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MOGULS ON THE SLIPPERY SLOPE...

Aircraft dealers and brokers find bumps in a downhill market.

The crowd that recently crammed into a ballroom at the Grand Hyatt Hotel at Dallas Fort Worth didn’t sound like it consisted of suffering- struggling business aviation people. Lively conversations came from scores of aircraft brokers and dealers- finance and title executives.

But as animated and lively as those conversations sounded from a distance- up close the content of those chats carried many somber- sobering angles on the pre-owned aircraft for sale industry.

The next morning the National Aircraft Resale Association (NARA) opened a one-day Forum on how to jump start a stalled business aircraft for sale market - and that’s when the picture emerged; a picture of a triple-threat set of issues that combined clog commerce in pre-owned and new business turbine aircraft: Value instability; Finance reluctance; Buyer hesitation.

In years past- any one issue might come into play for this deal or that. This year and through much of the last- the three seem to be flying together in formation- challenging efforts to move business aircraft at every stop. They work something like a three-legged stool in which the dealer or broker keeps fiddling with one- and then the other- to level the seating surface.

Now- if you add to the above trio- ‘seller expectation’ issues that are the flip side of buyer hesitation- you could label these characteristics anew: The ‘Four Wingmen of the Apocalypse’. Like the best flight-demonstration teams ever assembled- they all seem to maneuver in tight formation- but they act in defiance of any and all efforts to turn them in a helpful direction.

THE ONLY CERTAINTY
The only thing certain is uncertainty- itself. Who knows what today’s airplane is worth? So much conjecture- scientifically applied- of course- goes into valuations.

Fletcher Aldredge of The Aircraft Blue Book told delegates at the NARA Forum that many factors go into the reference’s estimates of market value - but that some of those factors must be ball-parked- “guesstimated” if you will. If published numbers aren’t good- who wants to loan money on it?

How can one be certain it’s worth the loan… or will be?

Uncertainty also comes into play for the seller; uncertain whether the aircraft value is going to get worse; uncertain of when things will reverse.

Others at the Forum noted that the hardest factor driving value uncertainty is the fire-sale driven emotions of too many buyers… or the reticence of lenders… or the unwillingness of some buyers.

UNCERTAIN OF VALUE
The thinking follows the lines of an auction – but in reverse- and with the opposite effect. There’s the buyer mentality that “That model and equivalent plane commanded 20- 30- 40 percent more a year ago; if it’s dropped that much already- it’s worth it to me to wait for it to drop further.”

A number of weak points come with this perspective - one being that- the lower the value goes- the more difficult it may be to finance… and that can cost the buyer. Perhaps the weakest aspect of waiting for further deterioration lurks in the possibility that the truly good deals will be gone before prices drop into a particular buyer’s comfort zone. All that will be left could be the cheap airplanes – and cheap isn’t the functional equivalent of good value!

UNCERTAINTY UNWILLINGNESS
As touched upon above- the uncertainty in value underpinned by buyers watching for lower prices puts lenders in an uncomfortable position. “How”- they wonder- “can we be sure the asset’s value will hold up to the principal loaned?”

What can lenders do to avoid seeing borrowers encounter the financial equivalent of wake turbulence- an encounter that upends the deal leaving the buyer with an obligation far greater than the value of the airplane?

The short answer is the lenders are doing everything they can – even to the point of sometimes doing nothing. As painful as the ‘nothing’ option may be to prospective buyers- it’s not really an attractive option for the lenders. Lenders need to lend money to actually make any money.

So “no” to the prospective buyer also means no income for that money at that time. And there’s certainly a chance the prospective buyer will try to find financial solace elsewhere- with another lender.

Even when lenders sign on- the time required to flesh out all the details and to make sure the deal meets the lenders’ own new guidelines- makes for slow motion transaction action. Maybe that’s better stated as transaction inaction.

UNREALISTICALLY WILLING (BUT NOT CERTAIN)
Let’s think now about the seller for a moment; none of this works to the seller’s advantage – and much of it works to the self-perpetuating disadvantage of sellers. It may have started with a seller’s unhappy surprise that the airplane won’t bring what it would when the seller signed up for that new deal for a new plane.

Maybe it started with a change in business that changed the rationalization for the company’s lift requirements. Back then- back in the day – some 13-16 months back – values soared- driven by the expanding population of aircraft users and record-length backlogs for new planes. In fact- demand for new ran so hot that a cottage business sprouted from the fertile fields of delivery positions – orders for slots placed solely with profitably selling that slot to a buyer able to pay extra simply to move up the queue.

Dealers that held new aircraft positions could often command 10-12 percent above list price; maybe even selling at close to new a pre-owned interim substitute.

The new converts who opted for an interim pre-owned aircraft helped push up the prices for pre-owned ripe for hard-core operators who never bought new. So it must be tough to hear that what you borrowed last year is more than it sells for this year – and even if the owner isn’t upside down- who wants to sell at the bottom of the market - a market that may come back in another year or two?

So the airplane is for sale – but not at the prices bought by the broker. And when the broker brings the seller a deal well below hopes and expectations- the seller balks – and the pre-owned inventory continues to grow- continuing the cycle of downward price pressure.

BREAKING THE CYCLE
Few attending the NARA Symposium volunteered that business was great; in fact- in a casual survey of aviation brokers and dealers- the common thread seemed to be at what fraction of normal sales seem to be running. One broker offered that so far in 2009 he’d sealed five deals – most still in the closing process- unfortunately. A year ago at the same point- that number was 25 – and they were taking days- not months to close.

Another dealer commented that he’d started looking for people to lease inventory that just isn’t moving right now. How many? Five planes- he said- all costing him money to floor plan.

But NARA’s President- Susan Sheets- organized the meeting more to find solutions. Tales of woe were easy to find; ideas to break the cycle was the purpose of the gathering. NARA Forum participants voiced a number of ideas for breaking the cycle – or- if not breaking it completely- at least taking out some of the down-spiral momentum.

Among the suggestions was for brokers to survey their sellers for signs that the airplane in question might not be for sale if today’s low prices are as good as they are apt to be at this time. Pulling off the market airplanes offered by uncertain sellers could serve to push down the inventory numbers and help prices stabilize.

Stabilized prices could serve to make lenders less squeamish and more flexible in their terms. More-attractive credit and greater availability could help push tentative buyers to act now – before the best deals disappear. As more buyers relieve more sellers- prices could start to gain some strength- attracting back to the forefront some of those recalcitrant sellers unwilling to sell at today’s artificially depressed price tags. Thus change could come gradually- and restore some stability to the pre-owned market.

And stability and growth in the pre-owned aviation market would help out operators with orders for new airplanes for sale- in turn helping out the aircraft manufacturers to restore growth to their production plans.

OEMs AT THE FRONT LINES
In February- Cessna Aircraft launched a program designed to move the many pre-owned Citations in its trade-in inventory. This “No Worries” program can provide the buyer with a guaranteed repurchase or trade-in price for Citations purchased through July 2- 2009. Enrollment in Cessna’s customer-service system is included in the program.

Other planemakers are working all the angles to help customers move older planes and accept delivery of new ones already on order.

Some brokers are resorting to sales incentives – and they’re getting pretty creative. For example- we’ve seen offers that buyers can receive free vacation trips – in the plane they just bought – with the brokerage picking up all the costs: fuel- crew- meals and hotel. We’ve seen deals offering free fuel worth thousands; deals that provide no-cost or reduced-cost maintenance through the first year; deals with free fuel for a limited time. One offer put up a new car for the buyer of a specific airplane – and not a cheap car- either.

There’s no denying the creativity of brokers- dealers and manufacturers. But as long as the crisis in value confidence continues- too many buyers are unwilling to move – or- if they’re willing- their finance deal serves as its own hurdle. No deal will be done quickly – not with the amount of time lenders are spending making sure they actually want the deal.

TIME WILL TELL…
None of these steps stand to alter the landscape instantly or over a few weeks; but over the remainder of the year- the market could start to rebuild. The rebuilding could begin as the country starts to recover from the ongoing recession- starting a new cycle- one beneficial rather than viciously damaging.

A rebound as the nation starts to recover could well help bring back new-order holders who’ve fed the downward cycle by deferring or outsight canceling orders. It could take 18 months to a couple of years – but it could help- nonetheless. By then the only people moping on the sidelines would be those who missed that great deal they saw because they waited for the deal to get better.

And it is doubtful there would be a single tear shed by anyone in the business of moving- corporate aircraft finance or supporting the pre-owned sales activity for those who missed. After all- if the dawdlers could truly justify an airplane in tough times- they’ll likely need and want one even more than watch their competition fly away with their business.


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