Pre-owned Business Jet Transactions on the Rise

For the fifth consecutive year, pre-owned transactions for current generation business jets have shown a year over year increase. However, market inventories, expressed as a percentage of the fleet, are on the rise, while the average selling price continues a downward trend.

When we factor age-based depreciation over a 30-year lifecycle, we can garner some semblance of normalized value at any given point. However, when we consider economic events such as those over the last 4 years, values and selling prices can take a drastic downward turn. As of the end of 2012, the average selling price for pre-owned, current production aircraft was reflecting a 17% decline in market value. Out of production aircraft slipped further to 33% under normalized values.

Current Production Aircraft 5 Year Sales Trend

Current Production Aircraft 5 Year Sales Trend

Out of Production Aircraft 5 Year Sales Trend

Out of Production Aircraft 5 Year Sales Trend

There are a number of factors contributing to the state of our market(s). The increase in transactions and current pricing suggests buyers are realizing substantial value in select aircraft. For example the G200, with its stand-up cabin, 3000 nm range, and Pro Line 4 cockpit, had a record 27 transactions in 2012, an increase of over 300% from 2011. A 2008 year model, with a list price new of $22M, sold for 10M in the 4th Quarter 2012, with under 800 hours total time. The same $10M could buy a 2001 Challenger 604 or Falcon 2000 with 3500 hours or a 2004 Challenger 300 with 7500 hours. Buyers seem to be looking more laterally with the perception of ‘how much value can I buy for the same dollar’. Obviously, the newer aircraft open up greater financing opportunities as well.

Compared to 2008, when pre-owned aircraft were selling for more than they cost new, 2012 continued to adjust prices to a level commensurate with the global economic climate. On average, pre-owned business jets are selling 25% under normalized markets, which seems to be one of the driving factors for the increased transactions. Further, according to GAMA new business jet deliveries for the first 9 months of 2011 and 2012 were 427 and 428 respectively. When current production pre-owned aircraft are selling for 40% less than the cost new, this can also stimulate the number of pre-owned transactions.

For the start of 2013, pre-owned inventories are on the rise; however activity levels (pre-purchase inspections, LOIs, Offers to Purchase, et al) are showing formidable signs for consistent activity.

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Question: I am thinking of selling my Gulfstream IV. How can I determine its true resale value?

As seen in Fly Corporate:

I am thinking of selling my Gulfstream IV. How can I determine its true resale value?
George Dubroux, Entrepreneur

As soon as an aircraft enters service, the asset begins to depreciate. Traditionally a safe guideline for market depreciation has been 3 to 4% per year. However, the current market for used aircraft can hardly be considered traditional. In addition to economic considerations, major maintenance, avionics upgrades, modernisation, engine programmes, total flying time and the number of cycles will all impact the baseline value of your asset. With proper planning and the right intelligence, resale value can be calculated in fairly short order.

A new Gulfstream IV (GIV) cost $21 M (€14.4 M) in 1990. Standard features include 13 passenger capacity, aft galley, forward and aft lavatories and an SPZ 8000 Flight Control System with dual FMS and Laseref. The standard engine warranty was five years or 2,500 hours, completion warranty one year, non-structural components (including avionics) five years. At some point, after the basic warranties have expired, assuming an annual usage of 500 hours, the aircraft will incur major capital expenditures for engine inspections (at 4,000 hours or 10 years), airframe check (72 month intervals), gear overhaul (5,000 cycles), avionics upgrades due to regulation and modernisation requirements, and interior refurbishment among other items.

Fleet Comparison Vital
As an aircraft ages you must compare it to the rest of the fleet. How many hours has it flown relative to the fleet, is it enrolled in an engine programme, what is the interior configuration, and have the avionics been updated recently? As of September 2009 the average total time of the GIV fleet was 8,600 hours, 20% were enrolled in an engine programme, 73% were configured with an aft galley, 71% were equipped with Satcom, while 8% had a Head Up Display. Drawing the fleet comparison model gives you a fairly good idea of how your aircraft compares. Excessively high time, a lack of major optional avionics, or an upcoming major maintenance event can all impact baseline value and ultimately resale pricing.

Armed with fleet intelligence you can then compare your aircraft to those currently available on the market. Don’t just compare it with other GIVs, but include competing makes and models. If you can purchase a Challenger 604 or Gulfstream IV SP for $12 M (€8.2 M), why would you pay near that for an older GIV?

The percentage of the fleet that is for sale will also affect value. As a rule of thumb, the baseline value assumes that around 10% of the available fleet is for sale. If it is less than this, the baseline value can be adjusted up – if its higher it needs to be adjusted down. There were 36 GIV aircraft, 16.8% of the fleet, on the market as of 10 September. Therefore the baseline value should be adjusted down around 7% to compensate.

Long-Term Planning
Any prospective seller should ask themselves why their aircraft would sell before the 36 currently available. Current average time on the market for the GIV is 214 days, although 16 have been available for over a year. Recent major maintenance or refurbishment may give you an edge, but your pricing must be attractive, especially when compared to recent sales of GIV and competing models. In the case of the GIV, asking prices range from $7.9 to 12.9 M (€5.4 to 8.9 M) but twenty-one are listed without a firm price (Make Offer). There have been two sales in the past six months, both in the $9 M (€6.2 M) range (+/- 2%).
There are many factors that need to be considered before you price your aircraft. If possible, put a long-term strategic plan in place to track and monitor present value, fleet statistics and market activity on an on-going basis. Before you make major capital investments in your aircraft, first establish what impact it will have on the value of the asset, not only today but also longer term.
Never place an aircraft on the market at Make Offer and never price it near or above the cost of a new model. Doing either of these two things will cost you more in the long run.
Dennis Rousseau, Founder and President of AircraftPost Inc.

BCA Quotes Dennis Rousseau on the Used Aircraft Outlook for 2012

AircraftPost president, Dennis Rousseau, was recently asked by Business & Commercial Aviation to give his outlook on the used aircraft market in 2012. In an article entitled Used Aircraft 2012 which was published in the magazine’s May edition, Dennis shares his thoughts on the market:

Dennis Rousseau of pointed out that the number of aircraft for sale is actually rising for many types, while transaction prices are still dropping. Plus, the macro economic picture is not rosy. “By 2012, the economic recovery was supposed to be here.  I don’t see it. Plus, fuel prices are going through the ceiling.”

However, Rousseau does see plenty of opportunities for would-be buyers. “What we are seeing is value. Pricing is more in line with the reality of the markets. We are running at about 30% under a normalized market,” which offers buyers “historic bargains.”

For the price operators paid for a small jet in 2008 they can buy a medium jet today, added Rousseau, and some operators are trading up. “People are buying not necessarily for their travel needs today, but for the foreseeable future.”

Factors driving the Pre-owned Market

The collapse of the housing market in 2006 was the point of origin for the current recession which started in 2007 and progressively worsened into 2008. Some of the cause can be attributed to reckless lending which led to an unrealistic rise in asset prices. There is rhetoric the crisis was over by mid 2009. Yet 3+ years later, we are still faced with high unemployment, low consumer confidence, a dormant housing market flush with inventory and declining values, escalating federal debt, unstable financial markets, an indebted US economy, et al.

Effect on Business Jets

There are a number of factors that affect aircraft values and market price, some of which are beyond our industry and control, such as economic fundamentals and the financial markets. For example, as we discussed at an industry conference in 2009, there seems to be a direct corollary between the movement of the DJIA and pre-owned business jet selling prices, as was the case from 2000 into Q1 of 2009.  However, that changed by 2011 when the Dow nearly doubled from 6600 to over 12,000, yet business jet prices continued to decline.

Factors specific to the business jet markets that have an effect on value are percentage of the fleet on the market, days on market, number of transactions, and selling price. Usually when inventories decline, markets tend to stabilize. In our market, 5% of the available fleet is considered normal, as was the case in 2008. However, by 2009 the number had tripled and in some cases quadrupled, as shown in the random sampling of current generation business jets below. Year-to-date [2011] the percentage of the fleet on the market is below that in 2009 and running slightly under 2010, which could be a result of the number of aircraft withdrawn from the market this year, which is 208 for this random sampling alone.

Although ‘percentage of fleet’ serves as an indicator for market timing and to some extent market pricing, there are other criteria more specific to value. Usually as time on the market increases, selling prices soften, placing downward pressure on market values. The average days on the market has increased by more than 55% from 2009 to 2011.

Days on the market can, to some extent, influence selling price and market value. However, the number of transactions has an equally important role and impact. Typically, increased transactions will absorb excess inventory, driving stability in pricing. The number of transactions YTD-2011 has increased over each of the last 3-years, and if sales activity continues on track, they could surpass totals from each of the last 3 years.

Another data point to consider is the number of transactions within a given timeframe. The summer months are typically the slowest time of the year for business jet sales. However, as we review 3rd Qtr transactions (2011) vs. first 6 months activity, we see a paradox and in some cases summer transactions comprise 50+% of the total YTD activity.

Applying age-based depreciation to aircraft, assuming a 30-year life cycle and calculating the impact of major airframe / engine inspections on value, current generation business jets are selling on average 22% under a normalized market.

What’s needed to normalize the business jet market?

  • Low inventory
  • Increased transactions
  • Selling prices to align with market value
  • Sound economic fundamentals
  • Stability in the consumer and financial markets
  • Availability of reasonable financing

What is actually happening? Some older aircraft are reaching economic obsolescence, where based on their age they cost more to maintain than they’re actually worth. With future air navigation regulations and criteria, many may be forced into retirement. The good news is the number of transactions over the summer months were up; year-over-year pre-owned transactions are on the rise; and the percentage of the fleet on the market is on the decline. On the flip-side, the financial markets continue to worsen by the day; economic fundamentals are in the tank; and selling prices of business jets continue to decline.

AircraftPost is an information service provider to owners of current generation business jets. The company tracks fleet statistics and transaction data and uses this intelligence, combined with economic factors and other data, to generate ‘real time’ and residual values specific to current generation business jets.

When Maintenance and Retrofit Costs Exceed Value…

Typically, the higher the value of the asset the more willing an owner is to make a major capital expenditure (i.e., G550 EVS to SVS). However, as aircraft age and approach 20/30 year maintenance requirements, values diminish and owners begin to weigh their options. After all, an aircraft is built with a life cycle and time limited components, or in other words ‘a piece of metal with an expiration date stamped on it’. Avionics and equipment, on the other hand, will typically reach a point of economic obsolescence.

By way of example, when we consider an early Challenger 601 with an airframe inspection interval every 60 months (GIV – 72 months; Falcons – 6 years), the average cost of the first [5 year] inspection was $75,000. When factoring the average utility of 450 hours per year and considering the engines have a 3000 hour [major] inspection interval, the first [midlife] inspection would come due in the 6th year at an average cost of $700,000. Further, considering an acquisition cost of $13M, the maintenance costs pale in comparison. However, as we increase time in service, scheduled inspection costs rise proportionately. The second 60 month/120 month airframe, including gear overhaul, averages $650,000. As well, downtime increases with each [major] subsequent event. Whereas the first 60 month may incur 10 days downtime, the 4th may require 8–12 weeks.

The 2nd engine midlife inspection would occur at 9000 hours and average $1,200,000 +/-. Overhauls, which are a scheduled event every 6000 hours, would cost [on average] $2,000,000 for the first run and $2,500,000+ for the 2nd overhaul.

Note: Regardless of the aircraft make/model (Gulfstream, Falcon, Lear, et al), similar cost and downtime scenarios apply.

There exist various avionics retrofits for most older aircraft and certainly just as many looming on the horizon in an R&D or certification phase. For example, there is a retrofit [coming] available for the GV that would replace the SPZ 8500 series Cathode Ray Tube (CRT) displays with LCDs, the final cost of which is yet to be determined. However, the question becomes what are the benefits (lighter weight, less power requirements, greater capability, et al) vs. cost, as opposed to the return on capital expenditure.

The Falcon 2000 (Pro Line 4) CRT displays can be replaced with Pro Line 21, which offers 4 LCDs and includes the Integrated Flight Information System (IFIS) with electronic charts, XM weather (including lightning data, satellite images and winds aloft) and enhanced navigation maps. The open source design of the system allows accommodating the upcoming ADS-B and data link mandates. The retrofit can also upgrade the FMS, enabling Wide Area Augmentation System (WAAS) GPS Localizer Performance. The Collins Pro Line 21 retrofit for the Falcon 2000 starts at approximately $1M, whereas a full upgrade, including autopilot, radar, radios and IFIS can run $2.3 million +/-.

Although there are benefits for incorporating the latest avionics, the return on expenditure can be elusive. There are older aircraft where retrofits seem to make sense due to the older cockpits becoming costly to support (economic obsolescence), but maintenance and corrosion issues can make it even more difficult for ongoing support (i.e., difficultly in procuring parts, increased downtime and costs for inspections…).

As aging aircraft and avionics issues (ability to add WAAS, ADS-B…) become more prevalent, owners can experience increased costs for airframe and engine maintenance; greater market time at resale, increased downtime and higher pre-purchase inspection costs. All of this occurs while the debate lingers, what is the return on capital expenditure?

Prices Stabilize for Current Production Pre-owned Business Jets

Although an industry-wide recovery remains stalled, it appears that select markets for newer, later generation (current production) business jets are showing signs of stability in market price, reduced inventory levels and absorption rates. However, the market for out-of-production aircraft remains unstable with no shortage of inventory and concern for continued deterioration in market price.

Since the recession began 3 years ago, pre-owned market prices have fallen severely. Absorption of inventory is one key to improvement and current levels for out-of-production aircraft are still showing 10% of the available fleet with absorption rates averaging 21 months, in spite of most of these aircraft now priced commensurate with market. Still, tight lending standards for older aircraft (10+ years) and a fear that prices will keep falling are keeping many buyers and lenders at bay.

The debt ceiling fiasco, decrease in consumer spending, high gas prices and unemployment are all contributors to our market. In many respects the pre-owned aircraft market seems to be running hand-in-hand with the housing market: prices have fallen from their peak, mortgage rates are at rock bottom, but few can take advantage of the situation due to tightened lending standards.

Pre-owned Business Jet YTD Sales Summary

Year-to-date transactions for out-of-production aircraft are up 10% from the same period 2010, while actual selling prices continue a downward trend.  Excluding depreciation, 2011 selling prices have decreased 10%. A contributing factor could be attributed to economic obsolescence.

Sales for the majority of current production [pre-owned] aircraft are down 10% while selling prices are showing a slight increase. This uptick could be due to a recent bout of irrational spending for select models.

YTD Pre-owned Sales Q1 2010 v Q1 2011