Market downturn ahead, predict industry analysts

 - September 30, 2008, 11:56 AM

Get ready for a bumpy ride. The sputtering global economy is sending the pre-owned aircraft market into a steeper dive and is likely to slow new aircraft sales and new aircraft development programs, according to leading industry analysts and observers. Prices for pre-owned business aircraft have been trending down for the last five quarters and the number of new jet buyers looking to unload their delivery positions is increasing. Flight operations are down 11 percent, and charter, depending on the region of the country, is down anywhere from 10 to 50 percent.

The altimeter is still unwinding and more turbulence could be in store depending on whether the federal government’s plan to resolve the current financial crisis works.
“The OEMs are fat, dumb and happy with their current order backlogs and are oblivious to how quickly things will change,” corporate jet analyst and consultant Brian Foley said last month.

Two September business jet market reports, one from JP Morgan Chase, the other from UBS, are also pointing toward a slowdown.

JP Morgan warned, “Let there be no doubt the used market is rapidly falling apart, which should lead to a deteriorating market for new aircraft in short order.”

UBS noted, “We believe the market has come off its peak and is likely to fall further.”
The prices of some pre-owned aircraft models, mostly light jets, have plunged below 2003 levels, when the market hit its last big trough. However, few are saying the entire market has hit that modern nadir–yet. Although JP Morgan points out that current used inventories are actually higher now than in 2003 measured as percentage of the fleet, up 80 basis points in the last month to 9.4 percent.

Pre-owned Prices Moderate
UBS noted that used prices in August were 5 percent below those in July and that used inventories were up 34 percent from August 2007. The company also said the soft used jet market was already affecting new jet sales, noting that new aircraft delivery positions for sale increased 6 percent in August from July and had quadrupled from August 2007. Of the 140 new business aircraft positions for sale, 66 were for very light jets, with the Eclipse EA-500 leading the way with 34. 

“This is not a bloodbath, but it is a blood-letting,” said David Wyndham, vice president of the aviation consulting firm Conklin and de Decker. “It is going to be a cold winter.”

“I don’t think this is really comparable” to 2003, said Fletcher Aldredge, who runs the aircraft price evaluation and tracking service Vref. “Remember, we were falling off the dot-com bubble of 1999 and 2000 and then there was 9/11. The midsize jet [price] index was down 14 straight quarters. Right now, we are down only five.”

But sellers of older airplanes, those that are 10 years old or older, are being hit especially hard. “My phone is just not ringing on older airplanes,” said Josh Mesinger, vice president of jet brokerage J. Mesinger & Associates. Aircraft in the 20-year age bracket are taking an average of 270 days to sell, about double those half their age.

Relating an analogy told to him by his dad, company president Jay Mesinger, the situation, he said, is like a high school dance, with boys on one side of the floor and girls on the other. “Buyers and sellers are standing back. Buyers are standing on the sidelines and sellers have been slow to adjust their asking prices,” Mesinger said. “But sellers are willing to entertain much lower prices than they thought they would have had to in response to offers.”

However, due to the current financial crisis, some deals that require financing are not getting done. “I had one deal where the bank raised the price of the loan 250 basis points in just a couple of days,” Mesinger said, adding that some lenders are not even quoting aircraft loans in the current environment.

While the used market for large-cabin jets has been fairly resilient, prices are down month-over-month by as much as 2 percent and the practice of paying premiums, sometimes in excess of the list price of a new airplane, is gone. Mesinger noted that the price of a newer Gulfstream is down 12 percent from its recent high.

The depressed market is also affecting aircraft owners who rely on charter revenues to offset the cost of ownership. Charter is down 10 to 50 percent, depending on location, although there is evidence that it is slowly recovering.

Pinnacle Aviation in Scottsdale, Ariz., operates a mixed fleet of medium and heavy jets and saw its charter business starting to trail off in March, according to Tamara Hernandez, director of charter sales. At the ebb, business was off 25 percent; however, recently the company has recovered about half of that.

Planemasters, in suburban Chicago, also saw a downtrend “earlier in the year,” according to charter manager Molly Francesconi. “We weren’t as busy as we normally are during the summer months,” she said. However, Francesconi said the company’s King Airs stayed busy, although some customers shifted out of pricier Citations in favor of the less expensive turboprops, even for trips as far away as Colorado, Florida and Texas.

Having a diversified fleet that includes turboprops is one of the keys to surviving the downturn, said Kerry McPherson, marketing director for Mountain Aviation in Denver. Mountain operates 13 charter aircraft, from King Air 90s to a Gulfstream 400. “Having King Airs gives our customers a place to come in” to the market, said McPherson. “Fleet diversification has been our salvation. We have been very fortunate. In our market, some of our competitors are down 20 to 25 percent, while we are down only 2.5 to 3 percent,” McPherson said.

Like charter, fractionals, especially smaller ones or those not affiliated with an aircraft OEM, with the exception of NetJets, may also been in for a rough ride, said Conklin’s Wyndham. “If customers are coming to the end of their contracts after five years, if they are on the bubble, if they aren’t renewing their contracts, then a few fractionals are going to be in a difficult cash situation and you may see somebody drop out there,” he said. Mesinger said that he already has seen an increase in the number of used fractional aircraft coming to market.

Wyndham added that he thinks some Part 91 corporate flight departments are also at risk in the current environment.

He expects the market will “settle down” by the middle of next year, but Vref’s Aldredge is not so sure. “It is stylish in this industry to say that things are going to turn around–and they will–but no one can tell you if it is going to be next quarter or next year,” he said. 

Mesinger sees the current market, if not a buyer’s bonanza, certainly as one decorated with opportunity. “It can be a good time to buy. You just have to pick wisely,” he said.

Industry experts agree on one thing: we probably have not seen the bottom yet.