European buyers reap benefits of weak dollar

 - February 1, 2007, 10:08 AM

The continued weakness of the U.S. dollar on international currency markets is stimulating sales of U.S.-based business aircraft to foreign buyers. With the dollar recently reaching historic lows against the three-year-old euro, prospective buyers from Europe are pouncing on exchange-rate-based discounts.

When the euro was launched in 12 European countries on Jan. 1, 2002, it was worth 89 cents (subsequently declining to a low of 85 cents during the course of that year). By the end of last year, the euro had increased in value against the dollar by almost 60 percent, to buy just over $1.36. Over the past couple of months, the dollar has rallied slightly to reach $1.30 against the euro on February 4 (compared with an average exchange rate over the past three years of around $1.11). Other leading international currencies, such as the British pound, have also maintained high values against the dollar over the past six months or so.

Brokers interviewed by AIN largely agreed that Europeans now have seriously bolstered buying power in the U.S. market for pre-owned business aircraft–as indeed they do when purchasing dollar-priced new models too. But while this market force is stimulating deals, not everyone sees it as a positive trend in the medium to long run.
According to Bryan Comstock, AIN columnist and president of Long Beach, Calif. aircraft sales group Jeteffect, Europeans are definitely more active in the U.S. marketplace than they have been in the past, and he expects this trend to continue for some time. “I’m somewhat fearful that this activity will reduce inventory further and continue to push up prices,” he cautioned, predicting that buyers could feel the full effect of this process by the end of this year.

In recent months, Comstock has seen foreign buyers swooping to outbid him for business jets, empowered by their strong currency. He said that with delivery dates for new aircraft extending well beyond 12 months and used examples of these same models in short supply, pre-owned prices are already firming up significantly.

However, for Janine Iannarelli, president of Houston-based Par Avion, the weak dollar is not such a powerful driving force on the market. Her perspective is that the market is still in recovery, but that it is now making good progress, with sales growth expected for this year.

In Iannarelli’s view, the strength of foreign currencies against the dollar has a greater effect on new aircraft sales. She said the size of the overall European market is still much smaller than that in the U.S. and a higher proportion of customers there are buying new aircraft and fairly new pre-owned models.

“Most people are waiting to bid for just the right aircraft for them,” Iannarelli said, maintaining that the strength of the euro alone isn’t enough to make European buyers jump into a transaction that they otherwise wouldn’t consider.

According to James Healey, managing director of Monaco-based Jet Alliance International (which also operates the Bloomer de Vere Europe joint venture with the California-based Bloomer de Vere Group), the main effect of the euro’s strength against the dollar is to encourage European buyers to upgrade the pre-owned aircraft they buy in terms of size and/or age. “They might have initially been in the market for a 15-year-old aircraft, but then realize they can afford a 10-year-old model,” he explained. “Or they might now buy something like a Challenger instead of a Hawker.”

A Buyer’s Market
On the flip side of the currency exchange equation, sales of aircraft from outside the U.S. are suffering as a result of the weak dollar. “Some people selling foreign-registered aircraft are seeing their profits evaporate and they want to close deals quickly before this situation gets even worse,” said Iannerelli. Overall, she felt that the strength of the euro is now hurting European businesses and deterring Americans from crossing the Atlantic to make deals.

Rick Engles, of Washington, D.C.-area broker Vance & Engles (which also has a UK office), said the continuing currency exchange imbalance is a double-edged sword because the vast majority of used-aircraft buyers are also selling something and so stand to lose as a result of the weakened dollar. “All purchasers are driven mainly by the simple desire to have an airplane,” he said, while acknowledging that the strong euro has quite probably encouraged some of those who have been hesitating about buying another model to get off the fence.

Tom Bunker with Geneva-based Jet Finances Consulting also insisted that the affordability of dollar-priced assets is far from being the dominant market force right now. “The biggest issue pushing aircraft purchases is security and the inconvenience of using airline services,” he commented. He agreed that lengthening lead times for
new business aircraft are reinforcing demand for used types, partly by the manufacturers themselves, who look to secure pre-owned aircraft to serve as interim equipment for customers waiting to take delivery of new ones.

Bunker also suggested that European buyers are well advised to take a longer-term perspective on aircraft purchases. “Many of their operating costs could be in dollars, so what will happen if the dollar bites back?” he asked. “And then three or four years down the road they might be looking to sell this same aircraft at a time when the dollar is strong.”

Jet sales are denominated almost exclusively in U.S. dollars because of the dominant size of the U.S. marketplace and the fact that other international markets such as Asia and Latin America trade in dollars. This gives European sellers little scope to avoid seeing diminished returns by pricing their equipment in euros, because they would effectively be ruling out prospective bids from outside Europe.

Healey explained that transactions conducted between Europeans will start with a dollar price, even if the transfer of funds is subsequently conducted in a local currency at the prevailing exchange rate. However, some smaller helicopter and fixed-wing piston aircraft deals are being done in euros.

In addition to existing business aircraft owners trading up, new European customers are coming to the market, particularly from the fast-growing economies of Eastern Europe.