Prices adrift as inventory continues to flood the market

 - January 29, 2009, 11:13 AM

The standoff between buyers and sellers over the last six months is beginning to show some wear. It seems that sellers had been concentrating on where prices were six months ago, as buyers were predicting where they would be six months forward. The dichotomy in perspectives aided in slowing transactions to a crawl. Recently, however, some sellers have begun to acquiesce and accept what can only be viewed as surprisingly low prices from opportunistic buyers. If anyone is wondering if there are any buyers out there, watch what happens when someone drops the price of an aircraft: there is not just one buyer but several.

Seller’s Market

It’s not atypical in the current market climate for buyers to make one-and-done offers. If a seller is unwilling to accept a buyer’s offer he’ll often move on to another prospective deal. In this market sellers making small price reductions do little more than keep up with the pack, while those intent on actually reaching the exit end up selling their aircraft. No seller likes to think the sale prices of some of these deals are market-adjusting events, but without subsequent sales of comparable aircraft at higher prices this could well be the case.

The GV market provides a clear example of this. There was one aircraft for sale at the beginning of last year before inventory increased to 13 last fall, which is still a small percentage of the type’s total numbers. Before last fall’s market downturn there were five transactions which, according to aircraft tracking data service Aircraft Post, saw aircraft sell for between $37.5 million and $46 million. The three that have sold since then have moved out from $21 million to $32 million. Most of the GVs for sale today carry asking prices throughout the $30 million range. Obviously, this price destruction has weighed on all Gulfstreams downstream from the GV, all of which have grown in availability and fallen in price.   

Buyers are apparently content to wait out the Citation X market as no transactions have occurred since before the NBAA Convention in October. Lack of buyer interest has pushed inventory above year-ago levels, but it still stands at less than 10 percent of the 300-strong fleet. Pricing at the low end has broken below $10 million, but later-model examples still climb into the high teens.

In comparing total transactions in 2006, 2007 and 2008, it’s no surprise that 2008 was subdued compared with the previous years. The intense feeling that the bottom has fallen out is to be blamed at least in part on the great number of transactions that occurred in 2007. While last year was below 2006 sales results as well, the difference was not nearly as dramatic.

There are still buyers. Some who might have considered buying six months ago and are still in a position to do so are ecstatic at the opportunities now before them.
A number of individuals who are not required to report to a board, shareholders and the like often take advantage of markets such as this and often are responsible for implementing trading ranges for comparable aircraft.

Buyers, sellers, brokers and so on can use a transaction price to bring some clarity to markets that have become obscure, to rationalize pricing to affect another sale. A seller’s agent can use a recent sale to say to the next buyer, “Well, this aircraft just traded at X and so this aircraft is worth X.” The more transactions, the more clearly defined the trading range becomes.

Right now, sellers are willing to consider options that were heretofore out of the question. For example, trades down, while never easy, have more chance of happening in the current market. While typically both buyer and seller would prefer an all-cash deal, a buyer shortage can make a trade scenario a viable option for both. This type of transaction typically avoids any low balling as both parties have aircraft they want to sell and it’s more about the difference figure. All things being equal, the parties might agree to a book retail-to-retail, or wholesale-to-wholesale.

Another option is to lease the unwanted aircraft, which again may not be the first–or the best– option but an option nevertheless and one that is employed by some who are taking delivery of new aircraft and don’t want the burden of paying for two.

As the market choices have expanded from 1,700 in January 2008 to nearly 2,900 today, you might expect that aircraft resale publications were ballooning with advertising, but the opposite is true. In fact, we’ve seen one publication take a hiatus and others get skinnier. Just five months ago, one of the premier publications grew to nearly 400 pages. Despite a significant increase in the number of aircraft for sale since then its page count has dropped dramatically month over month as resellers look to conserve or consolidate ads amid a period of lackluster sales.

Generally prices have dropped so far so fast that many believe the worst is behind us in terms of value destruction. While there may be additional slippage, it’s clear that many are nearing a tipping point that could slowly bring buyers back into the equation.