Pre-Owned Update: Turboprop aircraft market appears to level off as buyers perceive value

 - May 8, 2008, 11:06 AM

While people dealing in pre-owned turboprops are not exactly doing cartwheels over the state of their industry these days, most are optimistic that the downward spiral seems to be flattening out. They cite an apparent leveling of prices, which is bringing buyers back into the marketplace, and more favorable insurance rates.

“I’m encouraged by the signs that I am seeing in terms of buyers’ willingness to purchase these aircraft in greater numbers,” said Andy Biller of Duncan Aviation in Lincoln, Neb. “I think that there is a realization out there that the values are attractive enough, and the prices are stabilizing enough, that the buyers can do pretty well. In other words, we’re still very cautious, but we’re seeing renewed interest in buying these airplanes at the prices they are commanding today.”

Another factor in the new and later-model turboprop market is the owner-pilot, whom Biller describes as having been “a significant consumer” for some time. With insurance constraints placed on owner-pilots these days, they are finding it a little easier or less costly to get insurance for a turboprop than they would a jet.

Byerly Aviation’s Larry Byerly agrees that insurance is increasingly showing itself to be a factor in the pre-owned turboprop market. “The insurance force is keeping guys who would otherwise love to be in a light jet out of those airplanes until they’ve built sufficient turbine time to find their Citation,” he said. “I think that bodes well for us.”

Byerly Aviation, which operates at Greater Peoria Regional and Pekin Municipal airports in Illinois, specializes in the Twin Commander line of turboprops, which have been out of production for a decade-and-a-half. It claims to have completed more Grand Renaissance Twin Commanders than any of the Twin Commander Aircraft service centers that do the work.

“There’s a huge group of piston owners– both single and twin–who would like to move up,” Byerly told AIN. “I’m not going to say that today’s market is sterling; it’s down significantly. But we’ve had pretty consistent activity as far as calls are concerned.” While inquiries “just haven’t leapt up,” he admitted that sales have and ebbed and flowed. “We’ve had our slow points in the last year,” he said.

For aircraft brokers, drops in prices are less painful than for retail dealers holding a large inventory. Early last month Byerly said his company had about a dozen airplanes in stock, a mixture of brokered and owned. It had just acquired a Cessna Conquest.

Maintaining that there are still buyers out there, he said the question is whether the sellers are willing to meet the buyers. “In this market, as the opportunities come up, we’ve actually turned into a buyer and seller more than we were a year ago,” said Byerly. “I wish I knew where we were going to be in a year.”

‘Not a Good Year’

Skytech Aviation is a dealer for Cessna Caravans, the Piper Meridian and the Pilatus PC-12. And as a former Socata TBM dealer, Skytech represents that company for maintenance purposes.

As a dealer in new turboprop singles, it tries to leverage the current economic malaise into a sales pitch.

“It is certainly not a good year at all just in terms of general sales climate,” said Mike Fitzgerald, Skytech executive v-p and sales manager. “That being said, the airplanes that we sell we feel provide a lot of transportation for the lowest direct operating costs, and that’s one of the things that we’ve been hitting pretty hard.”

Fitzgerald argues that the Pilatus PC-12, in round numbers, has half the direct operating cost of a Beech King Air. “In tough times we like to think that some of these airplanes make more sense in terms of keeping the operating costs down,” he said. “Even though the up-front cost may be a little bit higher than a like used piece of equipment, the lower operating cost and newer technology wins out.”

In its dealings with pre-owned aircraft, Skytech Aviation, which operates at Martin State Airport in Baltimore, Md., and Rock Hill/York County/Bryant Field in South Carolina, sticks mostly with the new turboprop singles that it sells–Caravans, Meridians and PC-12s–because of its familiarity with the product.

“Our company won’t routinely venture out and just buy any kind of airplane that happens to look like a great deal,” Fitzgerald said, “mostly because we provide a high level of service after the sale, and our mechanics are trained to work on certain airplanes.”

That enables the company to know the marketplace for both new and used aircraft, and it is able to refurbish and recondition the airplanes as close to new standards as possible. But Fitzgerald added that Skytech will broker “just about anything,” but in most cases it is selected as a broker because of its knowledge of a certain market.

“That drives you back into the markets that you’re in most of the time,” he explained. “People go to offer an airplane for sale and they instinctively want somebody whom they feel knows the marketplace, knows the people who are going to buy the airplane, have the ability to operate the airplane and can talk about it.”

The Insurance Obstacle

As with his compatriots, Fitzgerald has found the insurance situation an “interesting obstacle.” He recalled that years ago the initial sales effort was to find a buyer who could afford the airplane and then find the airplane the buyer wanted. Nowadays, the first question is who will fly the airplane and if they can be insured?

“The ability to get adequate insurance for the owner-pilot is critical for us,” said Fitzgerald. “It’s really up on the top of our list.”

In the case of the Caravan, Meridian and PC-12, he said, good safety records cause the insurance companies to look favorably on them. “Since you can get the same speed–or greater–from a turbine single that you can get from multi-engine airplanes, have a reduced operating cost and get them insured, a lot of businessman-pilots are looking in that direction,” he said.

Tom Mekis of Piedmont Hawthorne of Winston-Salem, N.C., describes the current market as significantly slower than in the past, perhaps near the level experienced during the down times of the late 1980s and early 1990s. “In overall business volume this is probably the worst year we’ve had in 10 years,” he said.

“It’s a little frightening,” he acknowledged. “I guess the good news is that I don’t think it can get much worse than it is right now. It looks as if next year will be a bit better…but I don’t really have anything to base that on.”

According to Mekis, the values of the airplanes have come down to the point that they are really representing what he believes are their true worth. Hopefully, with that price adjustment, he said, people will start getting back into the market and buying airplanes again. But he cautioned, “I don’t think we will recover until the rest of the economy does.”

The current slump is not limited to pre-owned turboprops, and he opined the pre-owned turboprop market “seems stable in that we have steady activity.” Although it isn’t to the level of the late 1990s and 2000, he suggested it is not completely dead, either.

Figures supplied by Tinton Falls, N.J.-based Amstat seem to confirm that the retail market for pre-owned turboprops is sluggish, but stable. Monthly sales figures for 2001 and the first 10 months of this year hover around 1 percent of all active turboprops. Meanwhile, production of new turboprops–which one dealer described as “just letting them trickle out the back door”–has slowed recently to about 140 a year.

As a Raytheon Beechcraft dealer, Piedmont Hawthorne focuses mostly on new aircraft sales. As a result, it spends more time on late-model King Airs than any other airplanes. But it also brokers Learjets and Citations.

“We have a Cheyenne that we’re brokering right now, and occasionally other turboprops will trickle in,” Mekis said. “But you have to keep in mind there aren’t that many other turboprops out there. King Airs have dominated for a long time.”

The company also has a used-airliner division that dabbles in the 30- to 50-passenger turboprops, such as Embraers and Saabs, and the 19-seat Beech 1900s, a market that has dropped sharply because the regionals are all buying jets. “We’ve seen that segment of our business come to a complete stop,” said Mekis.

The exception is selling such aircraft to NASCAR race teams. “We’re heavily into that market down here,” he said, especially because of Piedmont Hawthorne’s location in the heart of stock-car racing country and the fact one of its salesman is actually a spotter on a NASCAR race team.

“We have probably sold 40 or 50 airplanes to the drivers,” said Mekis. “And they move up. They start out in Bonanzas and Barons and then move up into King Airs. Now they are all moving up into the larger regional turboprops. It’s a corporate shuttle for those teams.”

Dick Kladstrup, one of the partners in Kladstrup-Wetzel of Englewood, Colo., likened the sales of pre-owned turboprops to the nation’s current economic situation. “I think it’s safe to say that our particular segment of the industry, the buying and selling or brokering of used turboprops and jets, is pretty reflective of the overall economy,” he said.

“When things are tough, the first thing to go is the corporate airplane,” said Kladstrup. “Generally the last thing to come back is going to be the corporate airplane. So what we’ve seen is a definite building of inventories in a difficult market.”

With bigger inventories there are going to be corresponding price drops–the case for the past two years. “Today, there are an awful lot of airplanes available out there,” said Kladstrup, “and price unfortunately seems to be ruling the day. That’s not the best market to be in, but that happens to be the fact.”

While he believes that the industry is in a trough, the question that remains is how long will it last? “In the used marketplace we are at the mercy of the new airplane manufacturers,” he said. “If they’re pumping new ones out, we’re selling used ones. If they stop pumping out new ones–and that seems to be the case at a number of manufacturers–our end of it slows down too. There is only so big a market out there.”

Some are saying there may be no change for two to three years, and without some unseen catalyst Kladstrup’s company is convinced the market is going to remain that way for a while. Consequently, as a broker-dealer, Kladstrup-Wetzel has become much more cautious in its approach.

“It’s not nearly as much fun as it was when things are really hustling,” Kladstrup admitted.

“We’re much more conservative today in the numbers that we will bid for an airplane to come into our inventory, because we anticipate holding it longer than normal.”

Twin turboprops continue to sell, he pointed out, because few remain in production. With turboprop singles relegated to what he calls “almost specialty items,” the only twin-engine turboprops still being built are three King Air models and the Piaggio Avanti. [In the third quarter of this year, Raytheon built only 11 King Airs, while Piaggio produced one Avanti.]

But the out-of-production aircraft are still well supported by manufacturers, so it is still possible to get parts. Service centers are still out there in great numbers. And although prices have dropped somewhat over the past couple of years, it has not been a great decrease, in Kladstrup’s view.

“I suppose somebody who paid $800,000 or $900,000 for an airplane two years ago, that’s worth $750,000 today might think that’s a huge drop,” he said. “Well, tell them to look at their stock portfolio and see how that dropped.”

Noting that “they built these things to last forever,” he said the company has received a high number of calls from people still asking for older aircraft. But one of the things that is starting to affect used airplanes is the price of overhauling the engines, which has “really gone through the roof.”

Consequently, a customer could buy a short-body King Air or Cheyenne for six figures, but might then have to spend $300,000 to $400,000 to have the engines overhauled. So the engines are becoming as valuable as the rest of the airplane.

“We’re still getting a lot of calls and they’re still selling,” Kladstrup said. “And I’ll tell you why: what’s the alternative? There are a number of airplanes on the drawing board, but they’re not out there yet. So if somebody can’t afford that jet or doesn’t need a jet, but they need an airplane to get around in, what are they going to buy?”