The Financial Crisis And The Pre-Owned Market

The recent global financial crisis has had an enormous impact on virtually all aspects of the world economy.  From housing to banking to cars to aircraft, everything and everyone has felt its effects.  The resulting stock market declines have erased trillions of dollars of wealth from around the world.  But how have the events of the last eight weeks impacted the pre-owned aircraft market?

Private airplanes are unique assets owned by high net worth individuals and successful companies.  But their true distinctiveness is that ownership is rarely critical; they are mostly wanted as a significant convenience.  Owning an aircraft in a recession is often hard. The capital intensive nature of these assets make it hard to rationalize devoting critical cash for the aircraft’s ownership when capital could be used on higher returning investments or in maintaining ample liquidity to comply with often restrictive debt covenants.

What the financial crisis has done is to change consumer psychology of aircraft owners and operators. Before October, most individuals were convinced that there was little chance of a recession.  Now however, many see it as largely unavoidable. And daily messages reinforce this message. In the course of one month, the spending mentality of buyers has switched from boom-time consumerism to recessionary survival, marked by rampant cost cutting and forced saving.  Instantly, people who were considering buying something are second guessing themselves, or more frequently, taking a ‘wait and see’ attitude. They are concerned that buying an expensive item might be unwise if instead of a few months event, the recession becomes a multi-year cycle. The largest percentage of financially qualified buyers are electing to stand on the sidelines while they analyze whether the economy shows signs that recovery might be imminent, or years away, before they make capital expenditure decisions. 

A vital component of a recessionary survival is the buyers’ belief that they will be able to buy assets at fire-sale prices, and if they do not see assets at those prices, they will not buy.  The perception of buyers is that many current aircraft owners are in dire financial condition, and that they will be able to buy aircraft at huge discounts from their boom time value.  Some owners in a financial squeeze are forced to liquidate their aircraft. In rare instances, we have seen reductions of as much as 35% on selected transactions.  The vast majority of owners, however, have no need to sell at such a discount.

From the perspective of the current aircraft owners and operators, the crisis has created a need to cautiously observe and recalculate their needs and expectations.  Operators who were in the process of rapid acceleration are now divesting their fleets of superfluous lift as they witness charter demand drop by as much as 40%.  Private owners are deciding if they can really utilize the asset to their advantage to survive the crunch, or if the value of the asset would be better employed elsewhere.  Many must use such logic to determine if they should take delivery of the new aircraft they have previously ordered. 

It is new aircraft deliveries that have experienced the most remarkable turnaround.  Operators are analyzing if it is best to put them on the market since they would not be able to afford the asset at the current level of reduced charter demand.  Buyers that had financing commitments for new aircraft are seeing those commitments evaporate as the banks either no longer exist or are no longer making loans. Most new aircraft have very extended delivery dates and thus, at the peak, many buyers with near term deliveries were able to sell their position at premiums of 30-40% over contract value. 

But, in the space of eight weeks, virtually all premiums have disappeared. In some instances there are reports of unsold inventory on manufacturer’s ramps.  New aircraft delivery slots can even be found at discounts, as owners would rather pay the liquidated damages to the manufacturer and give the slot back than take delivery.

The prices and availability of new aircraft deliveries is the single largest determinant of pre-owned market prices.  Thus, such rampant availability and price decreases in new equipment have lead directly to huge price decline in pre-owned private jets. 

The critical issue in this market is not that people are making low offers; it is that potential buyers are not even responding to market availability.  For certain older makes and models, there are simply no buyers, at any price.

Those offering much newer and low time aircraft are seeing that only very large price discounts have created interest.  For example, a 2007 model Challenger 300 recently went under contract.  It had been on the market for a few months at the prevailing market price $21.5 million, with no interest. After the owner dropped the price to $16.5 million, it went under contract within two days at a figure around 16 million.  That transaction is the only Challenger 300 to sell in 90 days.

We are advising interested sellers that the only way to sell an aircraft in today’s market is to accept the new level of pricing.  The pricing of 60 days ago is totally irrelevant today.  Ignore what the other aircraft are asking, because they are not selling.  Gone are the days of simply putting an aircraft on the market at almost any price and watching it sell.  At 60 days ago prices, there is no market.  If you are forced into liquidation today or the foreseeable future, you have to find the new market level, and that means to be prepared to start low and potentially have to go lower. 

Embraer Legacy/Lineage Market overview

The Legacy 600/Lineage 1000 market has not been immune from this phenomenon.  In September 2008, there were four Legacys on the market.  That number has increased to 18 Legacy and several Lineage 1000 positions.  Asking prices are still at pre-crisis levels, but unfortunately, no aircraft are trading at those numbers.  There are a number of new or barely used aircraft for sale (one has only 50 hours total time).  At last count, there were three delivery slots between November 2008 and February 2009 for sale, and three aircraft that were delivered in the last three months on the market.  Classic supply and demand theory is at work and prices will fall to the point where the market is willing to absorb such supply.  Where that price point is presently is yet to be established.

Having just returned from Dubai and the Middle East Business Aviation Association trade show, we can positively confirm that there are still buyers, but they are few and widely dispersed geographically. Of all the aircraft we offered, the Legacy and Lineage were by far the most in demand.  We heard from many people that there are simply no other aircraft that will do what a Legacy will do, and this is the very reason that you purchased it.  Legacys and Lineages can still be sold as they are truly one of the most capable aircraft in the sky, but they will be sold at prices lower than those realized several months ago.

Currently on the market

Also:  Several Lineage 1000 Positions For 2009 Delivery:
Embraer Lineage 1000:  A cabin 5 feet longer than a Boeing BBJ.  Six feet six inches of headroom.  Almost five times as much internal baggage space as BBJ.  4,200 nautical miles of range.  Same normal cruise speed of BBJ.  16 to 19 passenger configurations.  Aft Stateroom.  Optional Shower.  Average Fuel Burn: 15% Less Per Hour Than BBJ.  Hourly Direct Operating Cost:  15+% Less Than BBJ.  Guaranteed Hourly Engine and Full Maintenance Programs.                                 Capital Cost:  $10,000,000 lower than BBJ.

Business Air International (BAI) is the department of Business Air responsible for the acquisition, sale and brokerage of private jets throughout the world.  Personnel in the department have decades of private jets experience and typically do approximately two dozen transactions each year, many of which involve trans-border cross-border transactions.  They are expert in the execution of contracts and aeronautical documentation regarding EASA, JAR-Ops, International Registry, FAA and individual country registration and certification.  Such knowledge and experience result in smooth, efficient, and successful transactions for their clients. Our very extensive international knowledge and experience have placed us in a position to locate and find limited buyers during economic declines.  In just five months we have displayed at private jet expos in Moscow, Geneva, Dubai, Napa Valley, Orlando; and visited Singapore, Cape Town, London, Paris. BAI specializes in medium cabin and larger private jets. The parent, Business Air, is the fixed base operator at KDTO airport just north of the DFW metroplex.  Business Air is a sister company of Jet Works Air Center, a major maintenance, completions, avionics and paint facility which services aircraft from Citations to the latest Gulfstreams and Global Expresses, and also do  re-furbs on corporate configured Boeing airliners.