Pre-owned Update August 2011: Inventory shrinks but prices remain low
Though battered and bruised over the last few years by what seems like a daily barrage of negative global economic news, the pre-owned market participants have become somewhat immune and are apparently now shrugging it off. Consider the continuing month-over-month reduction in the overall number of choices, which recently slipped to just a tick under October 2008 levels, when the bottom fell out.
While the numbers seem to have recovered, especially in light of a growing overall fleet, values, for the most part, have not. It’s these low numbers–especially for some of the older aircraft that had seemed to fall out of favor–that appear to be the draw. In fact it turns out it was just a price adjustment that was necessary to stimulate sales. The words price adjustment of course seem to understate, maybe even sugar coat, what has really occurred to a huge number of aircraft, but based on some recent activity, it looks as if pricing has arrived at a level that has spurred even the thriftiest of buyers into action.
Some of the supply might have been reduced due to the destruction of prices. An owner might realize at some point that it is less painful to pay down the monthly mortgage than to sell the aircraft well below the level of his bank note, which would require him to show up at closing with his own funds to put alongside the buyer’s just to get out from under an aircraft.
Others have commented that they are pulling their aircraft off the market until values come back. Such statements make me wonder what level people believe values will come back to. Waiting two years just gets you a two-years-older aircraft with two more years of flying time, and even if values were to increase marginally, any normal use of the aircraft would probably offset any appreciation. More and more sellers are becoming more realistic about the market and market values, and to their credit so are buyers. The radical price drops over the past few years have pushed aircraft to such levels buyers are having a hard time finding reasons not to pull the trigger on a purchase.
Older Aircraft Segment Heats Up
For the most part, it’s some of the second- and third-generation aircraft that finally seem to be moving. Many of the current-production aircraft continue to gain momentum, especially in the large-cabin, long-range segment that this column has reported on in the past.
If someone told you a few years ago that you could buy a Falcon 50 for less than $2 million or a Citation III for less than $1 million you would have wondered what they were smoking, but that’s the reality of the market today and these two examples have plenty of head-shaking-in-disbelief company. Of the nine Falcon 50s that have sold this year, five had more than 10,000 hours (but none above 12,000). There was a time when most buyers couldn’t conceive of owning a 10,000-hour aircraft, but as the fleet continues to season, buyers’ acceptance levels are growing. The Falcon 50 inventory sits at 53 aircraft for sale, near its low for the year, yet that figure represents about 22 percent of the number in operation, a clear sign that low prices will be the order of the day for some time. As an aside, one of my researchers by coincidence handed me the Falcon 50 sold report as I was writing this paragraph, which is one reason for highlighting the model. The thing I got a kick out of is that his date of birth, 1981, matched the oldest Falcon 50 sold this year. Clearly, they are both still viable! The nine sold this year have had price tags ranging from $2.1 million to $6.4 million, according to research firm AircraftPost.
On another age-related note, on a recent tour of Gulfstream’s Savannah G650 facility, a group of us were observing the robotic riveter, and the technology was impressive and uplifting to see. Then someone had to make the point that the aircraft that was being built will be flying long after we’re gone. I guess that falls into the sad but true department, but it is truly a testament to how viable and long-lived many of these aircraft are.
While we’re on the G650, some are speculating that as deliveries begin to deploy late this year we might see a slow build-up of G550s in the future. While there are probably an equal number who dispute this assertion, right now it is one of the hottest properties. There were as many as 20 for sale a few quarters ago, but that has since dropped to just nine (not including future delivery positions), bringing the supply to just below 3 percent of the more than 300 in circulation. Keeping company with the G550’s popularity is the Falcon 7X (with only two of 101 for sale) and the Global XRS, with three of its 143 for sale. These three examples offer indisputable evidence of where the sweet spot in the market is, but it doesn’t take away from the fact that the market is littered with opportunities waiting to happen.