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Just Plane Investment - how does this work?

In the early 2000s I had several attempts to sell me on this idea, including the then-new SR22 (back when ~350k would get you a new one). It was admittedly tempting to spend a couple grand a month on an airplane that would rent for 200/hr and be allowed to depreciate over 5 years for tax purposes (I think that was the rule).

EHRD, Netherlands

The model relies on aircraft values remaining high and certainly, if the last 3ish years has been anything to base the model on, then it would indeed, appear to represent a good “investment”. However, when values stabilise (at least in the UK, values have, in no small part, due to brexit and the CAA been making things more difficult for import and therefore artificially inflating used values) i wonder whether the “investment” will sustain? It could take another 3 – 5 years before we really see values settling back down to their natural value.

Malibuflyer wrote:

Obviously! This one statement is off – but they actually do their ROI calculation assuming zero remaining value of the plane – this is quite conservative.

Either you’ve misread the numbers, Malibuflyer, or I have.

Taking the base case (500 hrs) scenario, they assume you invest £70,000 at the start and net of costs receive £19,000 per year. So after 4 years, you receive a total income of £76,000. If you assume the aircraft has zero value, as you suggest, you’ve made 8.5% over 4 years, or about 2% per year, rather than the 27.5% which appears on their website. That’s assuming there are no expensive surprises.

Of course, they’ll point out that they include an “Engine Sinking Fund” in their calculations, so they can assume the aircraft maintains its value. However the ESF plus unscheduled maintenance totals £2,500 for each 500 hours. I’d guess the unscheduled maintenance alone would probably exceed that. But assuming you’ve bought the luckiest plane in the world and there’s zero unscheduled maintenance, you’d still be hard-pressed to buy and fit a new engine for £10,000.

KHPN White Plains

To me, that one statement drives the BS meter right off scale

so the other numbers don’t really matter

And all you need is a surprise or two on the maintenance front (which is a high probability event given the use the plane must be put to to get the annual hours; we are not talking about all-dual stuff like IR training) and the whole thing breaks down.

Sure leasebacks are popular in flight training. I was offered this in 2002/2003 when my TB20 was new. Fortunately I realised the BS factor early on and pulled the plane out. I also learnt that the people who run schools are very good at spotting “vulnerable aircraft owners” who are ripe for this kind of thing. It can work, and I have seen it work, in cases where the plane is worth almost nothing to start with and owner doesn’t care if it ends up being worth even less afterwards.

Also most of the training business – in Europe, anyway – operates on minimal maintenance. May be legal, yeah, right, not in cases I saw in my PPL, but things tend to be left until they break.

When aircraft prices start to fall (which they are bound to, given today’s silly levels) then you are going to lose big-time.

Administrator
Shoreham EGKA, United Kingdom

you’d still be hard-pressed to buy and fit a new engine for £10,000.

You bet! My overhaul (not new engine) cost me about $35K – $25K for the overhaul itself, and $10K to remove and reinstall the engine (badly – but that’s another story). Admittedly that’s an IO540, but even for a 360-sized engine hard to see how the total could be much less than $20K. And that’s if everything goes well, no unexpected damage etc.

LFMD, France

I think the old truism “How do you get a small fortune in aviation? Start out with a large one” applies to all of these things.

Andreas IOM

Typically maintenance organisations provide training aircraft to clubs on a dry lease. Am aware of one ‘mom and pop’ that has a fleet of twenty plus PA28s (mainly Warriors) which average 300 hours a year. The value of the fleet has increased by over 100% (probably closer to 200%), and my estimate of annual free cash flow being generated is around £200k, while providing the backbone to the maintenance organisation. There is a fair amount of operational risk, so I don’t think this is a business for a passive investor, and arguably a maintenance organisation is best placed to manage the operational risk. I can’t see how a financial administrator will add value, or protect from the operational risk.

Oxford (EGTK), United Kingdom

Can you invest, financially, in GA? For e.g. manufacturers, smaller scale than Textron, but lower risk than electric quadcopter startups.

I have shares in Latécoere, a fuselage and wiring subcontractor for Airbus, Boeing and Dassault. They were an aeroplane manufacturer in their own right in the 1920s and 30s (mailplanes, flying boats), and the Lignes aeriennes Latécoere became Aéropostale and then Air France. The name conjures a lost romantic era of independence and adventure, Saint Exupéry braving the Sahara or Guillaumet the Cordillera.

My Gazprom shares are currently frozen

EGHO-LFQF-KCLW, United Kingdom

IME, the only way to make money with “small companies” (basically, startups, and pretty well the whole of the AIM market) is to get in on the ground floor i.e. get in when they start up. Put it another way, act on inside information regarding some wonderful new invention about to be patented. That’s in theory illegal, but is completely normal with startups. You invest something substantial but an amount you can afford to lose, so say 5k gets you 1% of the company. Then, if this “500k company” gets bought by Geoff Bezos for 10BN, you can buy yourself a TBM

In reality this usually doesn’t happen and you lose 100% of your money, because the original 500k raised from investors gets spent mostly on putting the founder’s kids through private schooling, and when the money is mostly gone, he does another round of financing in which this amazing company is valued at 5M, so your 1% becomes 0.1%. A year later it becomes 0.01%. I once owned about 0.01% of a company which “Microsoft were about to buy for 1BN” but of course they didn’t, and I lost 100% of my 15k.

In fact I have lost 100% of every “small company investment” and of every startup regardless of whether listed or not

And these are supposed to be companies which are “properly managed” and have “proper accounting practices”. In GA, forget it. The whole business runs on a shoestring and is mostly right on the edge of collapsing. You only need to look at the extreme reluctance of GA companies to participate on social media (except to push out free advertising) – they don’t want their business to be openly discussed.

Administrator
Shoreham EGKA, United Kingdom

Peter wrote:

the only way to make money with “small companies” (…) Put it another way, act on inside information regarding some wonderful new invention about to be patented. That’s in theory illegal,

No, it is illegal only with listed companies.

ELLX
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