What are the opportunities in falling aircraft evaluations?
The character of today’s market for used business jets may be frustrating to some and beneficial to others. It all depends upon strategy, contends David Wyndham. Here’s why…
Rapid declines in used aircraft values have characterized the marketplace over the past nine years. In 2007, prior to the Great Recession, new aircraft models were selling for more than list price. Just one example included the list price for a 2007 Gulfstream G550 that was $47.6m. A year later, that 12-month-old G550 had an average selling price of $58m, according to Vref Aircraft Value Reference. Late in 2008 the market collapsed and soon thereafter, aircraft values fell.
Today, the US economy is doing well. The S&P 500 is up about 78% over the past five years. But business aircraft values, especially business jets, have not recovered. In fact, the past 12 months have seen annual declines in excess of 20% for many popular models. Revisiting that 2007-model G550 shows in the past 12 months a decline in value of 28% (per Vref)! Meanwhile, UK-based business aircraft broker, Colibri Aircraft, reported that a group of popular business jets in their survey dropped 35% between April 2014 and April 2017.
Over the following multi-part series, we will explore the opportunities for Business Aviation and aircraft buyers.
The chart below shows 10 of the top business jets based on deliveries from 2007 as reported by the General Aviation Manufacturers Association (GAMA), their 2007 list price, and their sale price today (per Vref Price Guide).
As a group, the business jets featured have lost about 62% of their 2007 price in the past decade. Adjusting for inflation using the CPI-U, the average decline in the past decade is 68% actually. With respect to aircraft values, 2017 is clearly not 2007. Nor are we looking to return to those days anytime soon. But there are opportunities to explore.
Buyers and sellers have options. And with options come opportunities as well as risks. Consider the following buying and selling scenarios:
Over the coming months we will explore each of these alternatives, starting with not selling this month.
Judging from still-declining values, standing pat seems to be the popular choice. If there were more buyers for business aircraft, prices would stabilize. Many aircraft brokers report that business is brisk today, but brokers are an optimistic group, and they make money when there are transactions regardless of which way the market moves.
An active market combined with the 10-20% annual drop in selling price means that sellers are willing to (or have no other option than to) part with their aircraft at attractive prices for buyers. But let us state the obvious: If you don’t sell, you don’t realize that loss.
Business aircraft lead a cared-for life. They are well maintained, and they typically fly only 300-400 hours per year.
Machines manufactured in 2007 (for the most part) are as capable today as they were when they were new, particularly if the owner has upgraded the aircraft’s avionics suite.
Even without additions, avionics and navigation systems manufactured in 2007 are highly capable even though they are aging. Many well qualified avionics shops can update your current aircraft for less money than the loss in value you’d take if you sold today. You can put in a new interior, repaint the aircraft; who could tell the 2007 jet from the 2017 one when extensively refurbished/updated?
In general, business aircraft are very well built. Consider the four popular early-generation jets (two light, one mid-size and one large) highlighted in the table below. The median age of the aircraft listed is over 30 years old. Over 80% of the fleet are still active. Provided that your aircraft was built in sufficient numbers to warrant being supported today, the evidence suggests that 30-40 years is a reasonable economic life expectancy.
Caveat Emptor: If you own an early model of one of the aircraft detailed in the table, you are likely to be the last owner of that aircraft. For example, an early 1980s GIII sells for maybe $500k. Overhauling its engines can cost up to $3m. In essence, these are examples of disposable aircraft.
If the aircraft you currently own is still capable of performing its assigned mission, and the cost to replace it is higher than keeping it, then stay the course and continue receiving value from its ability to provide valuable and unique transportation. Do keep in mind, however, that the older your aircraft gets, the less desirable it will be. Over about age 20 or so, you may be its last owner.