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Reading A Market

Jay Mesinger discusses his analysis of market data in an attempt to understand trends and make decisions regarding asset values of business aircraft. Tea leaves- he observes- are useless.

Jay Mesinger   |   1st October 2012
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Jay Mesinger Jay Mesinger

Jay Mesinger is the CEO and Founder of Mesinger Jet Sales. With over 40 years’ experience in the...
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As Directors struggle to determine asset values in this challenging economy- I have been studying supply and demand levels from the last high point of our markets in 2007 and what we thought to be the lowest point in 2009. Hopefully- such an analysis will provide insight for understanding today’s unsettled environment. While values are still fluid and supply is uneven- historical data traditionally reveal residual loss rates.

When you eliminate the highs and lows and artificially smooth the data- a typical annual loss rate of 3.5-5.0% holds true. In today’s world- however- a new understanding of the data is required. So for the purpose of this article I discuss residual loss- while also identifying specific data points that you might use in your individual circumstances to make sense of the market’s recent history.

With respect to residual loss rates- Boards do not always have the luxury of leveling out periods over time. Based on various circumstances (e.g.- lending covenants- or need to sell or transition an aircraft) the highs and lows of current markets can impose hardships or windfalls. There is a valid need- however- for many Boards to create a realistic value for the company aircraft at a specific point in time. So how does one read the market?

Believe me- understanding market dynamics is not an exercise of reading tea leaves. It is an exercise of reading data. I have said many times that our aviation industry is one of the most unsophisticated- sophisticated industries imaginable. In creating a comparable list of aircraft available for sale at any given time- nearly 70% of the inventory states “Make Offer” rather than specifying an asking price. Consequently you may have to contact many parties- including the vendors for the specific type of aircraft being considered as well as collateral aircraft markets that may create competitive opportunities for buyers. This dynamic of our industry makes valuation problematic.

Furthermore- there is no recordation body to capture sales prices of aircraft when they are sold. One must be in the market regularly- talking often to all sellers- to obtain accurate input. Typically sellers say they received more and buyers say they paid less! To address the lack of distilled information- I examined the reporting books and the multiple listing services to determine what I could learn from available sources.

DISTILLING THE DETAILS
It is interesting to note that the major multiple listing services have acknowledged that 2012 inventory levels are down from 2011 levels. On the surface this news sounds like a shift in demand and supply. The lower supply number could bode well for a recovering market… but now for the rest of the story.

Less inventory suggests that transaction numbers should be up- but this is not the case. Inventory numbers seem to be down due to sellers pulling their aircraft off the market for several reasons- such as using the aircraft more often in their own businesses (a good thing). Another reason- however- might be that an opportunistic seller realized that selling at the asking price was not possible. Reading the market in great part is about understanding the real factors in supply fluctuation.

Data points that I think are critical to reading the market are inventory levels during specific periods in given years in relationship to actual unit sales during those periods. This information- coupled with the retail and wholesale trend lines of the Bluebook and Vref- reveals market direction with respect to prices. I think it is unfortunate that sellers are either reluctant to state an asking price or submit a price that is unrealistic. In either case the seller seems to believe in a market turnaround.

Given what I am seeing in my analyses- unfortunately dramatic recovery is nowhere in sight. Using the Challenger 604 as an example- a quick summation of supply levels and transactions data points are as follows:

• In the first seven months of 2007 (considered the height of the market) there was an average of 18 planes listed for sale per month.
• In the first seven months of 2007- 35 units were sold.
• In the first seven months of 2009 (considered to be the market low point) there was an average of 48 aircraft listed for sale each month- with a total of 16 sales during that seven month period.

• During or the first seven months of 2012 there has been an average of 61 aircraft for sale with 20 transactions during the period.

As you can see from this analysis there has been a complete reversal of supply and demand- and prices have continued to drop steadily since 2007. In fact prices in 2012 are down another 32% since 2009. With this example and the many other markets I examined the same way- the graphic illustration of the data was a way to pinpoint a trend of actual supply and demand- thus capturing a basis for valuation beyond residual loss.

Do you have any questions or opinions on the above topic? Get them answered/published in World Aircraft Sales Magazine. Email feedback to: Jack@avbuyer.com

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