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Consensus View: 2011 wasn’t all bad- but it won’t be missed...

In 2010- according to the forecasts- the market recovery was supposed to start in 2012. In 2011 surety fell by the wayside in favor of a sense of gloom at the possibility of recovery moving further out- past 2012 into 2013.

Now the market is full-tilt into 2012 and based on the signs of the last few months- the Business Aviation market - both preowned and new-production segments - continues to cruise near the bottom of the trough. Yet some indications- weak and sometimes ambivalent as they may be- point toward an end being in sight. Developments in the world’s ostensible biggest potential market could help raise the tide for both new and pre-owned turbine-aircraft sales.

By a wide array of measures and observations- business flying grew slightly and somewhat unevenly last year- with observations of an increase of between 1 percent and 3 percent overall. Private aircraft experienced stronger overall growth – about 4 percent to 5 percent – because the total gains reported factored in declines in both fractional-operated FAR Part 91 ops and Part 135 charter.

Indeed- the overall gains year-over-year for 2011 came despite declines in all areas at different times of the year.

“From the perspective of operations- we’re seeing a little encouragement-” noted the ramp manager of one major Midwest FBO that caters to a large- diverse general aviation cross-section – much of it turbine. “We’d been seeing more work for our upgrades and enhancements to older aircraft in the past two years [this FBO offers modifications to a popular turboprop twin].

“Now we’re seeing some of those planes coming in for upgrade on-spec; that is- the owner wants to sell and feels the best price comes with an airplane that’s up-to-date on everything from airframe to panel and powerplants.

So how are pre-owned aircraft sales in general? “Well- they’re better than in 2009- 2010- but nothing like in 2007 – before things started tapering off in the market.” Among the other encouraging signs: a decline in the pool of pre-owned turbine aircraft for sale- some recovery in new-unit sales in latter 2011- and continuing encouraging signs in the economy generally.

SOME COMMON SENSE OUTLOOKS…
Many who were shrewd enough to acknowledge the decline when it first began in preowned sales back in 2007 see some signs of encouragement in today’s economy. Manufacturing activity has begun to grow. The Gross Domestic Product is now up for two straight years- with 2012 promising to be even stronger. Corporate profits overall (which ran record highs in 2010) repeated that standing in 2011- with major banks- financiers and manufacturers all recording huge gains in their black ink. The corporate coffers of America reached an alltime high approaching $3 trillion in uncommitted cash reserves last year.

Unemployment continued to decline- falling to 8.5 percent in December 2011 – and would have been down even more were it not for a bump in the release of public sector workers by- predominantly- state governments – many of them espousing the cuts as the path to creating more private-sector job opportunities- while not actually realizing the gains.

Even consumer confidence gained some ground in the latter part of 2011 – despite a year with Congress and the White House in a year that should set records for rancor and discord.

Among the observers who see some gains this year is David Wyndham- vice president and co-owner of Conklin & de Decker. “There is still economic uncertainty-” Wyndham admitted- “but- most economic forecasts point to slow growth in 2012. The US is forecast for about 2.8% growth in GDP. “With corporate profits up- we should see that translate into some hiring in 2012 and we have already seen more interest in acquiring aircraft-” he noted.

The consensus observation for the coming year: Continued strong sales among large cabin jets- with sales flat for mid-size and small jets- and for turboprops. Perhaps the best news in three years for the pre-owned aircraft sellers: expectations remain for values to hold- and for prices to remain flat throughout the year.

“We’re already getting less pushback on prices-” noted a West Coast broker- who six months ago reported that no price seemed low enough for prospective buyers. “For the past few weeks when we’ve quoted a price we get more questions about condition- viewing the airplane- and similar. We receive fewer remarks about what the caller saw as a price ‘elsewhere’ in the market. That’s not a bad thing – particularly when we tell them that financing is more available than two years ago.”

Indeed- while lenders still take longer and demand more of prospective buyers- interest rates remain lean and options for financing more plentiful than in 2009 and 2010.

“Two or three years ago- even a deal with 40 percent down-payment often faced concerns about the airplane’s residual value at the end of the loan term-” explained another dealer in the Southeast U.S. “We started pointing people towards their associations for some deals – and some popular lenders have all but run out of money to lend in the last quarter of 2011.”

An aviation attorney who works the financial deals for dozens of buyers annually reported a significant up-tick in buyers asking his firm to help them find financing after a manufacturer’s finance wing virtually stopped writing new notes after the third quarter.

“We had to scramble to get them financed before the end of the year so they could take advantage of the tax treatments in affect. We got them all done – but it was tight…and despite how good it was for us financially- aside from the goodwill generated for my firm- I’d prefer not to face that again in 2012.”

That special treatment – 100 percent depreciation available in the year of purchase – drops to a bonus of 50 percent extra this year. But there are indications that in a rare moment of agreement- the White House and opposition members of Congress may come together to extend that 100-percent possibility through 2013.

“It’s not like it set the world on fire-” remarked the attorney. “A number of our clients who qualified can’t effectively use all 100 percent in 2011- but they get to choose from there how they use the balance they don’t apply to their 2011 returns – and besides- every little bit helps.”

THE YEAR IN PREVIEW
The sum total of input from financers- consultants- contract attorneys- dealers and brokers carries the emotional feel of a crowd that just emerged from the storm shelter after a long time hiding from the maelstrom: They’re happy to have the drama behind them; happy to have survived; and happy to be done with the past couple of years.

“Most of all- I’m happy to be seeing a year start off with a little bit of enthusiasm- a tiny tinge of optimism- and a sense that we’ve weathered the worse-” one broker outlined. “From that perspective- it all looks better for 2012 – better than 2011- at least- if not better than 2008. Better than 2008? Who knows if that will ever happen.”

But a few gains here- a few more there; a steady return to economic and employment growth… it’s all got to help.

Said Wyndham- “I think 2012 will be a positive year overall. Slow and steady wins the race (and) it is still a good time to buy. If you are waiting to sell- it may be a while before prices recover much more than they have (save- again- for newer- large cabin business jets).”

As for depending on a return to profitability to spur a major up-tick in jet sales- you shouldn’t hold your breath- according to most.

The unheralded aspect of the Great Recession was how few companies actually sank into red ink compared to how many merely saw profits decrease. With two years of record profits among so much of America’s business- it’s clear that profits alone don’t spur aircraft buying – at least not any more.

One consultant to prospective businessaircraft buyers summarized- “Need has always been the best driver- and until more companies need something their current planes can’t deliver- don’t expect the kind of market of the 2006- 2007- 2008 years.

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