- 08 Jul 2021
- Brian Foley
- Market Insight
Brian Foley shares insights on how 2021 pre-owned business aircraft activity is going, and how the current inventory shortage could play out…Back to Articles
For those keeping track, AMSTAT reported 1,214 pre-owned jet transactions for the first half of 2021 (H1 2021), compared with 750 sales for H1 2020 – a whopping 62% increase.
While that’s great news, don’t forget that January to June of last year included a pandemic lockdown which temporarily hampered closings. Therefore, much of the sales activity simply got deferred to H2 2020, which created a year-end closing crunch of epic proportions.
With total transactions for the whole of 2020 numbering 2,319, the 1,214 recorded for H1 2021 should help put us in the ballpark with 2020’s transaction volume by year-end, helping 2021 to be yet another outstanding year.
What Can We Learn From Other Industries?
Business Aviation isn’t on the minds of mainstream economists, who instead comment and forecast on such fundamental basics as employment, GDP and household income.
Still, perhaps there’s a similar situation in the greater economy – low inventory and high demand – that could give us clues on how our own pre-owned market could eventually play out…
Auto Market: Used-vehicle prices are hitting all-time highs in the US, prompting a look at whether this is inventory-driven. Contrary to our industry, however, the unsold vehicle inventory is just 5% below levels a year ago; hardly a change that would explain prices being 25% higher than they were this time last year.
A further look at what drove used vehicle prices to record highs wasn’t overall scarcity – there are still plenty on dealer lots – but rather because there were fewer old, high mileage, low price cars for sale. Consumers cleared out the supply of the cheapest cars leaving plenty of the expensive, new, low-mileage cars which drove up the average price of used vehicles.
This is the complete opposite of our industry where the young, low-hour, more expensive aircraft are in high demand. Thus, nix auto sales as ever being a harbinger of how the pre-owned jet industry might behave.
Along these lines, I would even submit that pre-owned business jet prices haven’t risen much, despite historically low inventories. In part that’s because there are very few more-expensive, late models left for sale, leaving only the older, lower-priced aircraft on the market. This will tend to distort used jet prices, making them appear to be flat or declining.
Housing Market: Next, the housing market was explored to see if there were any similarities with the pre-owned jet market. Both lack inventory, have high demand, and set transaction records in 2020.
There are indications that the peak of the hot housing market was reached in late spring, at which point days-on-market (DOM) began to increase. This has parallels with our industry (which has seen DOM steadily climb from 481 days last summer to 603 days now). This suggests we’ve already been on the path back towards normality for a while, perhaps without even knowing it.
If the housing outlook is indeed a proxy for the preowned private aircraft trajectory, current housing projections call for the lack of adequate supply and rising mortgage rates to hold back some potential home sales.
More existing homeowners are eventually expected to list their homes which should help ease the shortage over time. Again, I would argue that there are some parallels with our own industry here.
Existing home sales forecasts have been revised downward lately, but 2021 sales transactions are still expected to exceed 2020’s. Price should rise more slowly through 2022.
The Take-Away Lesson
Whether or not pre-owned business jet sales will follow the home market, the lesson from any industry, including our own, is that markets like to reach an equilibrium and not stay at extremes for any length of time.
While there is nothing to indicate 2022 won’t be another good year for pre-owned jet sales, it’s likely that inventory and transaction levels will have begun to return to more traditional, and sustainable, levels.
Global Flight Activity – June 2021
Global Business Aviation traffic increased by 6% in June 2021 compared to June 2019, according to WingX Advance, and effectively set record levels of activity. By the end of June, Business Aviation traffic was just 3% off the comparable activity levels in H1 2019.
In the surging US market, activity was edging ahead of the H1 2019 activity, while the UEFA Euro 2020 Football Championships was clearly a catalyst for European recovery during June, with host cities seeing very strong growth compared to June 2019.
Business Aviation activity surged back in Europe during June, with 6% more flights in the final two weeks of the month than in the same two weeks back in 2019. For example, business jet and turboprop departures from airports in Germany were up 9% compared to the same fortnight in June 2019.
Spain’s traffic soared 18% above June 2019 levels, Portugal was 42% ahead, and Greece recorded an additional 55% in Business Aviation traffic. Belgium and Netherlands both had almost 20% more jet and turboprop flights than in June 2019.
Activity was still trailing 2019 levels in France and Italy, but only by 3%, whereas flight activity in the United Kingdom remained 23% below 2019 levels.
The US Business Aviation market continued to break records, with flights in June up by 11% compared to June 2019. For just business jets, the lead was even larger – with 20% more sectors flown during June 2021 than in June 2019. Year-to-date, at almost the half-way point of 2021, business jet activity was 2% ahead of 2019.
More than half the traffic was Private flight activity, but Part 91 activity still trailed 2019 levels. June’s growth essentially came from charter and fractional operators, with those sectors more than 20% above their normal levels.
Business jet flights within the US were up 23% in June, while international connections also picked up. Flights to Mexico were up 40%; flights to the Bahamas were up 60%; and flights to Turks and Caicos more than doubled (versus June 2019).
Flights to Canada, meanwhile, were still 70% below normal, while transatlantic flights were still half of what they were.
Rest of the World Activity
Outside Europe and the US, June’s business jet flight trended 4% below where they were in June 2019 (though they’re up 85% on last year. This compares to a YTD deficit of 12% compared to H1 2019.
“We have seen a significant milestone this month with business jet activity in the US, year-to-date, surpassing comparable 2019 levels,” said Richard Koe, Managing Director, WingX Advance. “The rate of the rebound is gathering pace in the US, and Europe may be picking up the same growth trend.
“The UEFA Euro host cities have seen big spikes in business jet arrivals, and the summer season has opened up for the first time in two years, with a surge of high-end tourists heading to the Mediterranean’s most famous resorts.”
Hagerty Jet Group: Major Corrections in Gulfstream Market
It has been a volatile cycle in the preowned Business Jet market over the last 12 months, says Hagerty Jet Group, which adds that there are some major corrections occurring in the marketplace…
This time last year, supply was at an all-time high, and prices were coming down as many buyers were hesitant to enter the pre-owned market while prices only seemed to be softening.
One year ago, there were 24 preowned Gulfstream G650s for sale. In stark contrast, today there are only four remaining for sale. For the first time since 2018, Hagerty Jet Group has seen aircraft values increase for two consecutive quarters, and expects that trend to continue (or at least remain flat for the remainder of 2021).
The market shifted from a buyer’s market in the fall of 2020 when transactions spiked across almost all makes and models of business jets. Buyers who entered the market in 2021 thought they were still ahead of the competition, but they soon learned that we are in a highly competitive market.
Nearly Non-Existent Supply
“We are experiencing similar issues as many of our industry peers,” Hagerty Jet Group says. “We have buyers who want to upgrade their older aircraft, but cannot find suitable replacements.
The supply of aircraft less than five years old is nearly non-existent, and it seems like everyone is looking for the same thing regardless of make and model.”
Hagerty Jet Group started an acquisition search for a Gulfstream G650 in early January, and made at least six offers to purchase different aircraft. In many cases, “it became a bidding war”.
In other instances, Sellers decided to remove their aircraft from the market because they could not find their replacements.
“Once supply had dried up, we shifted our focus to a different model, only to find a similarly competitive market,” the company adds. “We made an offer on a Gulfstream G550 within two hours of it coming to market. By the end of the day, the Seller had four competitive offers on the table.
“They closed the bidding and told the buyers they each had one week to see the airplane and make their final bid,” which Hagerty Jet Group successfully won, “not just because of price, but because we had the right team in place, including a trusting buyer with lots of experience buying and selling, which gave the Seller comfort”.
With the G550 under contract, the buyer’s G400 was listed for sale, and was on the market for less than 24 hours before a deal was accepted.
Hagerty Jet Group recommends that clients secure a replacement aircraft before listing their aircraft, because selling is much easier than buying in this environment. The spike in values comes as no surprise to the company, given the environment of historically-low interest rates and favorable bonus depreciation tax incentives in the US.
Pre-Purchase Inspection Availability
Another obstacle faced is availability for pre-purchase inspections, the company says. “The next available slot for a Gulfstream Aircraft and Records Condition Survey (ARCS) for a large cabin aircraft in Savannah is nearly eight weeks away, which is causing a significant bottleneck in the system.”
Since it is too risky to be under contract for so long, Hagerty Jet Group says many sellers insist that deposits become non-refundable upon signing the purchase agreements.
“From what we can see, backlogs at the OEMs are not growing substantially just yet. The pre-owned market is still a much better value than the new market. Large US corporations which typically buy new aircraft have been slow to return,” the company concludes.
The backlog for most new aircraft remains at more than 12 months for an airplane built to customer specifications, meaning the pre-owned market should remain competitive for the next 12-24 months.
North America Leads Pre-Owned Twin Heli Demand
Aero Asset’s Q2 2021 Heli Market Trends report indicates 15% greater pre-owned twin-engine helicopter retail sales volume in H1 2021. Available inventory shrank as the supply of helicopters for sale fell 10% year-over-year (YoY)…
After trailing Europe in 2020, North America now leads transaction volume, accounting for half of all global pre owned twin engine helicopter transactions YTD in 2021. VIP-configured sales volume led the way, with an increase of 40% YoY.
“Light twin engine retail sales jumped nearly 40% in the first two quarters of 2021, and medium twin sales rose 25%,” said Valerie Pereira, Aero Asset’s Vice President of Market Research. “Heavy helicopter sales, however, slumped during the same period.”
Deal Pipeline Drops
Pereira also noted that after two consecutive quarters of growth in the number of deals pending at various stages, the deal pipeline had decreased by a sizable 35% in Q2 2021 compared to Q1 2021.
However, the number of deals pending in the pipeline were up 15% YTD, versus the same period in 2021. The most liquid pre-owned market YTD was the Leonardo AW109S/SP, closely followed by the Eurocopter/Airbus EC/H145.
In-Service Aircraft Values & Maintenance Condition
Following the ‘for sale’ pool peak in June 2020, business aircraft inventory has steadily decreased over the past year with 1,450 aircraft now comprising Asset Insight’s fleet of 134 tracked models. How does their maintenance condition and marketability compare?
Asset Insight’s June 30, 2021 market analysis revealed a 5.0% contraction, equating to a year-to-date (YTD) decrease of 24.2%, as well as a 38.6% year-over-year (YoY) availability reduction – and all four groups were involved.
The average Ask Price for the tracked fleet decreased 1.8% in June to about the 12-month average, fueled by reductions among the jet groups. Q2 and YTD figures were higher (2.2% and 0.7%, respectively), while YoY Ask Prices posted a minor 0.2% increase.
Inventory Fleet Maintenance Condition
Q2 closed with sales of lower quality assets dominating buyer preference, helping increase the available pool’s Quality Rating while lowering Maintenance Exposure. Specifically:
Quality Rating improved for the first time in four months, rising 0.2% to 5.282 and maintaining the available fleet well within the ‘Excellent’ range, on Asset Insight’s scale of -2.5 to 10. The Quality figure signifies inventory assets will require near-term completion of fewer maintenance events.
Maintenance Exposure, defined as the aircraft’s accumulated/embedded maintenance expense, improved (decreased) 1.9% to $1.459m in June. The significance is that, on average, upcoming maintenance events facing inventory aircraft will cost less to complete.
Maintenance Exposure to Ask Price (ETP) Ratio
The ETP Ratio is a useful indicator of an aircraft’s marketability. It is computed by dividing the asset's Maintenance Exposure (the financial liability accrued with respect to future scheduled maintenance events) by its Ask Price.
‘Days on Market’ (DoM) analysis has shown that when the ETP Ratio is greater than 40%, a listed aircraft’s time on the market increases, usually by more than 30%. During Q2 2021, assets whose ETP Ratio was 40% or higher were listed for sale nearly 89% longer, on average, than aircraft whose Ratio was below 40% (281 versus 530 Days on Market).
June’s market analysis also revealed that 50% of Asset Insight’s tracked models, and almost 58% of the tracked fleet, posted an ETP Ratio greater than 40%. The ETP Ratio decreased to 73.5%, from May’s record worst (highest) figure of 76.3%.
With Ask Prices lower, a decrease in Maintenance Exposure was the driver behind the ETP Ratio improvement, but the figure remained worse than the 12-month average of 72.7%.
Availability for the tracked models decreased to 7.3% of the active fleet, compared to 10.9% in June 2020. Asset Insight believes availability across the entire model spectrum to be even lower. Demand continues to fuel sales of lower-quality assets. While one might think lower pricing is aiding the sale of such equipment, buyers are generally not the ones holding the better hand when it comes to pricing.
Patience and detailed analytics are key to securing a value-based asset for buyers. Some entities seeking younger, lower-time aircraft, have resorted to making unsolicited offers, especially within the Large Jet sector. This might accelerate a prospective buyer’s search for their ‘ideal’ aircraft, but the strategy is likely to invoke greater cost.
Large Jets: Availability for our 43 tracked models ended H1 2021 at 6.9%, which translated into a YTD availability decrease of 20.6% (89 fewer units) and a YoY decrease of 31.2%. The Quality Rating remained basically unchanged at 5.772, maintaining the Large Jet fleet well within ‘Outstanding’ territory.
However, Maintenance Exposure worsened (increased) to a 12-month high figure, financially demonstrating that, even though the picked-over fleet is not facing a greater number of near-term maintenance events, completion of maintenance events will be more expensive.
The average Ask Price decreased 1.9% from May’s 12- month high, but pricing was up 7.0% in Q2, 3.4% YTD, and 0.8% YoY. Meanwhile, the ETP Ratio actually improved to 61.1% from May’s 63.6%, placing it about half-way between the group’s 12-month average and low figures.
The news if you’re a seller is good. If you are a buyer, there is still ample availability on some models, while others will require patience (or for buyers to pay more to secure a unit from its existing owner with an unsolicited offer).
Mid-Size Jets: Posting the largest YoY inventory decrease among the four groups (-43.4%), Mid-Size Jet availability has decreased 26.3% YTD (-137 units). Just 6.9% of the active Mid-Size Jet fleet is for sale across the 45 tracked models.
Asset Quality stood at 5.324, well within the ‘Excellent’ range. This was down 0.4% from May, and slightly below the group’s 12-month average. Meanwhile, Maintenance Exposure decreased (improved) 0.8% to post the best figure for the past twelve months, as well as a 2.2% improvement YoY.
The average Ask Price fell 0.7% for the month, 5.7% during Q2, 5.6% YTD, and 7.1% YoY, while the ETP Ratio held up well through all these changes, worsening just a bit to 68.8% compared to May’s 12-month best (lowest) 68.6%.
Mid-Size Jet buyers are strongly urged to work with an experienced broker to help ensure they are acquiring a value-based aircraft.
Light Jets: The group’s ETP Ratio continues to be stratospherically high at 113.5%, even though that is the lowest (best) figure during the past four months. Light Jet Asset Quality posted a 12-month low (worst) figure in June, barely maintaining the group’s ‘Very Good’ rating – but Maintenance Exposure struck a 12-month low (best) figure by decreasing 9.2% (even though that still left Exposure 11.4% higher YoY).
Average Ask Price was down 0.7% for the month, 5.7% during Q2, 5.6% YTD, and 7.1% lower YoY, and, as was the case in April, the average Ask Price for a Light Jet has fallen below that of a Turboprop.
Given all of the above, surprisingly Light Jets continue to sell well, with the group posting the greatest YTD inventory fleet decrease at 28.0% (155 units), along with a 43.2% decrease YoY. For the 29 models we track, 7.1% of the active fleet is listed as being for sale. The problem for sellers is that some of these aircraft have been on the market for nearly two years.
Turboprops: There are multiple reasons why availability for the 17 Turboprop models Asset Insight tracks equates to only 5.8% of the active fleet. First, and foremost, the group’s ETP Ratio stood at 42.3% in June – higher (worse) than the 40% demarcation point, but sufficiently low to make it viable for sellers and buyers to reach agreement.
While the group’s Quality Rating may not be dramatically aiding the sales effort, residing only in the the ‘Very Good’ range at 5.187, June’s figure represented a 1.7% improvement over May, and a 6.7% improvement YoY. At the same time, Maintenance Exposure decreased (improved) 1.8% for the month and 1.7% YoY.
All of this led to a 12-month high average Ask Price, equating to a 4.2% increase for the month, 3.2% during Q2, 4.2% YTD, and 8.3% YoY. Units listed for sale decreased by 81 for the year, equating to 19.9% YTD and 32.6% YoY. Sellers definitely hold the better hand here, although the total number of listings provide a greater selection for buyers than the percentage of the active fleet figure might appear to intimate.