Preowned Market Annual Report: Throw out the rulebooks

Jan 22, 2017 - 5:30 PM

Inventory crept up and value declines steepened over the past year, but some market­ makers see foundations for a preowned aircraft turnaround in prog­ress. 

“The resale market is healthier than it’s been in a long time,” says Chad Anderson, president of aircraft brokerage Jetcraft, which registered $1.7 billion in transactions last year. “Yes, values are depressed, but there’s still an adequate level of buyers to exchange aircraft with, and worldwide, sales are up.”

About 11.5 percent of the jet fleet (2,415 jets) was on the market in October, representing a steady if small uptick from the 11.3 percent (2,298 jets) for sale at the same time last year, according to JetNet. (Turboprops for sale dipped from 8.2 to 8.1 percent of the fleet during the same period.) That’s still not far off the 10 percent fleet availability long considered the top end of a balanced preowned market, leading some to suggest that the old inventory benchmark needs adjustment. 

“I’m starting to think [10 percent] is no longer a balanced market, because we’re pretty close to that, and prices aren’t firming,” says David Wyndham, president of aviation consultancy Conklin & de Decker. 

Prices of models whose inventories are at or below the 10 percent mark bear out that suspicion. Only 9 percent of the Challenger 300 fleet, 7 percent of all Sovereigns, and 10 percent of Falcon 900s are for sale, yet asking and sales prices continue to fall. 

Data from Vref confirms “value loss has increased,” says Rick Cox, publisher of the valuation reference. In the last year, light, midsize, and large jets have lost an average of 5, 16, and 17 percent of their value, respectively, steepening their loss curves; the two-year value drops for these categories are 9, 22, and 31 percent, respectively.

“Yes, values are depressed, but there’s still an adequate level of buyers to exchange aircraft with, and worldwide, sales are up,” says one broker.

The oversized drop in value in the large-cabin market this past year is striking but understandable, given how long the category defied the declines seen in all other segments. The collapse even dragged down one of the bizav fleet’s most acclaimed, advanced, and popular models, Gulfstream’s G650: sales in the first half of last year brought in $66.5 million to $73 million each; in the first half of 2016, preowned G650s sold for $57.8 million to $62 million apiece, according to AircraftPost.com. You can see a cascading impact in recent bargain-basement-type price reductions in G650s on the market (e.g., from $59.9 million to $54.9 million) and in markdowns throughout the large-cabin fleet (e.g., a Global XRS slashed from $28.5 million to $23 million overnight, and a Falcon 7X cut from $29.95 million to $24.95 million.)

“Last month, we ran an analysis for a G550,” says Tony Kioussis, president of Asset Insight, a business aircraft appraisal firm. “The owner said, ‘These prices are falling like a stone. What should I do, hold onto it?’ I said, ‘Right now, our electronic trending modeling is showing the price is going down $5 million in the next 90 days. If you want to sell, you’d better do it now.’” 

Kioussis points to another benchmark under assault in recent years, abetted by price reductions in like-new aircraft that the G650s noted above illustrate: the notion that market depreciation is linear. 

“It used to be if you bought a new airplane for $20 million, in 20 years it would be worth $1 million—it was a fairly straight line,” says Kioussis. “Now the curve has gotten a lot steeper on the front end and flatter on the back end. You buy a new airplane for $20 million and in the first five to seven years you’ve lost $10 million.”

This accelerated depreciation brings great value to the preowned market but impacts the vitality of the manufacturers at the top of the food chain. “If residual values don’t stay within a reasonable, predictable loss rate, it makes it very difficult to sell new airplanes against preowned,” says Jay Mesinger, president and CEO of Boulder, Colorado-based Mesinger Jet Sales. “It’s a big problem for the manufacturers.”

But the manufacturers are where many believe a large part of the problem with the continual slide in preowned values begins. “They continue to turn out 650 to 700 new jets [annually], and that’s above what the market can bear,” says Rolland Vincent, of the consultancy Rolland Vincent & Associates. “We need a slowdown in the production side, but who wants to be first?” he asks rhetorically.

And once these jets join the fleet, few of them leave. “The real problem is that aircraft really have no identifiable obsolescence or end-of-life timeframe,” says Kioussis. “There are functional concerns as aircraft age, but there is always someone who seems to have a ‘solution’ that continues to keep older assets flying.” 

What does this mean for buyers and sellers? On the sell side, find a qualified firm to represent you, and take its pricing advice. On the buy side, give yourself a high five: the selection keeps getting better, the bargains bigger. 

“From an asset-quality or maintenance perspective, aircraft [on the market] are in the best condition we have ever measured,” says Kioussis.

Anderson notes that Jetcraft has enough confidence in the market to buy and hold for its own inventory both preowned and new aircraft (the latter in cases where, for example, a buyer bails on his purchase contract before delivery). “I’m more willing [to buy] today than I’ve ever been,” says Anderson.

And unlike an aircraft broker-dealer, you don’t have to just sit on your investment. You can fly on it, too. “It’s still a fantastic way to save time, promote your business and get face-to-face [with people], and it’s a great way to travel,” says Cox. “Those things haven’t changed, and there are lots of what I consider fantastic buys where people can get a really fabulous machine for a reasonable price.”