Dave Higdon pieces together the evidence from 2017 and asks Rollie Vincent and Brian Foley what the signs are for the used aircraft sales market in 2018…
Happy 2018! So how did we do in the year just passed? Thanks to some savvy observers and their tireless tracking of sales and resales, we're blessed with some observations – even though this is being written with three weeks left in the old year.
New aircraft sales throughout the year were down-to-flat, with different segments rising and falling according to quarterly reports from GAMA. Expectations for the year's end were similar, essentially.
But in the more dynamic used jet segment, 2017 saw steady sales delivering a market with a low percentage of the fleet in play. That assessment comes courtesy of numerous analysts’ observations and calculations.
Rolland Vincent, of Rolland Vincent Associates, pegged the end-of-year percentage of the fleet ‘For Sale’ at about 10.3%. That marks another year of decline for the used fleet ‘For Sale’ – and the lowest level for years.
“Now that percentage is likely to grow a bit as year-end closings on used sales release a surge of new trade-ins into the market,” Vincent explained.
“But it's unlikely to push up numbers appreciably. What it will do is add some late-model business turbine aircraft to the existing pool, and that could briefly impact prices.”
Brian Foley, of Brian Foley Associates, noted the strength of the economies in North America while Europe and emerging markets show signs of strengthening, too. And he observed these factors won't change much in the coming year.
Key to Strong 2017 Sales
A popular view is that we remain in a buyer’s market, but just barely so. When the percentage falls under 10% the outlook traditionally shifts to a seller’s market. Uncharacteristically, however, prices remained soft throughout 2017.
“We started with soft prices, and they've stayed that way all year,” Vincent observed. “They've been stuck in neutral all year.
“We haven't seen the usual incremental gains in asking prices typical as supplies decline.” By all rights, prices should have been increasing all year, he explained. “For the second straight year, that hasn't been the case.”
The expected influx of trade-in aircraft may cause some prices to fall, but no one is betting on that outcome. “People who searched for bargains were met with stable-market prices while others looked for niche aircraft – also at stable prices,” Vincent summarized.
After enjoying a strong period following the Great Recession, the Large-Cabin jet market seems finally headed toward prices dropping back to ‘reasonable’ territory, with the formerly depressed Light and Medium jet segments again experiencing the level of demand known to keep them competitive.
But the used inventory, Foley noted, as it stands, has been “picked over.”
Light and Medium jets struggled to find buyers through most of 2016 and H1 2017. Today, they once again shine as corporate-aircraft candidates.
The New Model Influence
With so many models in development or about to win their wings, OEMs have a backlog of orders. Deliveries of those new models should continue the fleet growth we've experienced in the midst of the Great Recession – and beyond.
With new sales and leasing models emerging, more operators will find themselves with innovative options for benefiting from business aircraft. And with the business aircraft industry's long-term habit of juggling sequential programs at once, the prospect of the pipeline drying out feels remote.
But other factors stand to complicate future purchases of business aircraft.
Still, there's potential for the used aircraft sales market via developments in the new aircraft field. “I think 2019 and beyond could be a bit improved as a lot of new models start hitting the market – models such as the Gulfstream G500 and G600; Bombardier Global 7000; Textron Longitude and Hemisphere,” Foley observed.
Conflicted Tax Bills
For Americans the past three months brought an endless stream of news and rhetoric focused on so-called “tax reform” as a tonic for an already strong economy. Claims that Americans need a $1.5 trillion tax cut for the economy to grow are heatedly refuted by economists.
Three percent growth for the past two quarters, coupled with the lowest unemployment numbers in years and record corporate profits all indicate no need for tax cuts to incentivize business investments. Even the businesses say so.
But that hasn't stopped the legislative snowball from gathering hundreds of pages of changes to the tax codes, some of which could bode badly for business aircraft operators. Vincent pointed out that the two bills in consideration differ in how they'd treat the purchase of a used business aircraft.
“One bill keeps the accelerated depreciation available for years now, while the other does away with it,” Vincent explained. “Which one we'll get must be worked out in a conference committee of members for the House and Senate.”
Losing the accelerated depreciation on used business aircraft would likely hurt sales, Vincent said, and possibly send the market back to where it was on the cusp of the Great Recession a decade ago. “We don't know, or won't know, how this resolves because the House and Senate bills differ completely in their treatment of accelerated depreciation,” Vincent concluded.
What’s The Impact of It All?
Dealers and brokers managed to work their way through 2017 without a great deal of attrition, but it took work. Barring any major upheavals from tax changes and world affairs, 2018 should bring more of the same – and a few changes.
Among factors dragging on business turbine aircraft sales, Foley said, is “…buyer realization that aircraft now depreciate like cars and dishwashers. This type of decline is actually typical for capital goods."
“Business jets had better residuals in the past due to there being more demand than supply," Foley added. "According to AMSTAT there are now over 22,000 business jets in operation worldwide which would make them seem more of a commodity today.”
But, he added, “The most profound factor not helping is the heightened interest in flying privately without having to buy (i.e. through charter, membership programs, jet cards, etc.). This is reflective of a new generation willing to pay a premium to have access to many different experiences on an as-needed basis rather than committing to ownership.
“For these same reasons as new, I would anticipate used aircraft sales to be flat into 2018 as well.”
If anything, 2018 could see some balance restored to the business turbine market. But with turmoil in American politics and world affairs the new normal, any forecast is tentative at best – and risky at worst.