Photo: Mark Wagner

Where the New and Preowned Markets Meet

The preowned and new aircraft markets typically behave quite differently. Prices virtually always go down for preowned aircraft, but they almost always go up for new ones. (The bubble preceding the Great Recession was an exception regarding preowned prices; among factory-new models, rare outliers include the Learjet Liberty, the upgraded and downwardly priced model 75 introduced last year to better compete among light jets.) Moreover, manufacturers determine new aircraft prices long before models become available, and unlike prices for preowned aircraft, those for factory-fresh airplanes are not often adjusted to changing market conditions. Airframers prefer offering enhanced warranties, additional crew training, and other value-added incentives over price cutting.

Discounts are a slippery slope: word gets around when a buyer receives a manufacturer discount, and demand for markdowns grows. Meanwhile, as soon as the news reaches the preowned market (almost immediately in most cases), prices face downward pressure, as some buyers see a reduced-price new model as a better deal than a late-model preowned one, and preowned values drop along with that of the discounted new aircraft. 

Manufacturers have a large interest in and responsibility for maintaining the residual value of their in-service fleet: no matter how many bells and whistles an aircraft has, fewer buyers will invest in it if it doesn’t hold its value as well as its competitors do. Indeed, manufacturer discounting is a major potential peril to residual values.

But how is this reluctance to discount playing out in today’s coronavirus-stunted market, where new business aircraft sales are expected to be down 30 percent in 2020 from last year’s totals, according to JetNet IQ founder and president Rolland Vincent; and Textron, Bombardier, and Gulfstream are furloughing thousands of employees?

For now, manufacturers appear to be holding the line on pricing, Vincent and others say. Buyers aren’t canceling orders, either, though some are deferring delivery dates from 2020 to 2021, or even to 2022. However, as in the preowned markets in times of distress, opportunist buyers are trolling the manufacturers’ waters in search of a strike. “Are there sharks in the water?” asks Vincent rhetorically. “They’ll always be there when there’s the smell of blood.”

If it’s not actually blood, it’s certainly red ink. Last year, an average of 50 new aircraft per month entered service, according to the consulting group AircraftPost. Through the first five months of 2020, the average was 31 aircraft per month. Few expect the flow of red will be staunched soon. 

“Repeat buyers will wait for some of the economic uncertainty to subside before risking capital,” consultant Brian Foley wrote of new jet sales prospects in a July report.

Meanwhile, on the preowned side of the fence, owners have also shown a determination to display pricing discipline in the face of COVID-19’s strong downward pressure on inevitably declining values. 

But what the broad metrics about declines don’t show is that pricing varies widely by model. AircraftPost recently provided some often-elusive apples-to-apples value comparisons between the second quarters of 2019 and 2020 that underscore the amplitude range: a 2014 model Phenom 300 dropped just 4.5 percent (from $6.6 million to $6.3 million) over that period while a 2014 Gulfstream G550 lost 35 percent (from $33 million to $21.5 million). Maybe the Phenom buyer this year was particularly motivated, and the G550 seller was eager to conclude the deal and transition into a new G600. It doesn’t matter. Those figures become the new standards for preowned pricing and residual values until the next transaction.

Meanwhile, according to AircraftPost, the value of a 2014 Citation XLS+ declined 12 percent over the same period; a 2015 Challenger 350 lost 13 percent; a 2010 Gulfstream G450 went down 18 percent; and a 2008 Dassault Falcon 2000 EASy dropped 22 percent. 

A couple of caveats to keep in mind about manufacturer resistance to discounting: this policy is often partially suspended come the fourth quarter of the year, as manufacturers aim to boost their annual sales numbers; and some airframers are known to be more willing and aggressive in such discounting than others, an eagerness often correlating to the numbers of aircraft the company produces. Even with current production cuts, Vincent predicts, manufacturers will have “some reservoir” of unsold aircraft—so-called white tails—as the end of 2020 approaches. If you’re on the fence about choosing between a preowned or new jet, that could be the perfect opportunity to test the manufacturer waters for yourself.