Pre-owned Update: July 2014
Buyers continue to make their collective presence felt in the pre-owned market, pushing worldwide inventory to multiyear lows following a consistent contraction since last year’s NBAA Convention. Since that time, the market outflow of choices has exceeded the inflow and levels have dipped from 2,600 then to about 2,335 today, a level not seen since the summer of 2008. There are likely a number of factors affecting the depletion, including the perception of an improved U.S. economy, which has stimulated sales activity. In some cases, operators have taken their aircraft off the market and recommitted to deploying them as the business environment in which they operate has improved.
While this downward inventory trend has been in place for the last five years, with a consistent year-over-year depletion of offerings, in the past three quarters activity has heated up significantly. Since the inventory peak in 2009, the number of aircraft for sale worldwide has descended by roughly 750 aircraft, with the last eight months accounting for one third of that figure. That offers a fairly clear indication that this market segment is off life support and breathing on its own. The flurry of activity will likely pull back a bit in the summer months, but the market could be setting up for a more active fall than we have seen in years.
One catalyst is attractive pricing. Over the past several years, even some jaw-dropping low prices did little to stimulate sales, with would-be buyers appearing to fixate more on operating costs than acquisition costs. If the next eight months are anything like the past eight, we are sure to see prices, which have been pummeled, begin to recover. That said, I don’t know of anyone who believes we will ever come close to recovering more than a small fraction of the value lost, even after accounting for normal depreciation.
Buyers Seek Expertise
Perhaps to cut through the clutter of some markets that are still top heavy, there seems to be a rise in the number of buyers hiring brokers to acquire aircraft. In the shifting market buyers are looking for an edge. For example, a buyer might see 20 aircraft for sale on a website but then come to realize that half of these options are overseas. That could be a big deterrent for many buyers who don’t relish the daunting task of gathering copious amounts of information to satisfy due diligence. Case in point is the Citation XLS, which has twice as many for sale today in Europe as in North America. To a buyer, the choice of 20 looks like plenty, but only one third are based in the U.S. and 60 percent are in Europe. One reason for this has to be Europe’s accelerated buying activity during the mid-2000s, when for the first time ever more new aircraft were being delivered into that region than into North America. Fast forward to today and with a struggling European economy juxtaposed against a recovering U.S. economy, one can understand the dichotomy.
A buyer who limits the search to North America has 1,364 choices of all model types for sale right now, or about 12 percent of the fleet. However, if he wants to stick to a model manufactured in 2000 or later, the number of choices drops to 436, or about 7 percent of the fleet. In contrast, 400 aircraft (15 percent of the fleet) are for sale in Europe; apply the 2000 or newer requirement and the choices there tighten to 258 or 13 percent. The smaller differential speaks to the younger fleet in Europe compared with North America. Regardless, when comparing both markets, the differential has remained fairly consistent for quite some time, with the European choices nearly double, in percentage terms, what’s available in North America.
It’s typical for activity to slow in the summer, and while this summer will likely be no exception, what appears to be pent-up buyer demand could make the respite briefer than usual. Typically we experience an inventory build between June and August, but last year that didn’t happen; instead, inventory trod water, shifting nearly imperceptibly, hovering in a narrow band. If that repeats itself over the next couple of months, we should see the breadth of the pricing stabilization begin to encompass more model types as we head into the most active part of the year.