Buyers gain the advantage as more aircraft offered for sale

 - October 9, 2008, 7:14 AM

The summer doldrums in the pre-owned aircraft market have more often than not been followed by an upbeat seasonal period for aircraft sales, but that is not the case this year. The collective inventory continued its unabated, year-long climb, while prices have been experiencing a corresponding downward trek, accelerated by an historic unwinding of the financial markets.

The pre-owned market is similar to the stock market in that aircraft tend to get overbought and oversold. Right now, in fact, the market is experiencing a long-anticipated adjustment as slower global growth has dragged this sector along with it. This environment has brought the total number of aircraft for sale to record levels. However, the worldwide fleet has also never been larger.

Most market participants expect the inventory growth trend to continue, despite the fact that this is often the busiest part of the year. We are in an interesting period now, as brokers field calls from clearly ambitious sellers, but they are also getting calls from opportunistic buyers who have been waiting on the sidelines for such a market move. Many of these buyers aren’t too concerned about the liquidity crisis because they are cash buyers and can seize any opportunity that fits their specific profile.

Buyers Snap Up Late-model Airplanes
Aircraft positions of nearly all types, as well as late-model and large-cabin aircraft, have been the sweet spot in the market for a long time, and this sector continues to hold up well. Certainly, position sale premiums (the prices buyers will pay contract holders for an aircraft delivery in the short-term, versus waiting several years for a new one from the factory) have begun to erode, but as recently as last month some light jets were bringing in six- and seven-figure premiums.

Some aircraft models are actually in lower supply today than they were a year ago. Some models have significantly more airplanes on the market this year than last year, but last year’s levels were exceedingly low. These models–and there are many of them–are still active and their added choices (which in many cases represent less than 5 percent of their respective production runs) can actually spur sales on.

Consider the GV, which last year presented only one to the pre-owned market. If there is only one of anything, you know you’re overpaying, a fact that might have kept a number of buyers at bay, if nothing more than for the principle of it. When there are a handful on the market, on the other hand, the buyer feels he can negotiate and steps back into the game. The same is true for the Gulfstream IV-SP, 14 of which are on the market this year, up from four last year. However, that figure still keeps the offerings a tick below 5 percent of the nearly 300 in operation.

The Challenger 604 is one example of a model type that has fewer choices available now than last October. Today’s 17 offerings place the supply at four below where it was a year ago and one below the 12-month moving average. Similarly, the 601-3R, the predecessor to the 604, has backed off a few ticks from last year’s levels and is also below its 12-month moving average.

Other models, such as the Falcon 900EX, are more numerous than last year. In the case of the 900EX, that was expected, as Falcon 7X deliveries began trickling to the market, many finding their way to current 900EX owners. The current supply of 15 Falcon 900EXs is only a handful above last year’s numbers and keeps the availability figure at roughly 7.5 percent of the nearly 200 built.

Similarly, anticipated deliveries of the Citation XLS+ might be the culprit behind the growing number of XLSes available, but here again the growth has to be put in perspective. Though the choices have tripled from a year ago, they stand at only 15, or 5 percent of the nearly 300 currently in service. Despite some healthy trading activity among a number of models, values abound among many others, and in all likelihood will continue to.

Buyers can often find a bargain if they connect with a seller who is upgrading. Many operators do not want to be left without an airplane while they wait for the new one, but they do not want to own two airplanes once the new one arrives. While these upgrade buyers strive to accomplish a nearly seamless transition from old to new, unless they have already secured a trade-in value from the manufacturer or dealer, it is challenging to execute and will likely become more difficult as time goes on. Based on the current environment, this is just one area where buyers will be able to uncover value. 

While the current pall over Wall Street can quickly cast its dark shadow globally, that cloud can lift just as rapidly. For now, though, a retrenchment in aircraft sales, albeit from extraordinary levels, is clearly afoot. Manufacturer backlogs of new aircraft will offer just one indicator of the overall strength of the market. If these get revised downward, many believe we will see a continuation of the diminution, and possible elimination, of premiums being paid for some aircraft positions. For now the market is acting more as if it’s in a holding pattern as companies and individual buyers proceed with greater caution while they digest a plateful of bad news in select–but important–sectors of the economy in the U.S. and throughout the world.

Bryan Comstock is a cofounder and managing director of aircraft broker Jeteffect.