1) How do you characterize the current state of the previously owned turbine aircraft market?
If the first three months of the year are any indication of what 2011 will look like, I am very excited to see the final results. Demand for pre-owned aircraft is hotter than I have seen it in quite some time. I have seen numerous offers submitted on a wide variety of aircraft and at varying price points since the first of the year. Some market segments that have been ignored by buyers for over a year are finally generating interest. With a few exceptions, if an aircraft is priced aggressively, buyers are making offers in hopes of capitalizing on today's discounted purchase prices.
There is enough activity right now that we even find ourselves in the position of negotiating with several parties on one aircraft. That said, I would not say very many, if any, aircraft owners should expect the value of their aircraft to start increasing anytime soon. Inventory levels remain quite high and there is still enough uncertainty in the economy that a potential buyer will look elsewhere if he is forced to pay a premium over the most recent comparable sales price. The number of jet aircraft for sale is now well off peak figures from 2009, but there still remains several years of supply and multiple options for a buyer in a particular market segment. There are also many things taking place around the world right now to give buyers a reason to worry. Consumer confidence is still very fragile and it does not take much to cause a potential buyer to rethink a large investment like a corporate aircraft.
2) What factors are driving current conditions?
I would say that two of the biggest factors that have been driving the surge in activity during the first quarter would be the strong earnings reports over the last two quarters and the strong gains we have seen on Wall Street. In the last 6 months, the DOW Jones Industrial Average has increased almost 20%. All the downsizing and streamlining that corporations accomplished in 2009 & 2010 have finally started to pay off. In order to sustain that growth, companies will now need to focus on increasing revenue and expanding operations.
U.S. monetary policies appear to have stabilized things in our economy, however controversial those policies may be. While unemployment figures and real estate prices are continuing to lag, several other leading indicators are pointing to recovery, albeit slower than most would like. The bonus depreciation that is available for new aircraft purchases have helped shore up the OEM's backlogs. Because of those new backlogs, some buyers that would prefer to purchase new aircraft have been forced to look at the pre-owned market in order to place an aircraft into service this year.
However, in the last two weeks, fuel pricings have risen dramatically, we have witnessed instability in many countries throughout the Middle East, Japan was hit with a major earthquake and now the entire world is watching their response to concerns with their nuclear power plant and most recently the UN has taken military action in Libya. I am concerned what effect these events will have on demand over the next quarter.
3) Which, if any, aircraft models are hot?
Although I think there is a lot of activity on many various models, right now, I do have some involvement in some specific markets that have experienced a notable up-tick in interest in recent weeks. The Citation Excel market has exploded with activity after months of stagnation. Most of the best buys are spoken for and the remaining buyers are now scrambling to find other opportunities. The supply of CJ2's for sale has tightened up significantly and those units that remain on the market do not seem to be as aggressively priced as the opportunities that existed just a few months ago.
There has been a recent surge in activity on Falcon 2000 aircraft. Toward the end of last year, some early model Falcon 2000's were getting attention at some very low price points, but the newer models were ignored for the most part. Those low-cost opportunities are no longer available which has caused some buyers to consider the newer model aircraft at significantly higher prices.
Several G-IVSP aircraft are in various stages of the sales process right now. There is some interest in the early models, but most of the activity seems to be on the newest, lowest time and best equipped G-IVSP's. This may be partially driven by the limited supply of G-450 aircraft available to purchase right now.
Age of airframe continues to be a very important factor to buyers as demand for aircraft produced over 20 years ago continues to lag. Concerns about corrosion, parts availability, aircraft down-time and reliability are more prevalent than ever. Only a few knowledgeable operators with access to affordable and experienced maintenance personnel are looking at those 25 year old aircraft as an opportunity.
4) Are there any major economic/regulatory/political developments (such as the availability of financing) that are influencing buying/selling patterns?
Right now things seem to be flowing pretty well. Buyers seem to be taking their cues from Wall Street which has had pretty good news over the last year. I see very few buyers concerned with financing right now. I think a lot of companies have been hoarding cash in order to weather the storm of the last few years. They now seem to be willing to part with some of it on assets that will help them to grow their business. Over the last year, very few transactions we have handled have involved financing. That is a big departure from aircraft sales prior to 2008.
I am concerned about the effect that the instability in the Middle East and the rising cost of fuel could have on the current bull market. So far, I have only experienced some minor pushback from potential buyers on these issues. I have noted a lot of interest recently from Middle Eastern operators who are interested in leasing large cabin aircraft. Although I understand why they might rather lease today than purchase, it will be a challenge for them to find a U.S. company willing to lease an aircraft in that part of the world right now.
5) How does the domestic compare to the international market? What regions are showing the most activity?
A vast majority of the interest on our listings is coming from the U.S. right now. I have seen a little interest coming from Western Europe, a few legitimate offers from Australia and interest in leases coming from the Middle East and Asia, but the lion's share of the buying is happening stateside today.
It would appear that there are some aircraft changing hands within Europe, but very few U.S. buyers are looking at European aircraft to purchase. I think part of the reason for that is the relatively low buying power of today's U.S. Dollar against the Euro. The additional cost and time involved in purchasing an aircraft overseas also impacts that decision. In order to entice a U.S. buyer into making an offer on an airplane based in Europe, there would need to be a steep discount in the purchase price. Many aircraft dealers who are purchasing aircraft for resale are looking at those opportunities and some have capitalized on them recently. But most end-users would prefer to avoid those hassles by pursuing an airplane based in the U.S.
6) How is your business faring in the current environment? What are your customers saying?
We are currently enjoying a level of activity that we have not seen for some time. The offers that seemed to slowly trickle in over the last year have picked up to a steady flow of deals. That said, the lead time to sell an airplane is still extremely long. The average time that an aircraft remains on the market before selling is still hovering around the one year mark. Even after an offer is accepted, there remain numerous hurdles to clear before the transaction can be consummated.
Attorneys are becoming a more integral part of every transaction in today's environment. Just because a buyer and a seller can successfully negotiate a letter of intent, there is no guarantee that counsel can hash out a purchase agreement to satisfy everyone's concerns. It has become imperative that agents and attorneys work closely together to generate a document that accurately reflects the business points, addresses the true risk involved in buying or selling an aircraft and does not over complicate the transaction.
The work-scope of the pre-purchase inspection is another hurdle that must be cleared. Sellers are very hesitant to open themselves up to any additional exposure in pre-buy after agreeing to such low sales prices. Determining the scope of the inspection that the seller will allow is a crucial part of negotiations. Every additional squawk that is found at pre-buy means more money out of the seller's pocket. This painful process is another reason that aging airframes remain in such poor demand.
Most of our customers have a much better outlook on today's business environment and their corporate flight department's role within the company than they have since the start of this recession. Even some of the larger public companies that were desperately trying to stay out of the spotlight in 2008 are taking steps toward upgrading their fleet today. Over the last couple of years it was primarily the individual buyers who were taking advantage of low prices that kept aircraft moving. It is good to see some fortune 500 companies investing in their flight departments again.
7) How do you see the rest of 2011 shaping up, both for your company and the market overall? What factors will influence the market going forward?
When a new year starts, it usually takes some time to get things moving again. This year didn't take as long as some, but we were well into February before things really started picking up. First quarter sales figures should be slightly down as they always are, but I expect second quarter figures to be up significantly. I don't think we can ever get away from the dreaded summer slow-down and the previously mentioned issues around the globe could make this summer even slower than normal. But, assuming those issues don't continue to escalate, I have high hopes for the later part of the 3rd quarter and 4th quarter of 2011 producing strong sales figures.
In order for this surge in buying to continue, we really need consumer confidence to continue growing. We need a period of sustained growth in corporate profits, the stock market and employment figures. We also need to see some stability in global economic and political conditions and inflationary forces. To summarize, we basically need everyone to make lots of money, have full employment, continued low cost of goods and achieve world peace. That's not too much to ask for, is it?
Toby J. Smith