Pre-Owned Aircraft Market Update – Q3 2023

Unlike the scorching summer many of us recently experienced, the aircraft market has shown a noticeable cooling that’s attributable to several factors that have led to a ‘hangover’ from the robust post-Covid surge in both General and Business Aviation.

The challenges aren't just the obvious high interest rates, rising consumer debt, or escalating delinquencies. Lower-than-expected utilization rates and industry-specific complexities (such as acquisition prices, aircraft age, and cabin class differences) further complicate matters.

This past summer marked what appears to be either a swan song or a warning siren for several aircraft models as we head into the third quarter (Q3). This particularly concerns their desirability and residual values. Unless you're a cash buyer with substantial reserves for maintenance, the prospects for aging aircraft appear bleak.

Opinions on whether we're entering a recession are less relevant than the alarming economic indicators, which show a direct correlation with aircraft transactions. For the first time since the onset of Covid, consumer credit card balances are surging — a red flag that has historically been followed by a recession.

Household savings are dwindling close to 2019 levels, thereby hampering banks’ lending capabilities. Car loan and credit card defaults have reached their highest levels since 2008, and a resumption of student loan payments will likely exacerbate delinquencies.

In the aircraft market, pricing adjustments appear to be short-term corrections. High valuations persist despite a transactional slump. Several metrics indicate fundamental shifts in the market. These include:

• Price reductions
• Extended listing durations, and
• Increased fleet availability.

Typically, when over 15% of a model’s fleet becomes available and resale times exceed 200 days, it signals a buyer's market.

To illustrate, one year ago there were just over 100 Gulfstreams for sale, a number that has now doubled to 209 publicly listed units. The actual number might be 10-15% higher when off-market listings are included. Other models – from the Bombardier Global 6000 to the Piper Meridian – show similar trends.

Notably, the average fair market value has decreased by 10-30%, while time on the market has increased. The seller's market is seemingly over, making it an ideal time to employ a broker's expertise, especially to avoid pitfalls like ill-advised, continual price reductions.

Credit Suisse and UBS have reported that the U.S. lost 1.8m millionaires in 2022, contributing to a global contraction of 3.3m millionaires. With high-interest rates expected to persist for another 18 months, turbulence in the pre-owned aircraft market is likely to continue.

With high rates and an unfavorable resale market prevailing currently, many Light and Entry-Level aircraft owners are leaning more towards renting or leasing their aircraft, rather than selling them. This trend could potentially be influenced by the ramifications of purchasing aircraft under the 100% bonus depreciation provision.

Introduced by the Tax Cuts and Jobs Act of 2017, the 100% bonus depreciation provision allowed businesses to immediately deduct the full cost of certain types of business property during the year the property was placed in service.

It is important to note that tax laws and provisions may change over time. Therefore, seeking the most current advice from a tax professional is recommended. If an aircraft is bought utilizing the 100% bonus depreciation and then sold a year later, it can incur several tax implications, including:

1. Depreciation Recapture: Selling the asset necessitates the ‘recapture’ of the claimed depreciation, which would then be reported as ordinary income up to the extent of the depreciation claimed.
2. Capital Gains or Losses: The sale might result in capital gains if the asset is sold for more than its depreciated value. The contrary would lead to potential capital losses.
3. IRS Form 4797: Generally, sales of business assets should be reported using IRS Form 4797, ‘Sales of Business Property’.
4. Maintaining Detailed Records: To accurately report the sale on your tax return, maintaining detailed records of asset purchases, sales, and claimed depreciation is crucial.

(Note: To comprehend fully how this procedure could impact your tax scenario, engaging with a tax advisor or accountant knowledgeable about the existing tax laws is essential. They can offer advice tailored to your distinct circumstances, guiding you to make informed decisions.)

This summer wasn't devoid of highlights, however. Gulfstream's G550 reached one million landings, Embraer announced a two-year backlog, and Bombardier is on target for its projected 138 aircraft deliveries this year. Eclipse Aerospace resumed production of the Eclipse 550, delivering two units in the first half of this year.

While it might be tempting to lump all aviation transactions together, the truth is that the pre-owned and new aircraft markets don't necessarily correlate.

Though Gulfstream's deliveries have slightly declined, Embraer and Bombardier have reported minor increases. As supply chain issues improve, so will manufacturing capabilities.

The shrinking pre-owned fleet deserves attention as numerous aircraft are being decommissioned due to various reasons, ranging from accidents to obsolescence. This will further differentiate valuations based on how well current owners have maintained, modernized, and refurbished their aircraft. In summary, here are the market trends for Q3 2023:

To continue reading Jason’s market analysis covering the Business Jet, Turboprop, Helicopter, Piston Twin and Piston Single markets click below…