Pre-owned Update: Bargain Prices Move ‘Classic’ Aircraft

 - October 1, 2011, 12:10 AM

While the pre-owned market has had to grind it out over the last couple of years to turn a deal, buyers have made a considerable dent in the number of choices since then, with 500 fewer aircraft available compared with the number of choices at the peak. As the industry heads into what is typically one of the most active periods of the year, the trend should continue. Of course, the impetus has come in the form of drastic price cuts across the board, and those price cuts have put the spotlight on a segment of the market that has been fairly dormant until recently. Often referred to as classic aircraft, many third-generation models are getting increased attention of late.

Some of these are now selling for 25 cents on the dollar compared with their price around the peak. A popular mid-cabin aircraft might have run about $4 million a few years ago; today it is priced at $1 million. It may be 1980s or early 1990s vintage, but it still does now what it did a few years ago. With the heavy discounting, buyers are willing to take on the higher operating costs of an aging aircraft and are clearly less concerned about deteriorating values on a $1 million asset than when it cost four times that amount. Certain maintenance programs on engines, parts and so on can also bring some predictability to the annual cost of operating one of these aircraft.

Inventory Available beyond the U.S.

While the total inventory number still seems large it’s not as telling as you might think. The Excel market–which a year ago stood at 45–has since dropped to 26, or 7 percent of the total number of Excels in operation. Still, at 26 it would seem like a buyer has some decent choices, but consider that these offerings are spread across the globe, making due diligence more of a road trip than perhaps at any other time before. Only half a dozen are based in the U.S. at present, a number reduced by half for anyone having an aversion to an aircraft with a fractional history. Twice as many choices can be found in Europe at present, but here one has to question a few that have been on the market for nearly 1,000 days.

Another case in point is the Learjet 45, which has an international appeal on par with the Excel. Slightly more than half of the 32 currently for sale are located outside the U.S.

There are a number of other older model types that are shoring up their numbers as buyers recognize the value, and yet the market can in no way be considered overheated. There are still plenty of good choices of most model types, but it’s clear that going forward proper due diligence will dictate that a buyer have a current passport. With challenges facing the Euro-zone it is likely that we will continue to see a stream of offerings flow onto the market. Exchange rates could help or hinder a buyer depending on the spread between respective currencies.

Markets Stagnate

The large-cabin, late-model, long-range segment is back on track and older generation, low-cost-alternative aircraft are also finding their footing, so it’s perplexing to see others stagnate. Consider the Challenger 604, a tried and true aircraft that started the year with 38 for sale, but has since grown to more than 50. In contrast to the aircraft mentioned above, two-thirds of them are based in North America. Even with prices beginning in the upper-$7 million range the model is getting a tepid buyer response, with the average time on the market exceeding 300 days and the rate of sales slowing to about one a month. That said, the buildup in inventory coupled with further price adjustments typically sets up for a turnabout in a market, which could be placing the 604 next at bat.

The GIV lands in the same category, with fewer aircraft for sale than the 604, but a slightly greater percentage of its production run. It’s interesting to note that all but one of the GIVs currently for sale are based within the U.S. Pricing in this segment has taken a blow, yet buyers are still reluctant to step up in great number, perhaps stretching to get into the successor model GIV-SP for as little as little as $10 million. Someone recently mentioned that the early GIV-SPs are now priced where the GIVs were priced before the downturn and GIVs are where the GIIIs were priced and so on.

Considering all the negative headlines this year about the economy, worldwide catastrophes, the roller-coaster stock market and a U.S. President who trash talks jet owners despite his own publicly paid-for private jet, it is nothing short of amazing that buyers are buying at all. Nonetheless, the pre-owned market continues, month-after-month, selling more aircraft than are arriving. One can only contemplate what would happen if the bad news flow slows to a trickle or we get some unexpected good news about the economy.