Pre-owned Update: Inventory shrinks, even as prices increase

 - March 28, 2011, 6:20 AM

Attractive pricing persists on many popular models despite a continued tightening of inventory to its lowest level since peaking less than two years ago.

A small number of models have experienced an increase in pricing off their lows, but arguably they might never return to the inflated levels visited during the market peak of 2007. Yet any price appreciation seems to speak to the resilience of the market, and further price bumps might be around the corner. Take, for example, the GIV-SP market. Its collapse pounded prices down by 50 percent from peak to trough, which is not hard to explain when, as it did between August 2007 and April 2009, inventory goes from four to 40. So the question is, to what level does inventory have to shrink before the market tolerates a price increase? There are currently 18 GIV-SPs for sale, with average asking prices around $14 million. When there were 18 for sale less than two years ago the average asking prices were twice that, which shelves the supply-and-demand argument that previously seemed a fitting explanation. Copping the line from a well worn financial disclaimer, it seems that “past performance is no guarantee of future results.”

‘Buyer Disconnect’ Remains

Ten-percent supply of any one model type on the market at a given time is generally accepted as a normal or average supply, and either side of that may be used to define a buyer’s or seller’s market. Right now the GIV-SP market has only a 6-percent supply (fewer than five if you subtract the three that are labeled “lease only” and “sale pending”). This market should be one of the next to experience an uptick–as soon as this quarter–if it maintains its current sales rate of better than 1.5 per month. However, a “buyer disconnect” has to take place first, and it affects every model type. This disconnect arises when the market improves and begins to lean in favor of the seller: the perplexed buyer discovers he can no longer duplicate a deal that might have occurred in the recent past. Once that epiphany strikes, the market spikes. Right now that seems to be where the GIV-SP market is, or is nearing. Supply is relatively low and buyers, beginning to hover, will likely have to pay more than before to snag a deal ahead of someone else. Sequentially, you should see subsequent prices meet or eclipse the previous sale price, and so it starts.

Clearly other forces and factors play a role in elevating prices for any airplane model but, sticking with the GIV-SP, you also have to consider how the successor G450 model influences it. After peaking at 20 in 2009, choices have been reduced to just four of a fleet numbering almost 200 in operation. Only one of these has been on the market for less than two years, but regardless, the G450 choices and pricing benefit the GIV-SP seller at present.

Other examples pointing in the same direction include the Bombardier Challenger 605, which presents fewer than 5 percent of its fleet to the market. Only one of the aircraft for sale has an “N” registration number, which catches your eye, but it’s really more a story about the high level of international buying activity over the last decade. Still, if you want to perform your due diligence, pack your bags for round-robin visits to Germany, Austria, Kazakhstan, the UK, Canada and California. Of course, it’s rare for a buyer to consider all aircraft in a market segment, and it’s more likely that there will be model-year requirements or something else that will likely further reduce the pool from which to choose, here again making the 605 a model that could easily see prices pop to the upside.

Similar to the G450 lifting GIV-SP prices, the tightening of the 605s could lift pricing on the later-model 604s, but with so many choices available in that earlier variant any snap back will likely take more time. The popular super-midsize Challenger 300 fares much better, having driven choices down to about half the number at the peak. Considering the supply is closing in on 5 percent of the roughly 300 in operation and that nearly half of them are based outside the U.S., it won’t take long for this market to realize an uptick.

Things have definitely changed from a couple of years ago, when it seemed every model type was going the way of the stagecoach and business jet owners’ photos could pop up in U.S. post offices any day. There now seems to be a resurgence, but unlike a couple of years ago when the market could be lumped into one bucket, there is now a market dichotomy that has been favoring the large-cabin segment and leaving some owners of smaller jets wondering just how much further values have to fall before their respective aircraft would sell. To that end, many if not most models seem close to being properly priced to sell, thereby providing higher definition in those specific markets and model types, thus paving the way for more sales. o