‘Any colour you like’ – the broker’s lament

posted on 11th June 2018

The health of the pre-owned business jet market depends on what you have on your books and how well connected you are with emerging markets, says Martin Roebuck 

The continued decline in value of many classes of used aircraft means it has never been a better time to invest in one – according to brokers and financiers, at least. Except for large and ultra-long range jets, the market remains soft, especially in mature markets such as western Europe and the US. For sellers, of course, the downturn in the last three or four years is a less welcome development and they have been forced to be more realistic about the value of their asset.

“There are 60 or 70 Citation IIs on the market at the moment, and the question is how you differentiate,” says Andrew Hoy, MD of ExecuJet. “With Citations and even Learjet 60s, it’s ‘I’ll get you one tomorrow. What colour would you like?’ Only those aircraft that are hard to find are going up in value.”

Hoy claims he has never been busier, and can sell a small aircraft in six months if the price is attractive despite the oversupply. “At $1 million you can get a deal done quite quickly,” he says.

The market in mid-sized equipment such as Citation Sovereigns and Challenger 300s is picking up a little, but is still price sensitive. A 300 will cost around $11 million today “and you get an awful lot of plane for that,” Hoy observes.

Further up the scale, the market dynamic is different and Global 5000s, for example, are fetching more than the Blue Book suggests. “We got one brand new on mandate. The owner ordered it in 2009 when OEMs weren’t taking orders,” Hoy says. “Now he will see a $2 million premium. It wasn’t speculation, simply a change of circumstances. He wants something bigger with longer range.

“It’s the same with the XRS. I had a theory a year ago that they wouldn’t go above $50 million, but with the next ones not available from the manufacturer until 2015, they have stayed in demand.”

Clients in China and Malaysia remain active, Hoy says, and Australia has come back to life, with buyers generally requiring sufficient range to allow flights such as Sydney to Los Angeles. Smaller, older aircraft are selling into countries such as Mexico, where owners are modernising though still primarily via the pre-owned market.

Brendan Lodge, business development director at JetBrokers Europe, is not optimistic about a sustained recovery in values this year. The guidebook is “miles adrift” particularly for light and medium jets in Europe, where values are still dropping quarter on quarter, he says.

JetBrokers Inc in the US division shifted good numbers of older, smaller aircraft last year but Europe sold just seven. However, although the respective markets are very different, there are some benefits to having “a footprint on both sides of the pond,” Lodge says. The company took a listing for a Swiss-owned but US-based Citation Ten in May 2011 and had concluded a deal with an American buyer by the end of July.

Such fast turnarounds are more typical of something like a Gulfstream 450, which spends an average of 100 days on the market, or the Global XRS, currently averaging 144 days.

Amstat data at the beginning of March showed that five XRSs, or 2.4% of the worldwide fleet of 210, were for sale. They were between three and seven years old, with an average asking price of $38.975 million. Fourteen were sold in 2011, and two had already been sold in the first two months of this year.

In comparison, 22 Citation Sovereigns were for sale, or almost 7% of an active fleet of 326 aircraft. These spend an average of 295 days on the market and none were sold in the first two months of this year, although 21 were sold in 2011.

Some Sovereigns are probably listed speculatively since sellers are asking for $14-15 million, while the going rate is closer to $10 or $10.5 million.

“For a 2008 model, still in warranty and properly maintained on a programme, you could spend $200,000 on the interior [after buying at the lower price] and it’s almost as new. It’s a hard argument to say you’ve got something that’s $3 million better than that,” Lodge says.

Speakers at the International Corporate Jet and Helicopter Finance Conference in London last February voiced concern at the limited availability of financing. David Vandenberg, director of structured finance at Bombardier Aerospace, said financiers were “falling over themselves” to fund high net worth individuals and corporate buyers, but more help was needed for lease and charter operators. Lenders needed to start looking at aircraft as business tools, not toys.

Oliver Stone, MD of Colibri Aircraft, believed a potentially lucrative market funding smaller buyers was not being served. Sergio Guedes, VP aircraft finance at Embraer, said that lenders’ uncertainty over the creditworthiness of those seeking financing at less than $15 million was making things difficult. Demand was returning to the market but Guedes was worried at the impact of new taxes on aircraft owners and operators, and suggested that potential borrowers may fail the “stress tests” banks were obliged to introduce under the new Basel III liquidity rules.

Mark Wooller, head of corporate aviation and consultancy services at IBA Group, said banks were returning to the market and new entrants such as hedge funds wanted to invest. Export credit agencies were increasing their presence, stepping in to fill the funding gap and support manufacturers in challenging markets.

Under their new, stricter lending criteria, some banks are offering a maximum 70% loan to value, which generally means a more modest balloon – a market correction that delegates agreed was needed. Banks are also more likely to review their terms and reassess the borrower’s business periodically.

Mike Kahmann, MD of CIT Business Aircraft, said his organisation had not implemented periodic appraisals but was aware that others had done so, increasingly conscious of the impact of usage on value. This was in contrast to the former attitude of lenders and lessors – “it’s a loan, why would I worry about usage?”

Lodge argues that while headline deals on “heavy metal” are still being done, the lack of finance for older, smaller aircraft further down the chain makes it difficult to upgrade. The whole system will become logjammed without activity at this bottom end of the market, he fears.

Awareness of new models in the pipeline can depress used aircraft values, and this may even affect sought-after equipment such as Gulfstreams. A 2008 G550 was on offer in March at $44 million, down $500,000 on the previous quarter. Hoy at ExecuJet thinks this trend will continue, given that the G650, which is aimed at the same profile of buyer, is coming on stream next year.

Steve Varsano, founder of The Jet Business (see separate article overleaf), told the conference that the market must embrace the idea of a 10 or 20-year cut-off point, as it was unrealistic to imagine that 700-800 older aircraft every year were joining an ever-expanding global fleet.

While some much older aircraft remain productive, the rising cost of maintenance and replacement parts eventually forces them into retirement. One speaker said nobody wanted 20-year-old Challenger 601s “because they will cost you two hours of maintenance for every hour you fly them”.

Challenger 604s, which did not enter the market until 1995, are also being broken up for parts. The airframe and avionics are 11 years older than the 605, and owners and buyers are not prepared to spend money on re-engining them.

Even 1999 Learjet 45s are heading for the scrapyard, although Hoy tells EVA that ExecuJet has had some success selling former Singapore Airlines training aircraft in the 10 to 12-year age bracket with around 8,000 hours flying time.

“At the right price and with new paint, interior and engine programmes, there’s no problem. The maintenance history is impeccable. Turn right and you’re looking at a brand new aircraft. They’re fetching nearly $3 million,” he says.

However, a new consideration beginning to affect resale values is the maximum age limit some jurisdictions are now stipulating for aircraft joining their registers. Jordan now has a 10-year limit, China the same (and with a maximum of three owners). Russia wants modern planes on its register, too.

Countries were trying, wrongly, to protect their safety records, but there was no rational basis for an arbitrary age limit, Hoy said. “There is no reason why you wouldn’t take a 12-year-old plane with a good pedigree.

Many owners looked to sell three or four-year-old Challenger 605s with 1,500 hours on the clock, and this market was still lively. But the new age rules meant anyone now acquiring such an aircraft would be forced to think about their exit point and the likely demand for it at eight or nine years old, he said.

Perhaps with this in mind, Varsano had a different take on where buyers should be looking for value, given the cheap cost of borrowing. “A 10-year-old Challenger 604 will cost you, say, $10 million, but you have to add $400,000 per year for maintenance. An aircraft that’s two years old will be $20 million, but it’s still under warranty. If you are borrowing at 4%, you will be paying the $400,000 in additional interest but nothing for maintenance. That story’s not being told,” he said.