Private jet market heats up: bonus depreciation restored, Bombardier gets a mysterious $1.7B order, and upgrade cycle unlocked

policy. It's called section 174. What it basically said is you have to amortize a developer cost over 5 years. So imagine you're a software company that's like just about break even, slightly profitable, maybe even lose money.

You could lose money but be deemed profitable because you can only deduct 20% of your developer salary as a cost. So imagine you're paying a developer $150,000. You can you have to break that expense over 5 years. So this is disastrous cuz you could own taxes despite losing money.

Y um this bill fixes it and you can now again take the entire deduction year one. Yeah. For local talent only. Yeah. That one always seemed seemed odd because um obviously a real cash cost. Local talent only though. So offshore. So this does this does hurt offshoring. We'll see. We'll see sort of where it nets out.

But this was definitely one of the few things that I think unanimously everyone's like, "Okay, this actually makes sense. " Huh. That's great. Cool. Well, anything else, Jordy? I think that was it. Thank you so much for anything else. Anything else top of mind that that that people should be thinking about?

Uh I mean there's so much stuff in there. Again, you know, I talk about it a bunch. I think these are these are sort of good highlights. Yep. Um but yeah, always talk to your tax professional. Not not tax advice, of course. Never never from Anchor, but carry. com. Check it out. Well, thank you so much for stopping by.

Cheers. Great to catch up. Bye. Uh well, if you're looking to invest some of that money, put it in public. com. Investing for those who take it seriously. Multiasset investing, industryleading yields. They're trusted by millions, folks. And why not go buy a billboard at adquick. com.

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John, every single day somebody runs by. I've got text every single day. It's crazy. So we're by Sunife Smoothie right now in New York. Go head over to Sunlife and you can see our building. I highly recommend just doing it out of home campaign. Uh let's bring in Preston, Mr. Mr. PJ. How you doing? What's going on, boys?

It's good to see you. Great to have you back on the show. Yes. Welcome to the stream. Uh kick us off. Break it down. Uh I I don't think you need a huge introduction now. You're you basically invented the private jet, but um but why don't you give a quick intro and then I want to get into the news.

Hey, I am Preston Holland. I am the founder of Prestige Aircraft Finance. Uh I am also I was called the private jet guy on Twitter once at a party by a guy who owns a private jet. So, uh I would say that that was pretty that was a actually was in that circle. Uh I'm thinking thinking back on it.

Uh wait, so so but you've never built a brand around the brand of like being a guy because like that's a thing which is which is good. I I I think all the guys should seriously think about rebranding to their own names. The private the private jet man. Yeah. Yeah.

Potentially all the guys got cancelled uh during the whole LP whisperer scandal. Uh that's deep that is deep in that's excellent. Uh but yeah uh stoked to be here. It is uh it is a good day for private jets and break it down. Uh so uh I think that you just had the founder of Carry On and we were talking about taxes.

Uh let me preface this with this is not tax advice. Uh and you should consult a tax professional.

So now we're going to talk about tax advice and uh but uh you can uh with bonus appreciation passing uh it is it's been huge for private jets and it's going to be be really big uh because you can expense the full cost of the jet in the first year. key is it has to be used 51% for business.

So if the technology brothers wanted to purchase a jet and 51% of the time you are flying between location shoots and studios and you're shooting great B-roll commercials or going on a wander promotional uh tour. Um, I'm always good for a good uh for a good plug.

And uh if you're using that 51% or more for business, then you can depreciate or cost accelerate the purchase price in the first year. So it reduces your tax basis, which is great. So it basically becomes highly profitable to purchase a private jet. Just kidding.

Not not quite not quite that, but but it can happen if you have massive taxable income and you're about to pay a bunch of tax and you buy a plane, you can depreciate all of that. Yeah.

And so if you're paying, you know, 30% 50% marginal tax rate at the level of like hundreds of millions of dollars, throwing a private jet on the books there allows you to write that basically all off on day one. Well, and there's also scale there.

There's plenty of you know if you're making 10 million a year and you buy a even a you can also do this for fra fractional ownership as well. Is that correct? Yeah. Yeah.

So for fractional when when you're buying fractional so for those listeners that are new to private jets uh fractional netjets flexjet are the largest providers of fractional uh of fractional jets. And so you are actually buying a sliver of an actual tail.

So like of an actual jet, you may not ever actually fly on that airplane in the entire in your entire contract life, but you do own a portion of an actual asset. And so you can depreciate that like you would a whole aircraft. Yeah. So how how quickly the bill was signed into law?

Was it it wasn't was it on the morning of the the 4th by the president, but how how quickly does the market react to this kind of thing?

Was there like deals that were getting worked on in the leadup to that assuming that this would go through that suddenly are are actually getting papered and signed now or do seller owners sellers typically want to hold and not you know price a transaction until this kind of thing gets clarified because it can have such a material impact on the actual cost of ownership.

So you kind of have so so it's retroactive to January 19th. Um, ironically enough, I have a client who we had to delay his closing about two weeks um to actually close on his plane.

He was supposed to close on like July or on January 5th and we had to delay it to January 31st and that ended up being a significant significantly good delay. Um, so it it it turned it turned good. I I actually have no idea why the arbitrary January 19th number um and not January 1st.

That kind of seems a little more logical to me, but uh Janu January 19th is kind of the back date. There was there you you had kind of a bifurcated market. You had buyers who didn't want to speculate on actually buying the aircraft and maybe it will come back, maybe it won't.

And so a lot of those buyers that were call it 80 to 90% of the way there are now saying, "All right, full steam ahead. Let's go ahead and and make the transaction. " Um, and then you had you had kind of a a set of buyers that actually um decided, hey, we're going to speculate. We think that it's coming back.

We have some sort of insider information that says that, you know, we're going to get it back, get bonus appreciation back. Um, and then sellers uh sellers were um sellers are a little bit less uh you know, of that dynamic unless they're upgrading.

So one of the key parts the the reason why bonus appreciation is such a big deal for private aviation and yes it's a big deal for real estate but not as much is there's no 1031 like kind exchange for aircraft. So if you understand how real estate works it's a it's about cost basis and you can step it up.

You don't have to pay recapture in airplanes you do. So, if you're going to step up and you only had a 40% bonus depreciation rate and you had 3 years ago taken 100% bonus depreciation, you end up with this liability if you're going to go to upgrade. So, it was stalling a lot of upgrades in the secondary market.

And so, it's now unlocked that because of the no 1031 like kind exchange, two separate transactions of 100% bonus cancel each other out. So when you have 100% when you're going from costing it 100% to another aircraft at 100%. You have a lot less uh depreciation recapture risk which is good.

Uh especially for those people that are trying to upgrade to the new G700 or the new you know G800 when it becomes certified. Uh it's really big for those kinds of people. Interesting. Um I want to talk about some of the implications of this on the various market players.

Bombadier is the stock's doubled in the last basically three months up huge in the last that's so let's let's double click on that that's not because of bonus appreciation it's not that's actually because of something different that happened last week okay what happened uh so there was a mysterious buyer that put a $ 1.

7 billion order in for challengers and globals. It happened last week and no one well no one knows for sure. There's a lot of speculation of who it was. Uh but no one knows for sure uh exactly who it is. Um I would bet that we'll end up finding out in the next week or so of who it was.

Uh but there was this there was this billion and that was that probably accounted for like 60 or I don't know exactly the numbers, but a lot of that pop has been over the last couple of days. So Bombadier is a $15 billion Canadian dollar uh company.

And I don't have their financials here, but uh you know, yeah, a billion dollars is gonna move move that significantly. This is fascinating. Uh who are the top leading contenders in the rumor mill for who might have done that?

So, uh the the the strongest contender right now is kind of a Saudi conglomerate and there's a few there's a few things that are pointing towards that. you have uh Bombardier just opened a pretty significant maintenance uh facility and network in the Middle East.

And so um there is some some speculation around it being uh Saudi driven, you know, uh sovereign wealth fund type driven. A lot of, you know, these these companies will um uh that are that are doing these these charter operations, they'll they'll place these big splashy orders.

You look at Flexjet uh has made a couple of announcements this year. NetJets's made a couple of announcements last year and they'll, you know, it it's the the manufacturer marches them out on on stage in a press release and says, "Look at Ken Ricky. He just bought, you know, a billion dollars worth of our aircraft.

" The fact that this is, you know, completely in stealth and secret has kind of made uh has has made it has made it curious, but NBS is currently the leading rumor out there. I really actually don't know who else it would be because the other companies in the US-based brag.

They love to talk about ordering the big order. So, it's it's not any of the usual players. Yeah, that makes sense. Um, what about other other like effects on the market?

Um, if private jets get cheaper, is that maybe bearish for some of the, you know, first class options or uh jet X type folks uh that are kind of operating in the middle? Does this mean that there'll be uh more will will charter rates come down because it's cheaper to own?

So more jets will be sold, increase supply, same price. What are you thinking? One of the last times we flew on one of the last times we flew JSX up to the bay. We saw an esteemed venture capitalist and I was actually concerned for the health of his his fund that uh he was flying JSX.

Maybe he'll be able to pick it up now.

So maybe yeah maybe maybe this would be the clearly flying for work so should be able to depreciate it the years of posterity right um so you have an you have an interesting there there's there's kind of three things at play and producer Ben I don't know if you're listening but I sent you a couple of charts and if it's possible to pull them up this is where I'm going to talk about yeah break down the charts so so let's talk about figure one uh so figure one is talking about transaction volume to bonus depreciation key point this is not the first time 100% bonus appreciation has been in market.

So you can look here I I built this chart uh I wrote a big article about bonus appreciation and you can see the red bars are transaction volume and the green line is the effective rate of bonus of of depreciation. So so we've been in a 100% bonus depreciation regime before. This is not the first time. Got it.

It's actually not the second time either. Yeah, which is really interesting. we we have some lessons from history.

If you look what I call what I call the country club effect um is is pretty in play here because people don't people didn't necessarily understand the concept of bonus depreciation uh when buying aircraft when how how it applied previously. And so if you look back into 2016, you can actually watch the red bar.

It's actually not until the next year that you get a bump in transaction volume. Uh so it's not necessarily in the first year there it's a lagging indicator. The same is true with what's called private jet bookings.

And so uh when you talk about ordering new aircraft and so that's what Bombardier Gulfream Textron Ember that's what all the big dogs follow they also have a lagging it bonus appreciation is a lagging indicator for them. And so transaction volume probably will pick up next year.

it may not necessarily pick up this year, but I counter that with uh figure two, which is talking about bonus depreciation versus interest rates. So, we're in an interest rate environment now.

If you've been watching uh Trump versus Jerome Powell, uh which I mean, I would pay-per-view at this point to see them in a room. Um you can see that uh the difference this time is that interest rates are higher than they were uh during the last era of bonus appreciation which is when all of the craziness happened.

You had in significantly increased levels of transaction volume which drove prices up. You had supply get constrained. You had COVID. You had all of these competing factors. But underlying kind of the core uh fundamentals were the fact that interest rates were effectively zero.

And so effectively zero interest rates means capital becomes yield hungry. You guys know this because you've you've been in venture capital for a while. And so when my effective risk-free rate is zero, I'm going to go yield seeking. Well, now my risk-free rate is 4 and a. 5%.

And the difference between an 8% IRRa and a 12% irr, right? makes the makes buying an aircraft and just chartering it out not make as much sense. So I think that that's you don't have the charter aspect that you did during kind of the 2020 craziness 2019 2021 craziness.

Um so that's your answer to kind of the the uh as far as charter rates but there is a lot of supply on the market and so this is where figure three comes in. Thank you to producer Ben for uh being on top of all this. if it if it is producer Ben pushing this button. Oh yeah.

So this is from my friend uh Greg Sidor at Guardianjet. He is on X. So everybody go give him a follow. Uh they are the uh number one volume transaction uh brokerage in the Fortune 50. And so they do a lot of buying and selling for the elite of the elites.

And so this is tracking uh this this is tracking total supply on the market.

So if you can if you look we have more supply on market today than we had during 2019 which is pre-COVID right you see the big dip that happened right after co it's because everybody figured out let's Can you guys zoom in a little bit zoom in just on the top graph yeah yeah so you can see supply by 2022 it dipped so low that it was probably restricting transaction volume because there was people wanted to people were like interest rates are zero bonus depreciation is high but we there's nothing to buying is that Right.

Yep. That's exactly right. And then people were doing really stupid stuff like buying site unseen in seven days and just wiring a bunch of money. It was I mean it was literally craziness. And I don't think we're going to have that level of craziness.

I think because the supply is at a point where you don't have to make those kinds of decisions to get an aircraft. You can say, "Okay, I'm going to go pick between these G650s. " Um, you know, and you can kind of take your pick. Granted, the upper end of the market is on fire right now.

I mean, it's, you know, your your G650s, uh, you know, like new G700s. Uh, Gfream's about to get rid of a lot of their demo G700s. Um, like that market and the G550 market even is on fire right now because you have the 650 guys moving up to the 700s.

So the 550 moves to the 650 and now the 550 market has become much more attractive and so there's a whole new classes moving into that. So like in the upper end of of the market there's a lot of movement in the older smaller call it sub 5 million older than 20 year aircraft market that market has not taken off yet.

That was the one that went the most bonkers and berserk and was like not even logical. That side of the market uh was what went crazy. It hasn't gone crazy. I don't anticipate it to go crazy again this time. Uh, one last question. Uh, h how does it work if jets are just being passed around?

If I buy one from, uh, Bombardier for $50 million, I take a 100% bonus depreciation, pay, you know, $25 million less in tax or something because I'm writing it all off. Then the next year I sell it to Jordy for$40 million. He sells it to you the next year for 30 million. Is does he get to depreciate it again?

Do you get depreciated? Can we just like keep depreciating these things again and again and again? Yes. So, the short answer is yes. But the thing is is when you sell it to Jordy, uh Jordy or you have to pay recapture unless you're going to go buy a brand new one from Bombardier. Okay.

Um and so and and this is where so recapture would be I pay I I I have to pay taxes on the You didn't actually take the loss that you wrote off. So you you you have to basically pay back what that your benefit. So you bought for 50. All public math. Um you bought for 50, you'd depreciate 100%. You sold a Jordy for 40.

So you actually had a $10 million loss. So you pay recapture on the 40. Yep. At your but it's it's taxed as as normal income. So it's not it's like taxed even worse, right? It's not long-term capital gains. It's taxed as like normal income.

But if you turn around and go buy a $75 million plan, right, like there's a there's a step basis there. And so it kind of washes itself out. If you don't take 100% on the next one,