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Market-Making: Incentives continued- buoying 2011’s hopes for improvement.

Are we up? Are we down? Has the market moved at all? What moved - and if it moved- which way? If the market held- when will it move again? Listening to- and reading various analysts’ outlooks delivers a clear picture of clouded conditions. Some segments of the business-turbine market fared well last year – new and pre-owned- alike.

On the new-plane front- the abandonment and cancellation of orders stopped- and backlogs firmed up…sales held for the larger segments- but remained depressed below that level. Other parts of business aircraft sales - particularly the pre-owned segment - changed little in net value last year from the year before- which is to say- business remained tight.

Charter activity proved mixed- and in general- the industry all seems a little confusing. With that established- welcome to Aviation Economics 101 as we enter the second decade of the ‘new’ century. In the broader business picture- many indicators pivoted back toward positive growth last year; a rising tide that raised some boats- but left others still aground – so in essence- it’s better for some- worse for others and status quo for most.

This brings us back full-circle- to where we posed our initial questions heading up this article to a variety of dealers and brokers- analysts and consultants.

THE YO-YO YEAR OF 2010
“We started tallying up the year around Thanksgiving to remind us how well things started out-” explained one Midwest broker who sells light jets- business propjets and cabin-class piston twins. “But it got depressing seeing how the year lost steam in the final months - so we waited until after the New Year to make us feel better.

“The wait helped us see we actually had an up year – slightly – without leaving us depressed that most of what was ‘up’ early on turned ‘down’ after seven or eight months. From October onwards- we trailed behind 2009 a bit each month.” Similar images came from descriptions from other brokers- several dealers and some of the analysts studying the market.

Depending on the reporting study- sales of pre-owned jets- propjets and turbine helicopters edged up through the first three quarters – about 14-17 percent- 14-16 percent- and 5-6 percent respectively – with transaction closings tapering off in the final three months. By some accounts- they fell to at- or below year-ago levels by year-end.

The strength of sales early in the year can be attributed in part to the accelerated “bonus” tax depreciation available in 2009- especially a surge in deals dated by the year’s end.

“When Congress didn’t immediately renew that break- sales action tapered off some- though interest remained strong- judging by our call volume-” said the Midwest-based broker.

The best news of the year 2010 by many observations was a drop in the percentage of the active business-turbine fleet for sale. According to an Eastern Seaboard broker/ dealer- “Anything that helps firm up prices and values should help – not immediately- but out a few months. That makes me feel like 2011 will show some strength or- at least- stability.”

According to various reports- inventories by percentage of the registered jet fleet dropped about 1 to 1.5 percent to around 15 percent- and to around 11 percent for propjets. Turbine helicopters left a hover and edged-up slightly to approximately seven percent.

“The whole picture just seemed to go into a holding pattern in the last quarter-” a broker in the Western states explained. Sales slowed a little- inventories shrank a bit and values seemed to hold- he elaborated. “The finance folks like seeing values stabilize; even if they are no less flexible about terms than before- they start to feel better about writing airplane deals.”

Some awareness of the stabilized picture may explain why several brokers sounded happy with how often their phones are ringing. “It is- I believe- people realizing that the end of days for deep discounting and fire-sale markdowns could spell the return of price growth-” the Western U.S. broker observed. “A few buyers have learned that it’s again a good time to buy.”

THE RETURN OF ACCELERATED TAX BREAKS
In what’s expected to be another sales-booster- 2011 started off with various tax incentives for business investment fully defined- enacted and available as selling points- unlike most of 2010. Three-quarters of last year passed without that tax break that helped during 2009.

“We got lucky-” said one dealer who specializes in a particular turboprop twin. “The reauthorization of accelerated depreciation and other incentives could not have come at a better time for 2011 sales prospects… in 2010.”

That action by Congress - he and other sales and tax specialists noted - makes those breaks available for the entire year. “That gives us time to work past prospects- and to sweeten the pot for new prospects.”

Speaking to the dealer in late 2010- after President Barack Obama had signed the law creating this year’s business-investment breaks he remarked- “We’ve already locked down two demonstrations for the first half of January – specifically because the client knows about the accelerated depreciation and what it will do for his company’s tax liabilities.”

The prospects both want to act before the planes they target are snapped up by others- the dealer added. “We can offer nicely upgraded airplanes at good values – and we’ve found something of a following for the airplane-” explained the chief of sales.

“The airplane works for them; they’ve got the money and they need to invest in the company or pay more in taxes. Now that the incentives are settled- the trick is less- and less about the money for these folks and more about support.”

That- sadly- is not a question resolved with the new tax structure- and not everybody feels happy about those incentives.

SHORT VS. LONGER-TERM
Not every accountant believes that the best course of action is cashing in on the tax benefits available this year. In fact- some tax and business advisors are counseling to look a little longer-term before deciding how to use the incentives. That’s because they believe there may be a reckoning from using today’s most-coveted tax break for investing in business equipment.

“I want to work with the investor- the client- to look at what they see coming for them in the normal five- to seven-year time frame we typically use to depreciate capital investments-” explained one accountant with a significant airplane-using clientele.

“The question I want them to consider- that I want to help them answer- is whether they’ll miss (maybe even need) those benefits in the out-years.

“If other investments or costs in later years can help them with their tax exposure- fine and good; but maybe they want to spread out that airplane’s depreciation more evenly instead of taking all- or most of it in the first year. It’s got to be a business-by-business decision; one size does not fit all.”

Still- the Business Aviation community continues to pin its hopes for the short-term recovery on short-term incentives that hold long-term implications with the potential to undermine recovery in the long-term. Conflicting- isn’t it?

Trading long-term tax deductions for larger here-and-now incentives holds tremendous appeal – which- according to some- can be credited for some of the increased activity seen in sales of pre-owned and new business-turbine aircraft.

The continuation of those incentives into 2011 bodes well for those rooting for some quick sales action- even as warnings sound that the trade-off will come when exhausted incentives deprives buyers of a tax-lowering mechanism longer-term. Yet- other observers counter- the rapid depletion of depreciation benefits could- in turn- increase incentives to trade again before most companies would have exhausted their depreciation benefits under the old seven-year or five-year systems.

NO TEARS FOR LAST YEAR…
Meanwhile- the Business Aviation aircraft sales community shed few tears at the passing of 2010 into 2011- because- as told by the dealers and brokers- recovery in Business Aviation remains lackluster - lacking any sign of energy; pre-owned aircraft inventories shrank a small amount- while sales crept back a notch in the closing months of 2010.

Business Aviation activity remained depressed- with use dropping slightly over the course of the 12 months just ended. Taken together- it’s not a picture that excites anyone about the prospects for 2011 bringing much in the way of recovery – but nor does it show many signs of deteriorating further.

That last point is one that heartens the broker and dealer community the most. So do signs that business and consumer attitudes are a bit more optimistic about aviation.

“Now- if we could just get the financial institutions to get more involved…we could see something of a rally-” said the Western-states broker.

STILL A GOOD TIME TO SHOP?
Regardless of which way you turn - to whom you direct your questions or from where the answers come - the consensus among industry observers concurs: the pre-owned market remains sluggish with inventories above historical averages and healthy market levels.

“It is still a good time to buy and now- a less painful time to sell-” wrote David Wyndham- vice president and co-owner of Conklin & de Decker. In his recent AIReport (see p128 of this magazine)- Wyndham noted he expects 2011 to be a year when values stabilize for pre-owned business-turbine aircraft- while acknowledging that others point out: variations will exist.

Those variations break down along size-lines parallel to what’s continued to sell well- with light- and medium-jets struggling while large-cabin and ultra-long-range jets remained strong in the past year – as they’re expected to do in this coming year…

“Popular- newer models will likely show some appreciation as a correction for being under-valued the last few years-” Wyndham predicted. Conversely- he continued- “Older business aircraft values will be stable.” But those fire-sale valuations for older jets should remain- most analysts agree.

“Don't look for any appreciation in first-generation business jets as their low prices are the new normal-” Wyndham said- before adding that “Business Aviation activity will continue to show steady- but slow- growth.”

THE CURRENT BREAKDOWN
Aircraft sales will slowly increase here in the US- be flat in most of Europe- and show some strong growth in the Middle East and Asia. As with the past several years- more than half of the new aircraft sales will be outside the US. Aircraft brokers with strong international connections should be in for a good year.

And that- more than any other factor- is where U.S. planemakers are pinning most of their hopes for new airplane sales in 2011 and 2012 – after which the domestic market may (if forecasts come true) begin to again show signs of solid growth.

“The stock market has risen-” observed our Eastern Seaboard analyst. “GDP is up and stabilizing- employment is showing tepid signs of growth – almost all the indicators you want to see trending up are trending up. If business aircraft sales stay true to past cycles- next year should be our year.”

To that- came a hearty “Yes!” from all the brokers- dealers- sales staff and consultants we interviewed. As our Midwest broker put it- “We’d all like to be part of some good news – starting any day now. “We’d all like to be able to see- say- touch and feel everything going up for this business- and for the country’s business.”

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