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The Dawn Of 2009

Business Aviation setting records of the undesirable kind.

If your mail boxes – electronic and snail – are anything like mine- they’re seeing a marked volume increase from aircraft dealers and brokers with airplanes to sell. It’s a sign of our financially difficult times. Already showing signs of weakness more than a year ago- the market for both new and pre-owned aircraft for sale continued to chug along- slowly losing steam along the way – until last fall.

And then there in the last quarter of 2008- well- you pick your preferred analogy: the market “lost its steam”… it hit a steep uphill grade.

A close friend who deals in pre-owned planes from high-end piston singles to lowend airliners put it this way: “We’d been cruising along- feeling a few bumps and a little down from time to time when suddenly- it seems like the entire sky turned into one big downdraft.”

‘Down’- is proving to be the common operative word across business aviation circles. Just in the two weeks since the start of 2009- the swell of news describing the depths and diversity of the “down” has come with breathtaking velocity and unsettling consistency.

The initial signs of trouble came staggered across 2008- mostly in a gradual decline in pre-owned aircraft sales activity and a steady rise in unsold inventory. New airplane sales also offered the factory types their own distinct signs of bad times: a dramatic slowing of new orders through the year- and a slow-but-steady increase in customer inquiries seeking to postpone- reschedule- defer or outright cancel an order.

At the same time- planemakers had already started adjusting to a softer market- as noted above- based on a significant decline in advanced orders. Efforts to preserve the huge backlogs were in full swing- as manufacturers worked to help customers meet their own new realities. And as the year wound down- planemakers were already worrying how far their prospects would fall. Customers wanted out or wanted longer.

Cessna- Embraer- Hawker Beechcraft and others had announced reduced production plans for 2009; Cessna and Hawker Beechcraft both started layoffs late in 2008 – about 650 and 500- respectively – and early in January they both unveiled new rounds of layoffs of about 2-000 at Cessna and 1-000 at Hawker Beechcraft. The companies cited shrinking backlogs and the ensuing production adjustments required to match output to demand for the cuts.

Meanwhile- analysts were predicting that the huge backlogs stretching out years in advance appear in peril. Some were saying those backlogs would shrink by half or more over the next two years – and judging from the responses of the planemakers- those predictions don’t ring as overly pessimistic.

Unsold inventory reports usually portray more than 90 percent as pre-owned aircraft up for disposition – with the owner moving up or moving out. Recently- however- the unsold inventory reflected a significantly growing number of new aircraft delivery positions that seems to reflect two different problems: order holders for profit getting itchy to eliminate their obligations. They will be hoping to get out with at least their deposits and any progress payments- if not outright profit.

Second thoughts among order holders will also be factoring – maybe those deciding not to expand the fleet- instead holding on to what they’ve got until they see whether government incentive packages make it worthwhile to buy something new. Offering up a delivery position works for the order holder only if they can find takers- though.

But at the top of the stack is a sharp increase in unsold inventory of pre-owned aircraft- numbering upward of 2-400 airplanes and growing incrementally each week- each month and an inventory of delivery positions that’s approaching four times what it was a few months ago – in high triple figures- many say.

PERCENTAGE FIGURES FAIL TO DESCRIBE
Early last year a number of scribes seemed to feel that although the already growing unsold inventory was admittedly going up – things weren’t truly bad compared to the dark days following the September 11- 2001 terrorist attacks. Some insiders put the depths of that downturn at nearly 20 percent of the in-service fleet.

Recently- however- analysts and insiders put the percentage at about 16 percent – and still growing. What the percentages seem to fail to recognize is the substantial growth in the in-service business turbine fleet since 2002. Just in the past two years- planemakers delivered about 2-800 new jets- and more than 5-000 since 2002 – with attrition and retirements culling only a few hundred from the fleet.

Today’s numbers send shivers through the psyches of the savvy- because the larger fleet size means the percentage can still seem far smaller while the actual number surpasses past peaks.

“Before this ends-” said a broker staffer for one large firm that deals in new and used aircraft- “the 2002 peak is going to be a nostalgic goal we wish we could get back to today. The really unsettling part is the growth in new-plane delivery positions – it’s unsettling some of the planemakers themselves. And it’s not likely to improve for a while.”

GUN SHY AND GETTING SHYER…
Analysts of all political and economic stripes seem in concurrence on a couple of elements in play today. First- they all seem to grasp the intuitively obvious to the casual observer – if anyone these days is actually a casual observer. Confidence is down- and it’s down to record lows. Consumer confidence- business confidence- you name it.

Feeding this mass malaise is a series of job-loss reports described alternatively as the worst since 1945 – when the end of World War II and the production it commanded sent millions onto the ranks of the unemployed – and 1935- when employment numbers from the Great Depression are said to have hit bottom.

During 2008- the United States lost approximately 2.6 million jobs – nearly wiping out the modest gains of the past eight years. Unemployment- as calculated by claims for unemployment benefits- hit 7.2 percent- a three-decade high. More troubling: that percentage does not include the hundreds of thousands of workers for whom unemployment benefits have expired.

Optimism and hope linked to the incoming Obama Administration and its economic stimulus and recovery plans do have some effect. But for the public-at-large- only actually passage and the start of implementation will begin to alleviate their sense of unease.

As one major-factory aircraft worker told World Aircraft Sales Magazine- “When you start seeing ‘white tails’ come off the line- you know there’s been some erosion somewhere- and as a relative newcomer- I’m not making any long-term plans for spending money I might not have if my job goes away. I’ll relax if things start to turn around and my job hasn’t dried up and blown away.”

QUIET ON MANY AVIATION FRONTS
Depending on whom you ask or at what level they work- business flying is down across the board. Some observers and insiders cite a drop in aircraft movements of 20 percent- drops in fuel flowage of 25 to 30 percent- and drops in charter bookings upward of 30 percent. Interestingly- the return of reasonable fuel prices seems to have had less effect on business flyers than those who fly for more casual reasons.

And- as noted above- sales of new and pre-owned aircraft have really hit the skids. But the reasons for the drop continue to elude many insiders.

Airline service is no better – or not much better – than a year and two years ago; in fact- airline capacity cuts mean fewer flights with large loads to fewer destinations. That’s a formula tailor-made for private flying to counter. And according to a number of people in the aircraft finance business- credit remains widely available – in much greater supply than demand.

“If you hear that vacuum sound in the background- it’s not the vacuum cleaner-” quipped the executive of one significant aircraft-finance firm. There’s no question- terms have changed; there’s no question many – if not most – finance outlets have gotten a little more finicky. But this isn’t a finance segment that’s ever played fast and loose- like we saw happen in real estate and the shenanigans that occurred in that business.”

While credit hasn’t dried up for aircraft purchase- terms and conditions have changed. Aircraft lenders have historically been more responsible- in terms of credit- the ability to pay- and collateral- these loan executives concurred. Many firms’ contacts conceded that where a 10-percent down payment usually satisfied their terms a year or more in the past- today 20 percent would be required.

What’s happened- as a result of this broad brush on credit being hard to get- is that all lenders have become very skeptical of the credit worthiness of the borrower and the value of the aircraft is uncertain- one executive explained. “Lenders across the board have gotten very skittish-” he stressed.

Some firms are more restrictive about the age of the airplane – jets more than 20 years old may require a 20-percent down payment and a shorter term of seven to 10 years- as well as excellent credit. Other firms - ones aligned with a manufacturer - have stopped writing notes for aircraft not manufactured by their corporate kin – and are more restrictive about the age of even pre-owned aircraft from that planemaker.

“It’s meant some people can’t go to those firms for loans on jets older than even five years – but they can still find money elsewhere- if they can live with a higher down payment and a shorter term than was available 18 or 24 months ago.”

And- as many pointed out- it’s truly a buyer’s market- given the high unsold inventories of pre-owned business jets for sale- turboprops and high-end piston planes favored by the small business owner/pilot.

IS THIS THE BOTTOM?
In her Blog at the National Aircraft Resale Association website- NARA president Susan Sheets noted in December- “The recent convergence of 1) a recessionary economy- 2) the constriction of the credit markets- and 3) the aircraft market's struggle to find the bottom on many models in the worldwide fleet is causing many in our industry to ask- ‘Is this the worst market ever?’”

“It depends – on whether you’re trying to sell or needing to buy-” one dealer broker told World Aircraft Sales Magazine. “I wouldn’t want my clients to hear me say this – they’re counting on me to get them a good deal on a nice Citation… but if I could get some of these gun-shy buyers to wake up- they could have a hell of a deal.”

As Sheets noted- “The increased inventory of pre-owned aircraft is depressing prices while at the same time- deliveries of new aircraft are slowing- according to GAMA's most recent numbers.”

And that means it’s a buyer’s market. But have we hit bottom? “Unfortunately- I think not-” our broker executive predicted- echoing others in his position. “Prices have dropped almost by a quarter just in the last three months.”

Part of the problem is that very thing: the buyer’s market and the mentality it inspires in buyers: they’ve been shopping- they’ve seen prices drop – and now they’re bargain oriented- willing to wait for prices to drop further. And continued excess supply will keep pressure on prices- insiders claim.

“Prices will drop further- too- until these jets become such a bargain that competition to buy begins – and I don’t see that happening for six- eight- maybe 12 months-” added the broker. “Once that happens and inventory shrinks to something sustainable- we’ll see a little price escalation return.”

Some models and sizes- however- seem less susceptible to this - later-model Gulfstreams- for example- Falcons 50s and later- and bizliners among them. Among the smaller jets- owner-flown models like the Citation Mustang seem to be holding better – because of the niche owner-pilot’s personal financial health and confidence.

For the vast number of jets in the light and mid-cabin range- though- those with hundreds in the existing fleet- demand may remain muted until that irresistible price point comes along. And the ability to concretely answer the question of ‘when’ that time arrives could make an instant millionaire out of someone.

Still- the forecasters- soothsayers and seers seem to see an improvement in jet sales coming in 2010 – in part based on a belief that government actions will be influencing the economy out of recession by the mid-point of that year. A lot of people in business aviation hope it doesn’t take that long – even as they seem resigned to the probability that it will.


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