Bargain hunting has characterised the pre-owned aircraft market in recent months. Buyers may well have started to return to the market but they are largely focused on bottom-dollar purchasing involving copious haggling and even then deals are in danger of collapse if the finances are not securely in place. We find out whether this is the bottom of the market, whether there new depths to plumb and what is even saleable
The broking market has never been so colourful. True it is fraught with frustration, but it is also the home of opportunity, the likes of which we rarely see in aviation circles.
The downturn has delivered a new type of equilibrium populated by a new breed of aircraft buyer that has never owned an aircraft before – or indeed ever thought they would – but recession has brought with it its own type of democracy which throws up the opportunity to buy an aircraft, especially a pre-owned ageing aircraft, for a much more diverse slice of the world’s population.
Of course diversity brings with it different behaviours, different expectations and varying access to finance. As a result, values have been pushed increasingly lower and, although the question of copious excess inventory is starting to be addressed, the truth is that the prevailing high volumes of inventory refuse to go down significantly. All this makes it a very exciting time for the broking market.
That is why JetBrokers Europe has set up shop. It was launched in September 2009 with offices in the UK and Switzerland and now a Berlin office has been established, headed by Ilaria Cicchetti, to cover the German and Italian markets. The European operation complements the trading history of big sister company, JetBrokers Inc. of St Louis, Missouri, and mirrors the raison d’etre of its American counterpart: to broker deals in the pre-owned aircraft market and to keep clients coming back for more.
JetBrokers Europe is headed by Tim Barber, Managing Director and they have recently relocated to new offices at Farnborough Airport in the UK,. Brendan Lodge has been appointed Business Development Director and John Sirett is the Company Secretary.
But what really sets a broker apart is full understanding of the market, the equipment it is trading and access to experts that can assist in the setting of true market values (based on willingness to pay), real finance (based on the availability of real cash) and a complete understanding of the private aviation market, its foibles and its characteristics.
A recent lunch hosted by JetBrokers Europe and attended by Paul Walsingham, UK Manager – Aviation, SG Equipment Finance, set out JetBrokers Europe shop front and exhibited the layers of expertise within the business and also those from outside on which it draws.
This young brokerage has a range of turbo props and jets available but like many other brokerages has a number of lower end aircraft – turboprops and early Citations available. However they are seeing a good level of activity in the heavy jet market, particularly in the “off market” sector. Of course the mid to heavy jet market is seeing much more interest of late with a reduced inventory in this area. Also notable is the increased market activity in Europe as opposed to the US market. Then there is the weaker euro to consider which has resulted in a price increase of 15-20% (given that aircraft are generally traded in US dollars) for European buyers who do not hold dollar assets..
Barber says closing deals at the lower end of the market in Europe is all about being flexible, being willing to negotiate and compromising on pricing and conditions of sale. He cites as an example the fact that there is enough Citation II inventory on the market for the next 2.5 years with 143 of these aircraft on the open market, representing more than 20% of the global active stock – more than twice the levels seen in a healthy market.
Commenting on CJ2 sales, JetBrokers Europe points out that these are well behind 2009 levels and, although prices have picked up, sales are taking longer to complete. For turboprops, prices have bottomed out and sales inventory has remained steady throughout the year.
In the mid-weight sector, JetBrokers Europe points out that there are currently 13 Hawker 850XPs on the market, with 10 sold so far this year and pricing still showing a gradual decline. However, an increase in the number of Challenger 604s on the market has seen prices diminish over the last year and, with 46 still on the market, this is not likely to change any time soon.
In terms of heavy metal, as noted above, there is a whole new story to tell. The European market is far more active than the US. There are just 14 Gulfstream G550s available to purchase (which will spend an average of 154 days on the market) for which prices have risen in 2010. The Global XRS also remains popular, with an average of only 93 days on the market
All this is what makes the pre-owned broking market so vibrant. Sweeping comments are useless given the specific dynamics of each sale, but one thing is for sure – regardless of aircraft type – getting the finance in place is a major hurdle. And this, says Walsingham at SG, is not because the purse strings have been tied at his bank; it is more to do with communication. He says that transactions are successful because there is real understanding between the bank and the client in terms of each others’ expectations.
Speaking generally, Walsingham points out that until 2008, banks were keen to grab whichever deals they could as long as the asset on which the financing was secured was a good risk. Today, there is a whole lot more due diligence to perform beyond the quality of the asset. And, he reminds us, it is imperative that the client asks all the right questions about the bank’s appetite, experience and processes. A clear set of terms issued early in discussions is very beneficial for both parties
Also, let us not forget that banks will be lending more sparingly generally because higher global minimum capital standards are being set. At its September 12, 2010 meeting, the Group of Governors and Heads of Supervision, the oversight body of the Basel Committee on Banking Supervision, announced a substantial strengthening of existing capital requirements. These capital reforms, together with the introduction of a global liquidity standard, will be presented to the Seoul G20 leaders summit in November 2010.
The Committee’s package of reforms will increase the minimum common equity requirement from 2% to 4.5%. In addition, banks will be required to hold a capital conservation buffer of 2.5% to withstand future periods of stress, bringing the total common equity requirements to 7%. This reinforces the stronger definition of capital agreed by Governors and Heads of Supervision in July and the higher capital requirements for trading, derivative and securitisation activities to be introduced at the end of 2011.
“This will create a consistency that we have not seen in the market before,” points out Walsingham. “It will create a more stable market. We will have to drill down to make sure we truly understand the deal.”
He continues: “Banks also need to be more open about their expectations and realistic with the client about deal delivery and likely terms. Customers in this sector have been used to getting finance freely based on reputation and this is no longer the case.”
This is a point taken up by Lodge. He says that, historically in this sector, lots of deals were closed based on very little research. Borrowers held all the cards and were not afraid to trade on their reputations. It was very much an environment where high net worth individuals could borrow money secretly. But recession has brought change and “taking punts” is no longer possible.
Another change is the number of air finance banks that are truly in the market. Walsingham points out that we are probably down to only five or six banks in Europe that are properly active in this market – whereas this number might have been closer to 30 banks at the top of the market. But Lodge points out it is important to distinguish between asset finance banks – who look at the deal purely as an asset financing – and private banks who are all about managed funds. This type of market really does require the asset finance bank approach or else fingers are likely to be burned.
Some private banks, he points out, will agree to a loan, taking individual’s private assets and capital as a guarantee. But unless the aircraft is part of a wider financing package incorporating larger jets, banks tend to shy away.
Although the structure of deals has generally not changed very much, the percentage of the price being financed has fallen to the 75% mark and residual values are now much more conservative.
Returning to the assets on the market available for sale, Barber points out that the toughest aircraft to finance are ageing ones – around 25 years old or more – and the entry level turboprops and jets. After all, the cost of an engine overhaul on an ageing aircraft can be more than the value of the whole aircraft. That is why there has been a flurry of activity in terms of pre-owned engine trading with plenty of scope for innovation.
It is not difficult to envisage the situation where two owners get together to make one good asset between them at a palatable cost. It is also easy to foresee a mass scrappage scheme on the horizon as aircraft reach the end of their economic lives given the cost of overhaul and maintenance of airworthiness standards.
This is, in part, why there is so much interest in the larger end of the market where hard-headed business principles tend to be entrenched, asset values remain comfortable and the future is so much easier to predict.