Cautious buyers hold out for price rationalization

 - July 30, 2008, 6:50 AM

While many expected 2008 to be one of the slowest summers in quite a while for the pre-owned market, foreign buying activity seems to have given the industry a boost. There are still plenty of U.S. buyers, but because prices rose to new heights a year ago as inventory fell, many seem to be holding back until the ongoing retrenchment in pricing is fully realized.

Prices always seem to fall more slowly than they rise, which often exacerbates
the correction, typically by extending it as sellers continue to want to trade the market that was, rather than the one that is. Lending credence to this is the inventory level that increased above 2,000 aircraft for the first time in five years. However, one can’t overlook the fact that nearly 4,500 new aircraft were delivered between then and now, so the current level is somewhat insignificant as a comparison and could be expected to rise further.

While 13 percent of the worldwide operational fleet is for sale, this figure includes many older aircraft that often tend to languish on the market. Conversely, less than 10 percent of newer aircraft–those that are five years old or younger–are for sale on the pre-owned market.

It’s interesting to field calls on Gulfstream GIVs in the current market. Sellers are quick to point out how crushed the market is (from their perspective), with 29 for sale at present, but they’re comparing this to last August when there were just eight for sale. In fact the 13 percent that are now available is closer to the normal supply than the 3-percent supply last year, which pushed up prices significantly. Those prices are now retreating–not as fast as some buyers would like, but nonetheless illustrating the point that buyers are there and waiting to step back in the market. In fact, some are a bit anxious as evidenced by their protest of prices after their offers seemingly fall on sellers’ deaf ears. Falcon 50s have climbed to 34, about four above the 12-month moving average but well below its all-time high of 51 that it reached five years ago. Taking into account the two sales pending, this market also sits at 13 percent.

Position Premiums Remain
As it has for the last few years, the market for large-cabin, long-range aircraft is holding up well. However, finally there are a few choices for prospective buyers of aircraft in this sought-after group. Looking at the G550, with the fleet drawing closer to 200 in service, there are only five deliverable aircraft for sale and another four delivery positions.

The G450 has about 100 aircraft in service and offers eight for sale, four of which are positions delivering next year. Similarly the Challenger 300, with an operational fleet size of 200, offers 14 for sale, four of which are positions. All these models offer greater choices from a year ago, but it’s hard to say that’s meaningful when in all three cases the percentage of the fleet for sale is negligible.

Demand appears greatest for aircraft that can be flown today, even though that means a buyer loses the ability to specify any interior appointments or paint schemes and colors, which is one of the advantages for buyers purchasing delivery positions.

Positions among this group, depending on their respective delivery dates, are still bringing significant premiums despite the greater number of choices available this year. Positions typically receive the greatest attention right before the spec date and then go somewhat dormant until a month or two before actual delivery.

If premiums on positions erode, as some expect they will, some sellers might opt to take delivery instead, as they may have placed the position on the market only because of the premiums sellers were getting when demand was stronger. These are not desperate sellers by any means and rarely are they first-time buyers. Many already have a nice large-cabin aircraft; they simply might not have realized how nice until the delivery positions started capturing $10 million premiums.

When someone can sell a piece of paper for $10 million, I find it more surprising that the supply isn’t greater, which probably speaks to the viability and actual need for the aircraft more than anything else. Taking the G450 as an example, consider that Gulfstream churned out 38 aircraft last year and six months into 2008 seems to be on pace to deliver that total number again this year. Basically Gulfstream is delivering 10 every quarter. (In 2005 and 2006 the combined total equaled 42). If you apply the 10-percent rule of availability, you might expect to find one position per quarter released to the used market.

A look at G450s shows that’s just about what’s happening, as there are currently for sale one first-quarter 2009 position, one second-quarter 2009 position and two third-quarter 2009 positions. In addition, only 4 percent of deliverable G450s are for sale and they are reportedly capturing figures well above the original sticker price. Going forward we will be watching these position sales closely, but for now, whether it be a Falcon 7X, Global 5000, or G550, most seem to be behaving in the same manner– great demand, a few more choices and significant premiums.
The arrival of fall will likely be a welcome relief for aircraft sales as historically this season is one of the most active times of the year.