Buyers Should Beware on Common Fractional Types

 - February 1, 2022, 8:25 AM
(Photo: Mariano Rosales)

Over the last 20 years, the number of whole aircraft transactions sold from major fractional companies has not accounted for many of the overall transactions. The average amount of fractional sales of whole aircraft makes up just 3 percent of the total preowned transactions in the industry. These fractional sales have not had a major impact throughout the industry on pricing or inventory for the past 20 years.

However, there are some notable exceptions for specific aircraft types. When major fractional companies choose to divest a particular fleet, in most cases, there was a major impact on pricing and inventory. From 2011 through 2014, fractional sales of Beechjet 400As made up an average of 40 percent of all transactions involving that model per year for consecutive years.

Overall, fractional companies have done a great job of not flooding the market with inventory while trying to protect the resale values of the aircraft types they are divesting from; however, these companies do need to move on from their aging aircraft. Somewhere past the tenth year of operations, the fractional companies divest of their aging aircraft.

The Beechjet 400As had a 28 percent loss in value in the four years fractional sales accounted for 40 percent of the transactions. A typical rule of thumb is that a corporate jet would depreciate 5 percent to 7 percent over its life. As one would expect, this curve is generally steeper in the first several years of an aircraft's life and by the age of 12, the curve tends to flatten out. In the case of the Beechjet 400A, it depreciated 7 percent per year, the upper end of normal but higher than usual considering the age of the aircraft.

With the Citation Ultra, fractional sales accounted for 66 percent of total transactions over a three-year period from 2008 to 2010. There was a 45 percent drop in value for the Citation Ultras over this three-year span. It is clear the infusion of high-time formerly fractional aircraft had a major effect on the price drop. The price drop for the Citation Ultras during this period averaged 15 percent per year, almost triple the normal decline in pricing for a corporate jet.

There may be some advocates that will argue that despite the price decline, owners of low-time corporate aircraft are not hurt by the market being flooded with low-cost, high-time aircraft. There is no question that low-time, corporate-flown aircraft will sell for much higher prices than former fractional aircraft.

The fact is that in any situation that removes buyers from a market, pricing drops and time on the market increases, which costs the owners money. These high-time aircraft still have the same cabin and the same performance as the low-time, corporate-flown aircraft, and some buyers will purchase the high-time aircraft instead of the higher-priced low-time aircraft.

In another case, fractional sales of Gulfstream G200s accounted for an average of 37 percent of the total transactions from 2014 through 2016. The resulting decline in values over that same period was 41 percent, which is an average of nearly 14 percent per year. This is more than double and closer to triple the industry average of a 5 percent to 7 percent decline in value per year.

In 2016, fractional sales of Citation X’s accounted for 75 percent of the total transactions and the market value for the Citation X dropped 25 percent in one year.

Throughout their history, the major fractional companies have done their best to release aircraft in a metered fashion while attempting to keep pricing as normal as can be reasonably expected. As in the case of the Citation X, caveat emptor! Be careful when buying the same aircraft type as major fractional companies because when it comes time for that operator to divest of that fleet of aircraft, for owners of similar aircraft types, values could be adversely affected. Consider that high-time, relatively low-cost aircraft will be around for many years too, so the effects on pricing will last for years.

Those high-time aircraft have the same cabin and performance as the low-time aircraft and some buyers will take the discounted aircraft.

Kevin O'Leary is president and CEO of private aviation services company Jet Advisors.

The opinions expressed in this column are those of the author and not necessarily endorsed by AIN Media Group.