Buying in the down market

Several of our customers have called us in recent weeks, asking for help purchasing an aircraft.  Each of them is a cash buyer and believes there is unprecedented opportunity to buy at prices not seen in over five years.  Inevitably, the question arises of ‘what should I buy that I am most likely to get capital appreciation after two or three years of ownership’.  First, we make sure to caution each and everyone one of these buyers that there is no way to guarantee any sort of capital appreciation because pretty much anything is possible with regards to aircraft values.  Secondly, we try to give them some sort of advice as to how to tilt the odds in your favor as much as possible.

We have been researching aircraft pricing trends over the past several months and confirmed that pre-owned aircraft trading prices are largely dependent upon the current price of factory deliveries.  A second trend we have noticed is that once a model reaches an age of 8 years old or greater, its price tends to settle at about 50-60 percent of the factory new price.  These figures can vary depending upon the manufacturer as some hold much greater resale value than others.  Gulfstream and Falcon, for example, typically hold value better than other models, whereas the Lear series and Beechjet line experience more significant market depreciation.  However, as an estimate, these basic axioms hold true.

We use such trend knowledge to identify aircraft that are priced beneath these values.  For example, the Citation Excel market has experienced fairly substantial price decreases recently, pushing its values below the 50% mark in some cases. By contrast, the Gulfstream 550 market, while having already experienced a price decrease in excess of $15 million, is still trying to hold a value at approximately 80% of new value.  Each market has its own specific characteristics, usually guided by the owner’s expectations from the previous boom era.  Citation owners, for example, saw prices hold very well for a long period, but were relatively immune from the premiums.  G550 owners, however, were used to 30% premiums, so they feel a greater reluctance to deviate farther from this psychological selling point. 

Once we have helped identify the aircraft that meets your mission requirements and we have assisted in identifying the subgroup that will most likely present the greatest opportunity for capital appreciation, the next step should be pre-arranging financing.  In today’s environment, the buyer who can close immediately without financing delays can and does achieve some stunning last minute pricing advantages.  We experienced this first hand quite recently assisting a buyer purchase a Falcon 900EX.

Buyer’s markets bring out large numbers of tire- kickers and dreamers.  Since you will be neither, do not be afraid to show it.  Showing your capabilities to close quickly will set you miles apart from the pack, and will elicit a much stronger reaction from the Seller.  We see huge numbers of extremely low offers, most of which are ignored as there is no evidence of the Buyer’s ability to perform.  However, a low offer backed up by proof is a much different negotiation and a totally different offer than one that is merely ink on paper.

With your finances in order at the beginning of the purchase process, you are in a much stronger negotiating position to wire a substantial fully refundable deposit to a respected Aircraft Escrow Agent. For those that show their commitment and ability in this manner, sellers treat negotiations as serious ones and give much more consideration to proposals.

Accommodation = A Better Deal, For You

Be flexible in the terms that you offer Sellers.  One of the most important items to look at is how fast the deal can move.  Sellers are typically concerned with one item: how fast will cash be put into their account.  The fastest deals get the most attention, and usually, the best price.  This does not mean you should avoid pre-purchase inspections; quite the contrary.  But it does mean you should look carefully at what will be a priority of each seller and their unique situation. Being flexible enough to accommodate their position will often give you an edge that few others can offer, and more appropriately, give the Seller a reason to sell at a lower figure.  Take their whole environment into account as well.  Many different countries have different tax loopholes and structures that can make sales rather difficult.  Knowing how to navigate them to the mutual benefit of both parties can earn you far more credit and much more leverage for a low price.

Some buyers approach this market as if they were a hero, coming in to save people from financial ruin by purchasing their aircraft at highly distressed prices.  While in rare cases this might be true, most sellers are not overly distressed.  And while their aircraft may be legitimately for sale at current market values, for most organizations, they are not losing money profusely and would rather keep the aircraft versus realizing a major loss that many fire sales create.  It is important to remember that each owner and each aircraft has its own unique persona and situation, and that while low offers are advisable in such a market, there has to be some consideration given by the buyer in the form of terms and speed in order to make such a favorable deal possible. 

In summary, because your purchase will be a three to five year ownership program, electing to purchase now at very depressed prices could potentially see you realize a significant appreciation in its value.  Even if the market should take 24 months to recover, its market value in that era would still be based against factory new pricing, and the prospects of that remaining depressed are limited.  Every manufacturer bases pricing with a CPI cost inflation indexer. And even with the economy in the current deep decline, the CPI continues to advance in virtually every economy.

How much of an increase in market value will occur over the next 36 to 60 month?  Will prices return to meet the market prices of 12 to 18 months ago?  Our crystal ball is not at all clear on that question, but 36 to 60 months after the business aviation downturns of the mid-1970s, early 1990, and 2001,  market prices recovered very strongly.

Legacy Market Overview

The Legacy market experienced market average declines during the last few months.  Since the market crash in October, there have been no transactions.  Complicating matters is the fact that inventory of aircraft for sale has steadily increased, now at 30 aircraft. 

Interest in used Legacys has actually been very active, but always by buyers at price levels far beneath owners’ requirements and expectations. As noted earlier, not all sellers are desperate and up to this point no Legacy owner has been forced to capitulate and accept a massive discount.  Importantly, no buyers thus far have exhibited much creditability by demonstrating their financial readiness to act promptly. Buyers have been making offers on one year old aircraft at the 17 million dollar level. For older aircraft, the figure has reduced beneath that level further.  Sellers are not yet to the point of accepting that number. 

At these price levels, owners reassess if they really need to sell the aircraft.  Buyers, on the other hand, wait for further financial turmoil in world markets and hope for a deterioration in the current aircraft owner’s finances.   Sellers are betting their cash reserves can last longer than the willingness of buyers to delay receiving their new aircraft, or that the market recovers.  Buyers are betting that that the Sellers will have to readjust. Optimists back the seller’s position; pessimists favor the buyer’s position.  Only time will tell which side acquiesced.

Lineage Market Overview

By the time you read this newsletter, Embraer should be very close to delivering its first two Lineage 1000 aircraft.  Going to a large Middle East Operator, the delivery date is set for mid April.  This will be an exciting product, and one that has been highly anticipated by Lineage position owners, Embraer salespeople, and interested Legacy owners alike.  Embraer has made some bold claims about performance improvements, and given their track record of fulfillment from other programs, everyone expects great numbers from the aircraft.  However, there has been little interest so far in the aftermarket.  There are selected Lineage positions for sale, but so far, the product is too misunderstood, too new and too intangible to create an active after-market, particularly given the worlds continuing financial conditions.  There have been no public market sales of delivery positions.  It is very likely, however, that after an operational period, the aircraft’s size and economics will win numerous loyal customers and interested parties. 

Legacy market movers

Instead of simply listing the number of Legacys for sale, we decided it would be more informative to outline some selected aircraft that have recently reduced their prices.  With 30 aircraft on the market, it is highly likely that there are more than a few candidates that are not truly for sale, and are leftover offers from a better economic time.  We find that price reductions are the true way to find actual sellers, as they are actively involved in the market, and in keeping their aircraft at market levels, or in front of market levels.