Wings Magazine

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Seaman: Aircraft Sales and Values

If you live in the aviation world, you would had to have slept like Rip van Winkle not to notice that aircraft sales for all types have been very good, to say the least, over the last few years. The OEMs have been doing a happy dance as their order books loaded up.


October 28, 2008
By Rob Seaman

Topics
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The use and value of corporate aviation is proven more so now than ever before. 

If you live in the aviation world, you would had to have slept like Rip van Winkle not to notice that aircraft sales for all types have been very good, to say the least, over the last few years. The OEMs have been doing a happy dance as their order books loaded up.

The supply of resale aircraft has also meant good things to the market as owners rush for first-time, trade-up and even interim aircraft. Throughout last summer and fall, if you called on a listing one day, the broker would likely have warned that an offer was in the works and it may go fast. And in many cases that became reality. Even during the traditional quiet periods like December and January, things just seemed to be running at full speed.

Growth in pricing has been a natural offshoot of the market success. Asking and actual selling prices on aircraft have been climbing steadily as demand seemed to outstrip supply. You used to able to bargain a reasonable amount between “ask” and “sell,” but increasingly “ask” became the final price. For those used to dickering a few hundred thousand off, the barter and banter in selling became a tougher go as sellers held firm on their price. Some have walked from the deal even though the price was literally within thousands of “ask” and “offer.” From the seller’s perspective, there was another guy around the corner tomorrow who would give what was wanted.

The commodity sales strategy has taken aircraft prices to new highs and created a speculative market as holders of positions with earlier deliveries than those from the factory, have offered them for sale at what is considered to be the price for today – not what they paid when originally ordered. It has even led some to openly offer an opinion that new aircraft orders may have become a new investors’ speculative market – that is, to buy a position today (as an investment) that you never intend to close on for your own use, and then resell it downstream to a guy who really does not want to wait four to five years for his new aircraft and is willing to pay a premium on it.

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As the profits and health of the aircraft builders goes, so too does that of everyone else from avionics and maintenance folks, completion centres, oil and lube providers and yes – especially the FBOs. Even with the introduction of new models and more types of aircraft available like revised versions of current favourites with newer avionics suites and engines through to VLJs, rotorcraft and many others, things had kept rolling along quite nicely. But like all good trends, there has to be a turning point and this industry appears to have reached it.

The talk over the summer – off the record, according to whoever was asked – was that we have hit the wall on quick sales and ever-growing prices. In fact, tracking prices on many older corporate jets on the market today has shown lowered or revised asking prices – some dropping by as much as $500,000 from one week to the next. The number of listings and discussions that involve “a motivated seller” is growing. In some cases this is because the new aircraft arrival is imminent and a buy needs to take place to avoid owning multiple units. With an apparent declining domestic market, this leads to quick-sale syndrome. Unfortunately, supply on some types today is bigger than demand.

The optimists still think that all is well and continuing as it should – once you factor out the U.S. part of the package. New orders continue at pace and resale of certain types of aircraft continues unabated. It all depends on what you have and where you call home. The truth is that North America now accounts only for 25 to 30 per cent of the global business aviation market. Bottom line – we no longer drive the ship! The evolving markets in Europe, Asia and Africa are driving the demand for all aircraft types from new to resale. The drive very much depends on what you offer. Long-range, larger aircraft resale units are in high demand – Challenger 604s, G4s and Falcon 900 and 2000 models.

Mid-sized bizjets that are newer and more recent in age and appointments such as Lear 60s, Hawker 800s and Citation Excels are likewise in favour. This is not, however, a dumping ground for older, falling-from-favour aircraft like Lear 25s/35s, Citation IIIs or VIIs, Hawker 700s and Westwinds – to name a few. These buyers are demanding quality and value and what the real estate crowd would call “curb appeal.”

Here at home, a good example can be found in a quick overview of the Citation III market. When it was introduced back in 1980, it became a highly successful competitor in the growing market for fast, mid-sized (six- to nine-passenger) aircraft. It set several records for the day including time-to-climb and speed events. It later evolved into the Citation VII – both models later growing into the Citation Excel.

In Canada, the Citation III has been a proven and hard-working asset to corporate fleets. It meets our distance needs and climate issues very nicely. But it is old by today’s standards. It burns fuel more than a newer aircraft. The cabin is dated in layout and design. The avionics systems – unless serious money has been spent – are also on the older side. So it fits the definition of older bizjet in the minds of most. You can spend some big money bringing an older aircraft up to date. And within that conversation is the question of what should you spend on an older and depreciating asset? The answer depends on how long you intend to keep it and how much it really is the right aircraft for your needs. Paint and interior definitely add value that can make the difference between sale or no sale. But avionics tend to be pilot-driven options more than by owners (who for the most part see the cabin as their main source of interest). That said, some of the avionics upgrades can result in improved performance and savings in other ways. So therein lies the delicate balance of what should you spend and why. It really comes down to personal choices.

There is one reality to this part of the equation, though – spending the money today does not get you a fast return on a sale tomorrow. It just does not add enough in some cases to make the aircraft worth that much more in relation to the rest of the market. For example, putting a flat-panel avionics upgrade into your aircraft today is big,  and to try and recover that means you simply have priced yourself out of the market. There will be too many newer aircraft that perhaps already have the same or similar options along with nice things like newer and better cabin, paint or more economical engines in a similar price bracket. So spending on an older aircraft – especially if you are doing so with a view to near-term or immediate sale – needs some thinking and caution in a market where some prices are now heading south of what they were even a few months ago.

Continuing with the used Citation III as an example, there are currently 36 aircraft on the registered For Sale market. Average time on the market is 283 days. Within that group the low asking price is $2.695 million for an aircraft with 4,460 hrs, 3,450 landings and built in 1983. The high asking price is $3.44 million for an aircraft with 7,921 hours, 5,840 landings and built in 1986. And the market median in terms of all things is $4.0 million for an aircraft with 11,992 hours, 10,237 landings and built in 1991 (even though it has higher hours and landings it is newer in age and perhaps has recent paint, interior and other things like maintenance and avionics updates). So far this year 19 have been sold while last year it was 48; 31 the year before and 43 the year before that. So this market has lots of choices and is moving slowly in comparison to others. As things tighten, prices will likely head further south and more could start appearing for sale. More options mean more competition and price sensitivity. For aircraft like this in the domestic market, things could get tough and there is not that much demand offshore.

From a broker perspective, taking on an aircraft like this is not as desirable. To be fair to the seller you have to market and promote it – all taking time and money. And to do so means you want to see return at the end. The longer it remains unsold, the less the return. So all in all, older aircraft while in demand by some, lack the broader appeal they once had and will become a resale challenge from several angles.

Another recent worry is that real estate may not be the only place where overvaluation and overfinancing has occurred. Trying to get people to put their name and company ID to this subject for journalistic purposes is impossible – however, on the basis of anonymity they will offer the following thoughts. Some aircraft owners have financed their acquisition quite heavily based on current value and a current dollar. But hold on – the dollar is not worth what it was a couple of years back. That, combined with some recent softening on pricing of certain aircraft models means that you could have a hard time selling at a rate that properly discharges that loan, let alone give you enough equity to leverage against a new purchase. This is a scary proposition but a reality that does in fact exist. Add to this that some lending institutions are in the midst of changing ownership – or disappearing altogether – having a close friend in the money lending business could become a real value when you decide to get a new aircraft or refinance the current one. One thing to remember, though, is that most aircraft owners borrow money to finance not because they have to, but rather because the lending rates and terms made it attractive to use their own resources elsewhere. So the prospect of lots full of repossessed aircraft is a slim chance at best – but there may be the odd one that falls outside of this reality.

Things are changing in the aircraft sales market. What folks have to keep in mind is that these things are cyclic and while there may be some uncertain days ahead, we have seen all this before in one way or another. The use and value of corporate aviation is proven more so now than ever before. And the airlines do not offer the right options to replace this convenience and value to the corporate business model. So while the coming months could get a little rough, only time will tell what tomorrow brings.