modified with a split vertical stab to accommodate the
aerodynamics of carrying and releasing the orbiter
11
Dilbert
5 Year Plan
Current Market
Pre-Owned Prices Versus Intrinsic Value
Developing a Strategic Plan
How do we
begin?
Current Market
Pre-Owned Prices Versus Intrinsic Value
Stephen Covey
The Seven Habits of Highly Effective People
Rule # 2
“Begin with the
end in mind”
Current Market
Pre-Owned Prices Versus Intrinsic Value
Flight Department Aircraft Replacement
How We’ve Done It In The Past
•Reactive
•Tactical
Versus
Current Market
Pre-Owned Prices Versus Intrinsic Value
Flight Department Aircraft Replacement
How We’ve Done It In The Past
•Proactive
•Strategic
Which leads us to
Current Market
Pre-Owned Prices Versus Intrinsic Value
Rule #1
“Be proactive”
Stephen Covey
The Seven Habits of Highly Effective People
17
Why This Is Important
Gretzky Strategy
Question: How did you score so
many goals?
Answer: “A good hockey player
plays where the puck is. A great
hockey player plays where the
puck is going to be.”
Commentary: We believe the
same strategy applies to
understanding aircraft values. It’s
important to understand not just
where they are today but where
they are going to be.
18
Aircraft Replacement Strategy
Primary Objectives
Strategic Objectives Should:
• Align aviation assets with needs with the core
business
• Have a process to keep aircraft assets
modernized with input and approval from:
• Executive senior leadership
• Finance
• Tax
• Legal
19
Aircraft Replacement Strategic Objectives
Supporting Goals
Have a plan that supports the following goals:
• Aircraft that are either new or relatively new with
the latest technology
• Well defined process to keep the plan current
• Aircraft must meet the operating mission
• Aircraft must meet the capital budget
• Meets the operating budget
• Mitigates market risk
20
How Do We Begin
Outlining the Process
There are a number of elements that should be
considered as begin:
• What’s the overall objective?
• What are the constraints, capital, technical and
other?
• What happens if you do nothing?
• What’s the time line?
• Develop a team and define the respective roles
and responsibility of the various team members.
21
Process Details
Company Size and Culture Drive Process Details
While company or organization size and management
styles will effect the process…
Regardless of size or management culture these
competencies are usually represented in the aircraft
replacement process.
• Executive - CEO
• Finance – CFO
• Legal – Internal and External Legal Counsel
• Tax – Tax department
• Aviation – Director of Aviation, Director of Maintenance
• Outside Advisor or Consultants
22
Planning Template
Work Process Flow
Develop Aircraft Analysis Planning Model for Aviation Department
Strategy And Business Plan
Phase I – Current State
Phase II – Customer Needs Assessment
Phase III – Alternative Aircraft & Financial Analysis
Phase IV – Plan Implementation
23
Current State Assessment
• What’s driving the change?
• Forecast utilization / geographic profile
• What’s the history been with the aircraft or fleet?
• Develop a baseline budget for comparison to
future aircraft for capital and operations cost.
• Identifying the management style of the company
and how that effects the process
24
Customer Needs Assessment
Mapping the Desired Future State
• Defining the objectives
• Deciding what will be required to
achieve the desired outcome
• Alignment of wants and needs
– Be careful they are usually different
25
Alternative Aircraft & Financial Analysis
Alternative Aircraft Considerations
• What aircraft types and manufacturers to include?
• Supply chain sourcing options should be considered?
• Aircraft are being considered for replacement.
– Timing considerations?
• Lead time for new or pre-owned
• Forward or reverse 1031 Like Kind Exchange
• Timing for selling relinquished asset
• Sometimes timing drives the decision (if order backlogs are
too long)
• Trade or sell relinquished asset
26
Alternative Aircraft & Financial Analysis
Financial Analysis
• Capital costs
• Operating costs
– Fixed
– Variable
• Cash flow analysis
• Residual Values
– Historical and Forecast
• Net Present Value
Case Study - #1
Organization
•Large Multinational Corporation
•Several Multi billion dollar companies
•Multiple bases of operation
Situation
•Nine aircraft, seven different types with aging issues
•$85 million aircraft on order placed by various subsidiaries
•Disconnect between business units
•No flight department input
•Acquiring company with two additional aircraft
Case Study - #1
Key Objectives
•Assemble strategic planning team and plan
•Assess & align aviation needs with core business
•Replace fleet with newer aircraft with less types
•Mitigate market value risk
Outcome
•Developed strategic plan with input from senior executives, flight
department, tax, HR, legal and finance
•Reduced aircraft types
•Reduced capital
•Newer aircraft
•Lower operating budget
$0
$2,000,000
$4,000,000
$6,000,000
$8,000,000
$10,000,000
$12,000,000
$14,000,000
$16,000,000
341234123412341234123412341234123412341234123412341234123412341234123412341234123412341234123412341234123412341
19851986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20122013
Pri
ce
GIII Residual Value by Year/Quarter
1985
Case Study - #1
Timing can be Critical
Executed sale
in anticipation
of market
decline
In five years
the aircraft
lost $7M in
value
$0
$5,000,000
$10,000,000
$15,000,000
$20,000,000
$25,000,000
$30,000,000
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20122013
Pri
ce
G IV Residual Value by Year/Quarter
1990
Case Study - #2 - The $10 Million Galley
Timing can be Critical
Recommend
sale at
appraised
value of
$16M
Actual sale
at $6M
Why the Gretzky Strategy Matters
Question:
What is the greatest cost of owning
and operating an aircraft?
Answer:
Market Depreciation!
Question – What’s the Greatest Cost of Aircraft Ownership
Historic Residual Value – All Business Jets
0%
20%
40%
60%
80%
100%
120%
0 5 10 15 20 25 30 35 40 45 50
Ave
rage
Pe
rce
nt
of
Ori
gin
al P
rice
Age (Years)
Aircraft Specific Residual Value History
Historic Residual Value – CL604 vs. GIVSP
0%
20%
40%
60%
80%
100%
120%
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20122013
Perc
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tag
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Pri
ce
Year/Quarter
G IVSP Residual Value by Year/Quarter
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
0%
20%
40%
60%
80%
100%
120%
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Perc
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Year/Quarter
CHALLENGER 604 Residual Value by Year/Quarter
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
1996 - 2001:
Up market
2003
Market
Bottoms
2004 - 2008:
Up market
2008
Market
Crashes
34
Macro Market Cycle
Aircraft Prices vs. the Stock Market
Aircraft prices have historically followed an 8 - 9 year cycle and are
correlated with the performance of the stock market
0
2000
4000
6000
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10000
12000
14000
16000
0%
20%
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60%
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100%
120%1
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Do
w J
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vera
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Perc
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Avg RV - 5 Yr Old Aircraft DJIA
Moving
average
divergence
35
Price Sensitivities Considerations
•Price sensitivity is inverse to price
•Markets reward “risk removal” and
technology
Aircraft Specific Residual Value History
Historic Residual Value – G550 vs. Global XRS
0%
20%
40%
60%
80%
100%
120%
140%
4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1
20022003 2004 2005 2006 2007 2008 2009 2010 2011 20122013
Perc
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tag
e o
f Ori
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al P
rice
Year/Quarter
G550 Residual Value by Year/Quarter
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
0%
20%
40%
60%
80%
100%
120%
140%
4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1
2005 2006 2007 2008 2009 2010 2011 2012 2013
Perc
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Year/Quarter
GLOBAL EXPRESS XRS Residual Value by Year/Quarter
2005
2006
2007
2008
2009
2010
2011
2012
Current Market
Pre-Owned Prices Versus Intrinsic Value
Current Market (Presented Aug. 2007)
Pre-Owned Prices Versus Intrinsic Value
Gulfstream
Bombardier
Dassault
List Price ($M) Intrinsic Value ($M)
Estimated Purchase Price
0
1
2
3
4
25 30 35 40 45 50 55
G500 G550
GEX-XRS
F7X
Current Market
Pre-Owned Prices Versus Intrinsic Value
Current Market (Presented Aug. 2007)
Pre-Owned Prices Versus Intrinsic Value
0
1
2
3
4
15 20 25 30 35 40 45 50 55 60
Gulfstream
Bombardier
Dassault
Estimated
Purchase Price ($M)
Intrinsic Value ($M)
CL 604
G-IV SP
F900EX
I Know This Stuff Can Get a Little Dry…And Probably
What You’re Thinking Right About Now…???
•Meee Too!
• I promise to
wrap up soon!
Case Study - #3
From NBAA Maintenance Air Mail Post
Question1: Should we upgrade our Challenger 601 3R to meet CPDLC,
FANS 1/A requirements
Question 2: Where is the threshold ($$$) that you stop doing upgrades and
how do you substantiate that threshold
Answer: 1. If the aircraft is currently meeting the mission
2. The owner is happy with it
3. There are no other major maintenance considerations
4. If there is not an alternative aircraft with the technology
without a major capital outlay
Then upgrade the aircraft
Commentary: Upon resale expect to recover only 25% of the investment
Try to keep aircraft consistent with others in the fleet
Aircraft Specific Residual Value History
Historic Residual Value – Challenger 601 3R
0%
20%
40%
60%
80%
100%
120%
123412341234123412341234123412341234123412341234123412341234123412341234123412341
199319941995199619971998199920002001200220032004200520062007200820092010201120122013
Perc
en
tag
e o
f Ori
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rice
Year/Quarter
CHALLENGER 601-3R Residual Value by Year/Quarter
1993
1994
1995
0%
20%
40%
60%
80%
100%
120%
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1
2008 2009 2010 2011 2012 2013
Perc
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tag
e o
f Ori
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rice
Year/Quarter
CHALLENGER 601-3R Residual Value by Year/Quarter
1993
1994
1995
Plan Implementation
When the internal team has completed it’s analysis and a
decision is made for action plan, then:
• Socialize plan
• Narrow choices to top two
• Compete the available choices
• Finalize and execute
Fun Quiz
The Devil’s in the Details
• How many know how old you are?
• How many know how old you are in:
• Years
• Months
• And days
• How many know how old you are in days?
• I’m 24,618 days old today!
Thank You
Thank you!
Q & A
Questions?