Used aircraft prices have gone parabolic since last year, first launching to lofty heights only to arc back down to earth. While the drop began just before last year’s NBAA Convention, at the show aircraft purveyors had that deer-in-the-headlights look as they shook their heads in disbelief as the Dow Jones Industrial Average plunged 1,000 points during the three-day event, punctuating the beginning of a year-long correction in pricing. Values imploded on everything from premiums on new aircraft delivery positions to aging aircraft.
A barrage of cheap shots by the general press fueled the fire and added challenges to operators who had to defend their jets, and it did not help that some didn’t. As the sector became the whipping boy for the greater ills facing the U.S. economy, owners reacted by curtailing flight activity and in some cases selling their aircraft, presumably the result of public pressure.
Now after 12 months of value destruction, bad press and near financial system collapse, we are beginning to see signs of buying on the rise. The current administration might call it “green shoots,” but it’s clearly opportunistic buying. Most noticeable are buyers from outside the U.S., and while there also are buyers from within U.S. borders, most of them seem to be those who don’t have to adhere to strict corporate governance guidelines or report to stockholders.
Due largely to visibility issues, it would not be surprising to see buying activity by major corporations sidelined until we see further improvement on Wall Street or, more importantly, Main Street. In perhaps a sign that the worst is over, we recently noticed a major company remove from the market two large-cabin aircraft it had for sale. It made one wonder if it had placed them there to appease stockholders or the general public and now that the dust has begun to settle, it can get back to business and redeploy its business jets.
Additional signs come from total inventory for sale, which seems to be stabilizing, though at levels near an all-time high. In fact, after a nearly year-and-a-half month-over-month increase in inventory, the market may have reached a peak in late summer of more than 3,100 aircraft for sale. Last year notwithstanding, summer is typically the most active sales period and if the action in that time frame is any indication, there will a promising finish to 2009. Even now price action among a few model types may be poised to rise. The drastic discounts are drawing in buyers in the large-cabin segment, which has been lethargic since the beginning of the year but recently has begun to show signs of life.
The road to recovery has been paved with dollars left in the rear-view mirror–millions of them. Not long ago, Gulfstream GIV-SPs were reaching into the $30 millions and now it’s difficult to command that price for a new G450, the successor model. Consider that in January of last year there were only five GIV-SPs for sale and now the average supply is 37. The earliest GIV-SPs have started to move again, but–like just about everything that’s selling–at very low levels. The earliest serial numbers are getting most of the attention and have enjoyed some recent buying in the $10- to $11 million range, which is below where GIVs were priced not long ago. Many of those are sub-$10 million GIV-SPs averaging one sale per month, while GIVs are averaging one per quarter.
The upper end of the GIV-SP market may have been stymied by some GVs trading in the low $20 million area and reportedly a tick below. It becomes hard to sell a high-teen GIV-SP when you can get a GV for not much more. Gulfstreams are just one of endless examples of value destruction that has been visited upon the used market, creating what should be viewed as one of the best buying opportunities ever.
On the Bombardier Challenger scene, just before last year’s NBAA show only 15 Model 604s were for sale. That figure has grown to 50, an all-time inventory peak. The average asking price has drifted below $16 million and the average days on market stands at 245. Five have sold over the last six months.
The Challenger 300 market appears to be gaining some steam. Not long ago it was one of the most sought-after aircraft, but the downturn did not discriminate. While a year ago no sub- $20-million Challenger 300s could be found, now none is priced above $20 million. That may also be why they are actively selling. Asking prices for a single-digit serial number have dipped to the low-$12 million area and later models are in the upper teens.
Factory as Competitor
Late-model aircraft, especially those in current production, can languish on the market for long periods of time. Typically the biggest and most formidable competitor is the factory. This year rumors surfaced that the factory just sold an aircraft for $X million and X was representative of a number that was far below any competing used aircraft that might be on the market.
The rumors may not have been unfounded. What seems to have occurred from time to time is that the factory (which may have had a seller default on a new aircraft), might exercise a liquidated damages (forfeited deposit) and apply it to the eventual sale of that aircraft. Effectively, the new buyer did get a great deal and may have bought the aircraft for well below current market, but the factory ostensibly was made whole and booked the aircraft for the amount for which the initial buyer contracted by applying the originally intended buyer’s deposit toward that purchase. That scenario may be winding down if the buyers who are now returning to the market begin to grow in number.
A Buyer’s Market
One of the more interesting curiosities during the downturn is that there were any buyers at all. Looking back at what was arguably the worst environment ever in which to buy a corporate jet, there were people–although not many– buying jets. Of course those buyers looked at the deal from the other side, that in fact, it was the best environment in which to buy a private jet. In retrospect it probably was the best time to buy, in terms of value. Deals are a long way from drying up and values abound in the current marketplace, but there’s a sense that the market has bottomed.
The midsize cabins were not immune to the price collapse. Learjet 60s, Hawker 800XPs and Citation Excels all plunged in price and rose in offerings. It seemed like just yesterday we were watching Excels sell in the $7- and $8 million range and now they are in the $4- to $5 million range. In fact, we were countered on a Learjet 60 last year at around $8 million, and that same aircraft is still for sale, but now presumably can be bought for sub-$5 million.
Until last year, these late-model aircraft have enjoyed a fairly predictable trading pattern, but the economic choke-hold arrested the normal deal flow and created a pricing structure no one ever imagined, let alone accurately predicted.
Consider then the sales environment for older models, some of which present anywhere from 25 percent to 35 percent of their total fleet size for sale. These types took a hit, too, but it was less noticeable, perhaps because they never really experienced the run up in prices their late-model counterparts enjoyed between 2002 and early 2008.
Now this segment’s maturity is under scrutiny. With 30 and 40 years of age on some airframes, the audience they attract has narrowed and their future viability has been called into question. Many banks back off aging aircraft opportunities, leaving fewer finance options for the receding stream of buyers. About 25 percent of aircraft that were manufactured more than 20 years ago and that are still in operation are for sale. That figure contrasts to 13 percent availability for aircraft built in the last 20 years. There are about 11,400 aircraft operating now that are age 20, or younger. The older-than-20 group accounts for 5,200 in operation.
Despite this, many older aircraft are selling, which makes sense because the downside risk on aircraft that were priced low before the market collapse has been largely been removed. While value-wise late-model, large-cabin aircraft may experience price drops in the millions, the percentage drops older equipment experience might be the same in range as those of the later models, but a 30- to 50-percent price drop on a $1- to $2 million aircraft gives buyers a sense of comfort, or less cause for distress, as there isn’t too much farther to fall.
In contrast, late-model buyers may have been fearful that the value of a $45 million aircraft falling to $30 million could conceivably continue to correct in seven-figure increments. We saw early serial number Learjet 45s, Citation IIIs and GIIs move at a time when sales of most late-model aircraft were dormant. That’s now beginning to change in the upper end, as pricing floors look to be more permanent than at any time in the last 12 months.
Lehman Collapse, One Year Later
To illustrate a point and not to pick on a specific model, as many others are experiencing similar conditions, consider the Falcon 50EX. Before the Lehman collapse there were 15 for sale–the same number as today, yet early this year availability had climbed to 24 before slowly ratcheting back down.
There’s only one reason fewer aircraft are for sale today–pricing. Mid- to high-teen pricing was the order of the day a year ago. Compare that to today when the average asking price is situated at less than $12 million, according to research firm Aircraft Post, which indicates the average sale price is now under $9 million for the year. As in so many of the markets, prices of aircraft such as the Falcon 50EX negatively impact their predecessor models, not just in terms of pricing but also vying for the attention of buyers. In many cases, last year’s Falcon 50 buyer is this year’s 50EX buyer as prices of the later model have fallen into the zone where the predecessor model was parked last year.
In the last six months 10 Falcon 50EXs have sold and subsequently departed the used market, whereas Falcon 50 transactions have shuffled from manufacturer to dealer, or retail user to finance company, or were internal company transactions with only one true retail transaction during that time frame, according to Aircraft Post. Current inventory for sale for the Falcon 50 sits at 50, a peak this model reached during the last downturn experienced early in this decade.
The same parallels can be seen in the G550s impacting GV values, which in turn impact GIV-SP values, which impact GIV values and so on.
This scenario plays out amid all the manufacturers and is one big reason why buyers are returning. Last year’s GV buyer may be this year’s G550 buyer, or last year’s Challenger 604 buyer is now a 605 buyer and generally this occurs without changing the allocated aircraft acquisition budget."
The NBAA Convention often appears to be a springboard that gives the market a shot of adrenaline and carries it through the end of the year with an upbeat feeling. And, while that emotion was nonexistent last year, the atmosphere this year seems slightly more promising.
Certainly buyers have had a field day, but some of the best buys of the downturn appear to have already been made. While there are still plenty to go around, it should be of some comfort to sellers that buyers underbidding aircraft are losing the deals, which emphasizes the point that a bottom has been reached in some markets and that bottom looks to be holding. No one is forecasting the market to suddenly rocket back up to 2007 levels, but a slow and steady return of buyers to the market can be expected.