1) How do you characterize the current state of the previously owned turbine aircraft market? What factors are driving current conditions? Which aircraft models are hot? Which are not?
Similar to most of the reports coming out of Wall Street these days, the signals on the state of the pre-owned turbine aircraft marketplace are mixed. There are several positive things we can point to like the continued reduction in inventory levels taking place across the board. When considered as a percentage of the active fleet, current inventory levels on all classes of turbine aircraft are now almost back to 2008 levels, well before the flood of aircraft hit the market in 2009. Additionally, although not to pre-downturn levels just yet, the number of resale transactions has been steadily growing since 2009 with hopes for continued growth figures in 2011.
However, there are a few statistics which continue to concern many of us. The time required to sell an aircraft has been climbing for the past three years with no signs of tapering off. The average jet aircraft takes well over 12 months to sell in today’s market. There are many factors contributing to this slow sales cycle including: high inventory rates, disparity between buyer and seller market sentiments, increasing complexity in purchase agreements, maintenance facility staff reductions and a host of other hurdles we face in nearly every deal. A lack of brand loyalty on the buyer’s part means sellers are not just competing with other aircraft of the same make and model in a particular market, but all similar aircraft in a particular price range. Price remains the most important factor in selling an aircraft in this environment.
2) Are there any major economic/regulatory/political developments (such as financing) that are influencing buying/selling patterns?
I am frequently surprised with how fickle buyers can be in this industry. I have a few customers who thoroughly analyze their travel needs and their current fleet capabilities regularly and make buy / sell decisions based on the results of that analysis. However, many more operators make their decisions based on image, consumer confidence and other intangibles that are much harder to define. In today’s economy, I am afraid that consumer conviction remains low and is easily swayed by world events or relatively short term market trends.
An example of this came in late March of this year. The first quarter of 2011 was looking very strong and momentum seemed to be growing for a number of aircraft to change hands. However, world news began to be dominated by high gas prices, instability in the European economy, political unrest in the Middle-East and the final straw came from the earthquake and resulting nuclear scare in Japan. Those four headlines were enough to cause several buyers to reconsider their plans of purchasing an aircraft until things settled down.
Fortunately, although none of those issues have really been resolved, the headlines have not been quite so dire over the last six weeks and activity has been brisk once again. There are several issues that could rise to influence tomorrow’s purchasing decisions. Obviously I cannot predict events like Japan’s earthquake, but I can certainly look to the current state of U.S. monetary policy, European and U.S. debt levels, next year’s Presidential elections and the recent pull back in the stock market as potential influences buyers will be considering. The good news for now is that oil prices have been falling since Memorial Day which has lowered the price of regular unleaded gasoline by 23 cents in the last month according to AAA.
3) How do you see the U.S. market compared to the international market?
For new and ultra-long range aircraft, the international market continues to bite off a larger piece of the pie than the U.S. Market. As of this writing, Gulfstream is reporting 60% of their new aircraft deliveries are international and 40% domestic. A surprisingly large chuck of Gulfstream’s international business is going to Asia at 30%, 20% to the EU and the remaining 10% to other countries.
Over the last five years, Dassault has focused even more heavily on the international markets with 58% of their sales going to Europe, Africa and the Middle East, 13% to Canada, Mexico, Asia and South America, and only 28% of their new aircraft deliveries going to the U.S (not including sales to Netjets).
Although some of the emerging markets like China and India are experiencing significantly larger growth rates than the rest of the world, due to the size of the current fleet already operating in the United States, pre-owned transactions are still heavily concentrated state-side. Of the almost 19,000 jet aircraft in operation today, 63% of them are currently registered in the United States. Last time I checked, the state of Texas had more aircraft than the total fleet based in the EU, so the United States remains the primary focus for pre-owned jet aircraft sales.
4) How is your business faring in the current environment? What are your customers saying?
Despite all the challenges we face in today’s business environment, there is still a lot of business to be had. We find ourselves talking to a good number of potential buyers and some of the Fortune 500 operators who have not considered any fleet changes since the downturn are now having serious discussions about upgrading. As always, the biggest drivers on these kinds of decisions are corporate profits, trade and GDP growth and wealth creation. The replacement cycle for these large publically traded companies has been stretched recently, so I have hopes for this piece of our business to increase over the next year.
I would say our customers are struggling with the same issues most of us are struggling with today. They remain uncertain about the direction of the current economic recovery and are struggling with a myriad of economic and political issues. Because their conviction levels are low, their reaction to any negative publicity is magnified and confidence is easily shaken. However, as evidenced by the strong interest we are seeing from aircraft dealers to purchase inventory right now, most of us feel that potential buyers should look past the near-term risks of market stagnation and view the current prices as a strong buying opportunity. Prices remain as low as they have ever been and aircraft utilization has been steadily growing with further utilization increases expected over the next 12 months.
5) Can you provide an example of a recent transaction that typifies the current state of the resale market?
I am currently assisting a customer in the acquisition of his first jet aircraft. His business has been growing significantly in recent years and his travel needs have exceeded what he could perform via the airlines. This buyer had a specific budget, but was not overly concerned with the make or model of aircraft he would like to purchase, as long as it met his travel needs requirements within his specified budget. The high inventory rates and recent price corrections placed many different options within this client’s budget, so we were needed to help him distinguish which aircraft would be the best investment for his dollar.
After analyzing the various aircraft, we settled on one that seemed to be the best fit and then began the process of finding the best value within that market, which still left almost 50 units to consider. This is where our company’s 35+ years of experience and relationships within the industry really benefits the client. Within a weeks’ time, we were able to compare and contrast all the customer’s options and narrow the field to three aircraft that represented the best value. One of those aircraft stood out well above the others in terms of value. It was owned by a bank which had recently taken possession of it from a client as part of a lease return. An offer was made and after some negotiating we agreed upon an acceptable price and scope of the pre-purchase evaluation.
I think this client typifies a lot of the customers we have been working with the last couple of years. His company is privately held and is therefore not subject to all the public image concerns of a publicly traded company. Although his sales did suffer from the downturn, he sees the current economy as an opportunity to gain market share from his competitors and sees the low prices on aircraft as an opportunity to purchase a valuable business tool at a fraction of their previous prices.
Toby J. Smith