One Last Look...
2009: The year of hope (that 2010 would arrive soon!)
It was a year that saw plenty of bad news- but in almost every instance there was usually some offsetting good news (however small) during 2009.
THE BAD NEWS
Since 1854 the U.S. has recorded 32 business cycles. The 2003 to 2007 expansion was the 5th longest (73 months) running economic time period in U.S. history before the economy started to slow in December 2007… and then fall into full recession. The longest running U.S. economic expansion period was 1991 to 2001 (120 months). The U.S. economy remained critically weak in 2009- with rising unemployment- a severely depressed real-estate market- the near-collapse of the domestic automobile industry and the steep decline of the dollar.
THE GOOD NEWS
The U.S. Bureau of Economic Analysis (BEA) recently reported real quarterly gross domestic product (GDP) - the output of goods and services produced by labor and property located in the United States - increased at an annual rate of 2.2 percent in the third quarter of 2009 (that is- from the second quarter to the third quarter).
This was the first positive performance for the GDP after four quarters of decreases- and it marked the strongest sign to date that the recession may be ending. THIS IS VERY GOOD NEWS!
So does that mean that the recession has ended? Not necessarily. Some caution may be in order. Several consecutive positive quarters may be required. Historically- looking back to 1Q 2001- the U.S. GDP declined by -1.3% followed by an increase to a positive 2.6% in 2Q 2001- then 3Q 2001 went to a negative -1.1%. Of course- 3Q 2001 included the events of 9/11.
The first estimate of the U.S. GDP results for the fourth quarter of 2009 was set to be reported shortly after press for this magazine issue. Most economists expected the U.S. GDP to show even stronger growth.
In short- 2009 was a year that we will be happy to put behind us. But before we do- we will take one last look back…
BUSINESS JET MARKET
Since 1996 the business jet market has shown that the length of decline can take 1-2 years to bottom-out- while recovery to the next peak can take 3-4 years. Of course- to apply that logic to today assumes that history will repeat itself.
The record high U.S. JET-A fuel price bubble that peaked in the 3rd quarter of 2008 at $6.83 per gallon dropped to $4.61 in the 1st quarter of 2009 (according to Conklin & de Decker’s survey data). This is represented in Chart A (above). The decline of over $2.20 brought hope that it would spark a positive change in the declining business jet flight operations that started in April 2008.
Unfortunately- the good news of the fuel price reduction was overwhelmed with the bad news of the continuation of both the U.S. and Global recession. U.S. JET-A prices for the 4th quarter 2009 stood at $5.25- and were on the rise. Nonetheless- they remain well below the 2008 fuel price bubble peak.
As illustrated in Chart B (overleaf)- U.S. Business Jet Flight Operations declined from March-April 2008 (at -3.7%) to the February 2009 low point (-30.5%). However- the decline has now improved significantly- and stands (March 2008-November 2009) at -4.7%. All indications are that the fall in Flight Operations may be over - and hopefully- these improvements are positive signs of a nascent recovery.
It is important to understand that business jet sales markets tend to be bifurcated – purchasers tend to be either New aircraft buyers or Used aircraft buyers. NEW business jet sales are driven by strong economic activity- corporate profitability- wealth creation- and business investment.
NEW business jet sales are usually based on the successful sale of existing aircraft in the pre-owned market. Therefore a market change (increase or decrease) by one will have an impact on the other.
PRE-OWNED BUSINESS JET MARKET
In this month’s article we’ll review the JETNET numbers for Pre-owned Business Jets with an historic perspective- and a goal of sharing market wisdom. Our talking points will look at market conditions and how they differ from previous cycles to provide a full assessment of the current market environment. We’ll examine the following metrics:
• Percentage For Sale
• Full Retail Sale Transactions
• Average Months on Market
• Average Asking Prices
To begin- Chart C (left) shows the Preowned Business Jet Inventory for sale percentage (reported by JETNET). In December 2009- 16.3% Business Jet Inventory “For Sale” had declined for five consecutive months from the July peak of 17.7%.
Chart D (bottom left) illustrates the 4Q 2009 Full Retail Sales Transactions (reported by JETNET). As we can see- they continue to show signs of improvement- and have now risen back above the previous low point recorded in 3Q 2001.
The ‘Average Months on the Market’ for Business Jets stood at 10.9 months for 4Q 2009 (see Chart E- top right). Since 2001 the average months have ranged from a low of 6.5 to a high of 13.1 months. The current number of months on the market has increased considerably from last quarter at 8.1 months- but still remains below the peak during our time-frame.
The Average Asking Price for Business Jets was $5.0m (as of 4Q 2009)- which was down by $1.7 million dollars from the high point of $6.75 million in 1Q 2009 (see Chart F- middle right).
Generally- a greater number of corporations find that it is difficult to retain business jet ownership in recessionary periods. They list their business jet for sale on the used market- and demand then falls because business has declined and tighter financing requirements are placed on prospective buyers. This leads to an imbalance between demand and supply that forces motivated sellers to reduce prices. The current decline in business jet values is more rapid than any gains.
Before the recession- the past three or four years had not been normal and some sellers had unrealistic pricing expectations. Today- even if companies wished to acquire a used business aircraft- the shortage of funding and the need to find larger deposits limits this. For those in a position to buy- however- remember there is no such thing as a free lunch- but there are some great deals out there.
The fall in pricing over the last year needs to be placed into the context of price increases through to the latter part of 2007. A used aircraft bought in 2004-2005 may be worth the same now- but for those that acquired in 2006 and 2007- the price has fallen. Even if the aircraft does not have to be sold- the book value will have to be adjusted to reflect new market realities- and loan-to-value ratios may dictate a need to renegotiate terms.
The business jet market has been characterized by extended disposal periods during a downturn. Owners have previously been less willing to sell aircraft at a significant discount- safe in the knowledge that prices will pick up in a year or two. However- inventory levels of pre-owned business aircraft have remained high and sales have bounced along anemically for the entire year of 2009.
Similar cycles in 2000 and 2003 were relatively short-lived and business aviation recovered even stronger than before- so we all hope this current decline is behind us as we begin a new year.
Under normal circumstances- recoveries happen when companies begin hiring and those new employees start spending their pay-checks on goods and services. Thus the elements that typically drive a robust economic expansion after a recession are:
• Increasing jobs and wages
• Increasing consumer demand
• Increasing production and sales
These elements have not appeared yet and at best- it’s a mixed bag. It may take a while as we move from very bad to mediocre before good appears again.
DECADE IN REVIEW
In Chart G (bottom- right)- we examine the ‘Full Retail Sale Transactions’ for the ‘Noughties’ (starting with the year 2000). Our conclusion is that there have been steady year-over-year results from 2000- 2007- except for 2001. The year 2007 set a record exceeding the 1-800 Full Retail Sale Transactions mark. The year 2009 had the lowest number of full retail sale transactions in the time-frame at 1-163 (by 18% compared to the 1-419 transactions recorded in 2001).
Our final observation is that there has been a fundamental shift in the market in the last three years of this decade. The percentage mix of pre-owned international business jet sale transactions (compared to the U.S.) has increased to 28% (average) versus an average of 23% for the years 2000 to 2006. We will continue to track and report these market changes in future articles.
For more information: Michael Chase is president of Chase & Associates- and can be contacted at 1628 Snowmass Place- Lewisville- TX 75077; Tel: 214-226-9882; Web: www.mdchase.aero.
• Marj DeLong is president of MarketLift- Inc. and can be contacted at P.O. Box 595036 Dallas- TX 75359; Mob: 214-862-8992- Web: www.market-lift.com.
• JETNET can be contacted at 101 First Street- Utica- NY 13501; Tel: 800-400-2298; Web: www.jetnet.com or www.avdatainc.com