Rick Adams examines the pre-owned market and discovers a gradual return to optimism amid brokers on both sides of the Atlantic
“Every year there’s a bundle of people, always the same suspects, constantly hyping the market, telling of record years the year before. It’s all part of the PR spin. I don’t think too many people actually believe it. This year I’m hearing similar stories, positive views, but I’m hearing them from people I trust a bit more. So maybe, just maybe, 2017 will see an uptick.”
That’s the cautious, caveated optimism of veteran business aircraft broker Tim Barber, who recently joined US company Duncan Aviation to represent its business aircraft sales interests.
Barber, who previously started Jetbrokers Europe and is based in London, nonetheless sees the bizjet market as “…undoubtedly slow, flat. A few people are talking about prices going up; it’s certainly not being reflected in the trade value guides at this point. There’s still far too much inventory.”
According to the AMSTAT market update, there were 2,421 business jets for sale in January, or 10.9% of the market. That includes 644 heavy jets (10.2%), 822 medium jets (11.2%) and 955 light jets (also 11.2%). These numbers represent about a 0.2% improvement over January 2016.
“The pre-owned market is still trying to absorb the excess supply created during the run-up to the 2008 recession,” said Jahid Fazal-Karim, chairman of the board at Jetcraft, the largest international buyer and seller of business aircraft. “Although the inventory is edging back to equilibrium, the pricing of pre-owned aircraft is seemingly lagging.”
One glimmer of optimism has been the so-called ‘Trump Bump’, based in part on Donald Trump’s penchant for flying on private aircraft and his promise to spend money to improve US infrastructure, including airports. “Having a president of the United States who is business aviation friendly probably ultimately will do the market no end of good,” said Barber. Fully 80% of business aviation executives say the new US president will have a positive impact on the industry.
Daniel Jennings, president of The Private Jet Company in Palm Beach, Florida, an area where Trump often hangs out, said demand for selected aircraft types surged in the first three months of 2017. “We’re very busy with calls from prospective private jet buyers, particularly in the US market. If this trend continues, I believe we’ll see the market approach a balance between supply and demand for the first time in several years.
“There’s still a sense out there that the market is in a slump,” Jennings admitted, “but I believe we’re seeing the best indication yet that the slump may soon be over. With fewer aircraft available, we’re also seeing the ones with the best pedigrees – lowest flight time, best maintenance record, and newest interiors – being sold fast.”
Chad Anderson, president of Jetcraft, added, “The resale market is healthier than it’s been in a long time. Yes, values are depressed, but there’s still an adequate level of buyers to exchange aircraft with and, worldwide, sales are up.” Last year was Jetcraft’s strongest in its 55-year history.
Falling Prices or Rising?
AMSTAT stated that average asking price trends ‘continue to be a mixed bag’. Heavy jets have ticked up since mid-2016, but are only back to the January 2017 level of $15 million. Light jet ask prices are up slightly to $1.66 million, but medium jets are down almost 10% to $3.23 million.
“The market is heavily polluted with old aircraft. The minute you go to 25 or 30 years old, everything seems to be on the market,” said Barber. “But the question is, are they really on the market, or is somebody just sticking them out there and praying?”
For example, “G450 inventory has risen and prices have fallen horribly over the past year. One broker was talking about prices increasing 15% on G450s. I’m less convinced; I’ve not seen that.”
Various theories are offered for the price plummets of recent years: the Great Recession, of course, but also Brexit in the UK, the malaise of once-promising new-wealth economies including Brazil and China, and the rise of the US dollar and subsequent decline of Sterling and the Euro. “Every time there’s a degree of political uncertainty in the world, the market seems to slow,” said Barber.
“One explanation for the delay in the residual value recovery may actually be artificial,” noted Jetcraft’s Jahid Fazal-Karim, citing the company’s ten-year market forecast, released in October 2016. “Five years ago, OEMs were extending inordinate discounts to jump-start sales… residual values of five-year old aircraft remain stagnant at 55% of initial list pricing. One natural consequence of this may be that sellers who paid higher prices three to four years ago are reluctant to offer their aircraft for sale, further slowing the market.” Jetcraft’s 2016 market forecast calls for 7,879 unit deliveries, representing $248 billion in revenues (based on 2015 pricing).
Stonebriar Commercial Finance executive vice president Michael Amalfitano said, “Owners and operators who turn over their aircraft on average every three to five years are now holding onto their aircraft an average of six to eight years.”
Educating the Customer
Duncan’s Barber told EVA he tries to make sure the buyers and sellers he works with understand the market. “There’s nothing worse than somebody with $10 million in their pocket going out and trying to buy a $15 million plane, thinking that everyone’s distressed and they can ‘steal it’. Every time I deal with somebody who talks about ‘distressed assets’, I get a little bit nervous that I’ll be doing a lot of work and never quite delivering what they expect.”
He provides information on the number of aircraft on the market, how long, pricing trends, where the inventory’s rising, where it’s falling, and so on. “They also need to understand what aircraft they’re going after. You get people who are little bit broad in their expectations – one minute they’re talking about a G450, then they’re talking about a Citation Sovereign. Narrow it down; make sure they’re focused and totally understand their mission.”
For example, a buyer might fly in Europe 90% of the time and 10% transatlantic. “The cost-effective solution,” said Barber, “is to cover what you need of the 90% with the aircraft purchase, then charter for the odd 10%, the long-haul transatlantic stuff.”
A customer might acquire a Gulfstream G550 to go from London to Munich. Barber said the mindset is: “I know it’s overkill, but I don’t want to mess about with anyone else’s plane.” “Don’t buy an airplane larger than you need for your mission profile simply because they are so cheap,” advised Allen Qualey, Senior Advisor for 1st Source Bank of South Bend, Indiana. “Hire a consultant to assist in this area – it’s a small amount of money well spent. Many buyers are too thrifty to spend a few dollars up front, but they pay a huge price later.”
Barber said: “Sometimes people realise that they bought the wrong aircraft. They trusted their mate’s advice and bought what looked like a great deal, then realise the aircraft doesn’t actually do what they thought it would do. They need to take eight people, they need to take luggage, and suddenly they’ve got to do a tech stop (for refuelling), and everything they were told about the aircraft was wrong. That’s a hugely expensive mistake when you’re buying a depreciating asset.”
On the selling side, Barber said about two-thirds of the aircraft on the market are being sold by brokers. “Everyone is a broker. Pilots are brokers. Crew are brokers. MROs are brokers. CAMOs [Continuing Airworthiness Management Organisations] are brokers. Then you’ve got the people who sell yachts and jewellery and cars and jets. There are all manner of intermediaries. And the odd number who are dedicated to brokering.”
The typically cycle, Barber explained, is that an owner often attempts to sell an aircraft themselves. “Then, after the frustration of dealing with a flaky buyer, after six to 12 months, they’ll give it to a broker to sell… by which time, of course, they’ve lost a further 10-12% of their value. If you’ve got an asset depreciating at 1% per month, you don’t have to spend too much time on the maths to understand that you’ve got to shift that pretty damn quickly.”
He also cautioned against the multiple-broker approach. “With multiple agents working for you it’s hard to retain control and before you know it, someone you’ve never heard of is purporting to represent the aircraft and offering it at a price well below what you would accept. The right broker, exclusively mandated, will give 100% to achieving a sale and protecting the online presence of your aircraft by preventing secondary, unauthorised marketing. The commission will ultimately be about the same, you just focus your efforts on working with the right partner.”
Barber advises buyers and sellers to work with brokers who are members of the National Aircraft Resale Association (NARA), which promotes professional standards and a 14-point Code of Ethics. The association now has more than 100 members. He warned: “Sometimes the slickest websites are run by a lone broker operating from a spare bedroom while purporting to offer a global network.”