Reports: storm brewing in pre-owned market

 - September 30, 2008, 5:21 AM

As if there hasn’t already been enough bad financial news, reports from UBS Investment Research and JPMorgan indicate that pre-owned business jet inventories continued to increase in August, leading both firms to warn that deliveries of new aircraft could fall as a result.

David Strauss of UBS Investment Research said pre-owned available inventories hit another high in August, 4 percent higher than in July and 34 percent higher than in August last year. He said the increase was driven by the rise in the number of new (less than 10 years old) airplanes on the market, which was 7 percent higher in August than in July and nearly double the previous year’s levels.

Still-strong order activity would appear to indicate a business jet market that is holding up well. “However, we believe the market has come off its peak and is likely to fall further, although deliveries and earnings could continue to grow, given unprecedented backlogs and strong pricing embedded in them,” Strauss added.

JPMorgan was more pessimistic. “Let there be no doubt the used market is rapidly falling apart, which should lead to a deteriorating market for new aircraft in short order,” it said. According to the investment firm, used aircraft inventories were at the highest level since September 2003.

Inventories for sale are up 52 percent from 6.2 percent in January. All three business jet categories–heavy, medium and light– saw higher inventories, with heavy jets up 90 basis points, medium up 70 basis points and light up 60 basis points.

JPMorgan also noted that average asking prices declined by 2.3 percent year-over-year, influenced mainly by heavy-jet prices, which fell 5.8 percent. However, midsize-jet prices rose 5.4 percent in the past year.

“We continue to believe that this data portends a major deterioration in the new aircraft market quite soon, and it has been a factor in our recent downgrades of the two largest OEMs–Bombardier and General Dynamics,” JPMorgan said. “To us, the most relevant question remains not whether the market is going to shift, but how well the OEMs, with their record backlogs, are able to weather the storm.”