Parabolas and Other Nerdy Observations
In follow up to last week’s blog, at the NARA conference in San Antonio earlier this month, there was quite a bit of discussion on where we actually are in today’s resale market. Many dealers strongly disagreed with VREF & Bluebook’s opinion of aircraft values in their latest editions. These dealers argued that you could not claim large drops in asset value with no actual sales data to support the numbers. Others argued that true values could not be determined even in those markets that did have a few actual sales last quarter if those sales were classified as “distressed”. Many hold the view that one distressed sale does not make the market.
I tend to disagree with many of my colleagues on this one. I think that the current market is defined by not only what has closed recently, but the price levels that competing aircraft are currently being offered to the marketplace. Today’s buyers are extremely well informed and the marketplace is more efficient than ever. To claim that a listing should be worth X based on a recent comparable sale is not realistic. You need to take X, adjust it based on the most competitively priced aircraft currently in that market segment, then you might even need to drop it another 5-10% simply to motivate someone to make an offer. I think before we can see any price stabilization, we need to demonstrate one of the following three things:
- A good track record of sales prices
- An increase in demand or
- A significant decrease in supply.
Many markets are still quite a way off from being able to demonstrate any one of these trends.
The good news is that overall trends are finally beginning to turn in our favor. At the NARA conference, Andrew Young of Amstat provided some data that was very encouraging. I have begun to take Andrew’s graphs very seriously. At a meeting in the spring of 2008, he pointed to a sharp uptick in inventory levels across the board that he thought might be significant. One month later, the corporate jet resale machine came to a grinding halt and hasn’t been able to get started since.
According to the data Amstat tracks, the rate of month to month inventory growth has slowed significantly for the newer market segments in light and medium sized jets, the inventories of newer large jets has finally leveled off and the inventory of older large jets has actually come down over the last quarter. In graphical form, these trends are clear and quite refreshing.
Andrew provided a chart of inventory levels on jet aircraft & turbo-props over the last 15 years and highlighted the largest periods of growth from 1999 to 2002 as well as the last eighteen months. Interestingly, although the percentage of the fleet available for sale today is roughly the same as it was at the past peak in 2002, that number represents a significant increase in actual units (4,300 for sale today compared to only 3,300 in 2002). This means that when we do start selling aircraft, unless the demand this time around far exceeds the last recovery, it will likely take much longer to get back to normal inventory levels.
Another interesting observation of this graph is that the parabolic curve that started in 2008 is much steeper than the curve that started in 1999. Last time inventory went from 10% to 16% of the fleet in 33 months, this time it took half that long, only 16 months. The makeup of that inventory is also noticeably newer in this downturn. In 2002, 81% of the aircraft for sale were 11+ years old, 9% were 6-10 years old and 10% less than 5 years old. This time, only 70% is 11+ years old, 14% is 6-10 years old and over 16% is less than 5 years old. I wasn’t able to include the graph in this blog because it is in PDF form, but f you would like to see a copy, let me know and I would be happy to email it to you.
All this tells us is that a lot of newer aircraft were dumped on the market very quickly when the pooh hit the fan last fall. I wonder if all this inventory is really for sale, or is a lot of it on the market for image reasons, likely to be removed from the market equally fast when recovery is imminent? "It's about the future, Madam Chancellor. Some people think the future means the end of history. Well, we haven't run out of history just yet. Your father called the future "the undiscovered country". People can be very frightened of change." - Captain James T. Kirk in Star Trek VI: The Undiscovered Country
Live long & prosper.
Toby J. Smith
JBA Aviation, Inc.