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A Glimmer Of Hope In The New & Pre-Owned Markets?
By Michael Chase & Marj DeLong

During the recent National Business Aviation Association (NBAA) Convention in Atlanta- it was reported that new large-cabin- long-range business jets are being planned in the future. Adding to the mix of the previously announced Gulfstream G650 were two new aircraft from Bombardier- the Global 7000 and 8000 aircraft.

As the Middle East Business Aviation Conference (MEBA) is scheduled to be held in Dubai- UAE from December 7-9- 2010- and given the past orders placed at this and other events in the region- the chances are that we will see new orders being contracted at MEBA for these new models.

However- new aircraft orders are based on the health of the pre-owned aircraft market. Questions about the recovery still linger - and with most of 2010 behind us- a common feeling is that we are just not there yet.
In the first nine months of 2010- the percentage of pre-owned business jet inventory fell two percentage points year-over-year to 15.1 percent- according to JETNET’s latest data of the worldwide market - a statistic that is represented on Chart A.

In the first nine months- the percentage of pre-owned business turboprop inventory fell 0.9 percentage point year-over-year to 10.5 percent. The change in the ‘For Sale’ inventory can be seen on Chart B.

Although “For Sale” inventory remained in decline through the first three quarters of 2010 the pace of reduction was comparatively anemic to that of the fourth quarter 2009.

IT’S THE ECONOMY
According to one group of economists- the recession ended in June 2009 and the U.S. has now recorded five consecutive quarters of positive results in U.S. Real Gross Domestic Product (GDP) - defined as the output of goods and services produced by labor- and property located in the United States. However- the GDP quarterly numbers released by the U.S. Bureau of Economic Analysis have shown a sub-par result- at least for the last two quarters- as Table A depicts.

Historically- whenever the GDP has been greater than 3.0%- the business aircraft market is in a growth mode. However- the business climate is improving as reported by Gulfstream on its third quarter aircraft deliveries. “With deliveries to Latin America and Asia leading the way- Gulfstream sold more business jets during the third quarter of the year than it has in any quarter since 2008-” the planemaker revealed. “Analysts see the rise in corporate jet sales as a sign that the economy is improving. Gulfstream sold 23 planes in Q3- according to parent company General Dynamics.”

PRE-OWNED AIRCRAFT MARKETS
While the ‘For Sale’ aircraft inventory is still at a high level- Pre-owned Full Sale Transactions for Business Jets have increased by an impressive 22.8%- and 5.4% for Business Turboprops in the first nine months of 2010 versus the first nine months of 2009 - and that’s very welcome news.

Here- we also consider the ‘For Sale Inventory Turnover’ rate - defined as the product- or measurement of time (months) that it would take to sell off the number of aircraft listed for sale- based on the current Full Retail Sale Transactions.

As illustrated in Chart C- the Business Turboprop Aircraft Market reached a peak in July 2010 at 20.1 months to inventory turnover and then declined to 14.1 months in September. The Business Jet Market reached a peak in April ’09 at 31 months and then declined to 18.5 months in September 2010. The lowest inventory turnover time was seen for Business Jets in December 2007 (6.9 months) and Business Turboprops (6.1 months) in January 2008. So the For Sale inventory of the overall market needs substantial improvement before the levels of 2007/2008 are again achieved.

A bifurcation of the business jet market now exists- segmenting the marketplace by those built before 1990 and those built thereafter. Because the older jet segment accounts for 49% (see Chart D) of the current marketplace- their extended time on the market constitutes a source of stagnation for the sale of late model jets and the demand for factory new aircraft.

For older aircraft- it is not just the passing of time that impacts the market appeal but also the obsolescence of equipment and improved systems in later models. This translates into higher direct operating cost and higher forecasted maintenance and upgrade expenditures. Models older than 20 years are additionally burdened by a lack of available financing for prospective buyers. All of these encumbrances together- conspire to accelerate the older aircraft’s journey to becoming market-irrelevant.

Table B correlates Business Jets ‘For Sale’ by age with their average time on the market. Clearly- there is a direct and pronounced relationship between a jet’s age and how long it takes to sell… the older the jet the longer its time on the market. Business jets built prior to 1990 (older than 20 years) are now lingering on the market for nearly a year and a half - or longer. By contrast- the majority of newer jets (20 years old and newer) are generally selling in 15 months or less.

As Chart E illustrates- October 2007 denotes the point in time when the inventory of business jets began a two year trend of substantial increase in units offered for sale. Depicted are seven age groupings in five-year increments by month (since January 2005).

Two of the age groups – the 0-5 and 11-15 year groups - have shown the largest percentage increase of all the segments: Three and four percentage points respectively. This change is from the average percentage for each age group since January 2005 through August 2010- compared with August 2010 alone. (For example- the average percentage for the 0-5 age group from January 2005 to August 2010 is 11%. By comparison- for August 2010 alone- the percentage is 14%- resulting in an increase of three percentage points.

Meanwhile- the two age groups 21-25 and 26-30 years of age have shown the largest decrease of all the segment of three and five percentage points respectively.

SUMMARY
We are hopeful that the results for the Fourth Quarter of 2010 (and year-end) will inch closer to where the market was in early/mid 2008- especially as new aircraft - Gulfstream’s G650- Bombardier’s Global 7000/8000 and Cessna’s reinvention of the Citation Ten among them - should help stimulate new market growth.

Historically- the Fourth Quarter of the year shows the most sales growth compared to the preceding quarters. The continuation of bonus depreciation in the United States will again aid in this year-end push Stateside. As indicated by Gulfstream’s third quarter observations- we expect that sales outside the U.S. will further stimulate business aviation growth in the Fourth Quarter of 2010 and beyond. We expect to see further growth that will coincide with many of these emerging regions’ economic expansion- and naturally will continue to monitor business aircraft activity through 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.com

• 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. * You can now follow JETNET on Twitter at www.twitter.com/JETNETLLC


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