Preowned Report

 - October 13, 2010, 12:14 PM

For more than a year, recovery mode in the pre-owned aircraft market has meant more an outflow than intake. Although the number of choices has decreased, there has been no corresponding increase in prices, making it extremely attractive for buyers. Currently, purchasing an aircraft is more about operating cost than it is about acquisition costs.

While flagship aircraft for the major manufacturers can still see mid- to upper-$40 million pricing, the low end has never been lower. Excellent ­values prevail in the sub-$2 million sector, which may present the industry the opportunity to initiate first-time buyers into the ranks of jet owners.

Aircraft in this segment will not have the latest technology and most efficient powerplants but they will allow first-timers an affordable entrée into the market. Consider a late-model (’85, ’86, ’87) ­Westwind 2 with transcontinental range for close to $1 million. Too old for you? Then jump 10 years and fly away in Beechjet 400A for about $500,000 more and where financing will be a bit easier to attain as it falls within the 20-year ­window many lenders like to see.

Another compelling story is the original Cessna CitationJet, which can be found between $1 and $1.5 million in its earliest form. While prices could always fall below their already historic lows, consider that all three models above– the Westwind 2, Beechjet 400A and CJ–are well below their two-year inventory peaks. In addition they also are at, or below, their 12-month moving average.

When you look further at the available inventory of each model, you begin to notice that nearly half of the offerings of each have been for sale for more than a year.
One can draw his or her own conclusions as to the questions this raises. Are there not enough buyers, or are the buyers just staying away because prices on many of them are still out of the range buyers are willing to pony up?

The “days on market” figure also plays a role in the overall inventory. In mid-September there were 2,634 aircraft for sale worldwide, according to aircraft database company JetNet. More than half of them have been on the market for a year or more, and a quarter of them have celebrated their second birthday on the market. Yet despite this, the number of aircraft on the used market has managed to fall below its all-time high of roughly 3,100 aircraft for sale slightly more than a year ago.

Prices Regulate

It can be a tough call to say who is serious about selling and who is not. Another database, AircraftPost, applies its own formula to make that determination for its paid subscribers. Hit a certain number of days on the market and/or be priced a certain percentage over comparably priced aircraft and you won’t show up on its database of aircraft for sale. As an example, by applying its parameters to one market, AircraftPost presented about 45 percent fewer choices than another database, which lists any aircraft that the owner “says” is for sale. One of these had been listed for sale for more than 1,500 days. So while you may read analyst reports about high inventory, there clearly is more to the story.

It has been my experience that one of the more confusing things to the buyers is too many choices, but that can be equally confusing to a seller, whose natural instinct might be to price his aircraft at or above the closest comparable aircraft to his. Unfortunately, if that aircraft is grossly overpriced to begin with, there will be two grossly overpriced aircraft languishing on the market.

A case in point is the Learjet 60XR market, which has been dormant for more than a year. For a time, 60XRs were priced in the upper $8 and $9 million range, and with every new listing seemed to come another price at which buyers’ snubbed their collective noses. Just recently, prices of a small number have dipped to the low-$8 millions and one even dropped into the high-$7 millions, which will likely cause buyers to take a look and maybe engage the seller with an offer.

Any current production model like the 60XR runs into the same challenges–you end up having to compete with the most formidable of competitors–the manufacturer. Obviously, the manufacturer has far more arrows in its quiver than the reseller does, unfortunately leaving the reseller up against the ropes, with price being about the only effective weapon in his arsenal. Without the backlogs of a few years ago as their savior, resellers are forced to wage battle against the manufacturer’s fresh factory warranty, crew training, price flexibility, trade-in ability and so forth.

Speaking of price, every model was negatively impacted by price over the last two years, but we since have seen many markets stabilize, while some have been selling above the trading floors established during the downturn. In this area some Gulfstream models stand out. Fifteen of the roughly 325 G550s are available for sale on the used market, about half the number available 18 months ago. The current figure is comprised of five future delivery positions, five U.S.- and five non-U.S.-registered and -deliverable aircraft.

Those positions are getting a tepid market response from buyers, presumably due at least in part to the constricting language of many purchase agreements. Perhaps also at play is the lack of clear forward-looking visibility of buyers given the economic climate. Excluding position sales, G550s have been selling at a one-a-month pace during the past year, setting a price floor of $33.2 million and reaching as high as $45.1 million.

Consider that only about half of the GVs available on the market are for sale–the other half are for “lease only,” or have a “sale pending.” The average asking price sits slightly above $24 million at present, but should the limited pool of availability shrink further, a case will likely be made for higher pricing in this segment. If that should occur, look for pricing in the GIV-SP market to strengthen. Offers in that segment have plunged in the last 18 months from a high around $40 ­million to about $15 million today–the lowest it has been in the last three years.

You might expect the Challenger 604 to follow suit and while it might, it clearly hasn’t yet. In the spring, it looked as though that was going to occur, when offerings shrank from 50 at the peak to 37, but then it reversed direction again and jumped to nearly 45 available. The model may well benefit from the depleting supply of GIV-SPs when buyers looking for this class aircraft find limited offerings to choose from.

Values among 604s having been compelling for some time and the right catalyst could trigger a buying spree similar to that which occurred in the GIV-SP market.
One of the sweet spots for Bombardier has been its Challenger 300 and while, at 28 for sale right now, used offerings are in abundance, that figure is below its high of 36 from a year ago and slightly below its 12-month moving average. At NBAA two years ago you couldn’t twist someone’s arm and get a 300 bought for less than $20 million, but this year one traded at $10.5 million. In fact, the average sale price in the most recent six-month period is $12.86 million, according to AircraftPost, down slightly from the previous six-month period.

Apathetic Buyers

The recovery has not been broad-based, witnessed by the fact that scads of models appear to be attractively priced, but have yet to garner sufficient respect from buyers. Entry-level offerings, super-midsize and large-cabin all present examples that have fallen victim to buyer apathy.

Consider the versatile Gulfstream G200, whose inventory started to rise two years ago (from 24), peaked in ’09 (at 38) and then retraced its path last month to 24 (coincidentally taking 24 months to return to its two-years-ago level). Not only did it reach a peak of nearly 40 aircraft for sale, but it had to fight market forces once its replacement–the G250–was announced in October 2008 right about the time the overall market was tanking. The average length of time to sell a G200 during the last 12 months has been well over a year–421 days to be exact–according to AircraftPost. Also according to AircraftPost, $7.8 million is the pricing floor for the G200 and about half of the roughly dozen that have sold during the same time frame went for less than $10 million. Compared to two years ago when $15 to $20 million was the common trading area, this looks like just one of a number of compelling values.

Buyers seem to be in tune as choices are slightly more than 20, or about 10 percent of the operating fleet of G200s and well below its 12-month moving average of 30.
As with any model, when prices plunge they typically take everything around it down, too, and in this particular example, it looks like the G150 was the recipient of a pricing slap down presumably courtesy of the G200 market malaise. Only three have sold in the last 12 months and only two this year–one in the past six months, which was a bank repossession. Sale prices for the three were all sub-$10 million.
The 10 for sale now carry an average asking price of $10.66 million, which would seem to ensure that we will see further trades in this area. While I’m not totally on board with using the absorption rate the real estate industry uses, AircraftPost does provide one, which, based on recent sales rate shows five years to deplete the supply of G150s. Unlike the real estate industry, what typically happens with aircraft is the owner, recognizing the time/cost value of money and market conditions, will drop the price to a level that will move the jet quickly.

The Falcon 2000, another super-midsize, appears to be doing some market formation flying with the G200 and Citation Sovereign as it relates to inventory, but has a clear edge with time to move on the market, which is about 300 days fewer than the G200 and 100 days fewer than the Sovereign, looking at the past six months. Sale prices are within a tight range among the three, with the six-month sale prices averages shaking out like this: the Citation Sovereign, $11.3 million, and both the ­Falcon 2000 and G200 $10.45 million.

Ratcheting down a notch below the super-midsize finds the tarmac littered with mid-cabin models. In nearly equal amounts are the Hawker 800XP with 57, the Learjet 60 with 57 and the Citation Excel/XLS with 60. In general there are some incredible deals out there and with this many offerings between the above-mentioned popular pre-owned model types this segment is no exception. About 30 percent of the Learjet 60s sold in the last year went sub-$3 million with a posted low of $2.1 million; a number of them were repossessed. The high so far this year is $4.3 million, occurring twice–most recently on a 2002 model with about 1,800 hours total time.

The market participants may have gorged themselves on the low-priced aircraft and may have, for the time being, satiated their hunger when you consider that during the past 12 months the Learjet 60 averaged two sales per month. As we write this, none of the successor Learjet 60XR models has sold in the past 15 months, but recent price adjustments appear ready to change that stat. The Hawker 800XP, on the other hand, increased its sales rate in the last six months, moving about three per month on average, up from about two in the ­previous six-month period.
Average pricing held steady at around $4.3 million, according to AircraftPost.