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Although the headlines ran in September pronouncing that a council of economists identified June 2009 as the endpoint of the Great Recession- many in the aviation business observe that aircraft sales remain recession-bound- sixteen months after the downturn reportedly ended.

Dave Higdon   |   1st November 2010
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Dave Higdon Dave Higdon

Dave Higdon writes about aviation from his base in Wichita Kansas. During three decades in...
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A Snails’ Pace Recovery

Recession ended 06/2009; Business Turbine recovery trails.

Although the headlines ran in September pronouncing that a council of economists identified June 2009 as the endpoint of the Great Recession- many in the aviation business observe that aircraft sales remain recession-bound- sixteen months after the downturn reportedly ended.

Few questioned the observations that the downturn- which started in late 2007- ran the longest of any of the post-Great Depression downturns. But few reported a return in business aircraft sales to reflect the news that it was over. In fact- the news produced equal impact on the business aviation aircraft market as it did on the national psyche: zero (barely observable) in its tepidness.

Wall Street spent several days in mild exuberance- lifting the Dow Jones Industrial Average above 10-800 and making the month and the third quarter positive across many lines of business. Yet business aircraft sales appeared largely immune.

Sales of new aircraft continue to struggle- as bargain-hunters cash in on scooping up many of those at-risk orders and benefit from the downturn and the resulting buyers’ market.

The resulting new plane sales lethargy- in turn prompted general aviation planemakers to continue cutting; Cessna Aircraft lead a trifecta of staff-reduction announcements in September; days later Hawker- Beechcraft Corp. (HBC)- followed suit only days ahead of Piper’s staff-cut announcement.

Cessna- which plans to cut an additional 700- concurrently announced another production adjustment- downward again to a new 2010 target of 225 Citations – less than half the 467 output of 2008 and well below the 289 aircraft delivered in 2009.

HBC put an exclamation point on Cessna’s announcement by cutting 350 more staff- while also raising questions about its future in Wichita- and Piper- already much smaller than either Cessna or HBC cut about 60 and- like the others- said it would be further adjusting production – but to a level ahead of last year’s total.

Frustratingly- the blame for the continued struggling business aircraft market remained stubbornly familiar. The leading contender remains the excess supply and the resulting depressed valuations of most pre-owned business aircraft. Combined with a wholesale lack of enthusiasm for spending more- or adding to debt the results are prospects holding back on a transaction when they would otherwise line up for a different – maybe new – business turbine aircraft.

With fractional programs taking most new-plane orders off the books- new plane sales may be the only business tougher than pre-owned sales.

Through the first six months transactions of pre-owned business jets trended upward- gaining about one third over the same period in 2009- according to various reports. In the seventh month- the gain started shrinking – down about half from earlier in the year and showing only about a 15 percent gain over July 2009.

In August and September- the slowdown became more evident with the market’s year-over-year gain barely hanging on to an approximate 10 percent gain over the three quarters of 2010 to date. So what happened?

The consensus among a number of analysts shows two conspiring traits: the absorption of the early “best deals” and the continuing value deterioration among even some of the fleet’s most-coveted aircraft types.

For example- according to a report from aircraft valuation service Vref- values of an under-20-year-old Beechjet 400A “went off a cliff-” dropping 51 percent in the past two years; similarly- year 2000 Falcon 50EX values plummeted 46 percent- while the market worth of a same-year Gulfstream GIV-SP fell more than half.

Propjets- which enjoyed a few months of brighter sales in 2009- suffered the value hit along with the jets. A 25-year-old King Air C90 declined about 27 percent according to the Vref report- while the value of the once-popular Cheyenne II fell by almost a quarter. Sales of propjets dropped July over July – by about one-third – while year-to-date sales trended up about five percent. Since July- the same trend impacting jets started to again cut into the gains in propjet sales.

Conversely- some of the piston models popular among business owner/operators started slowly appreciating – trending back up- thanks to demand by the small business owner seeing the way for the company to own an airplane at an attractive buyin – airplanes like the perennial favorite Beechcraft Bonanza- the six-place Cessna 210- and the speedy- high-fuel-efficiency Mooney 201.

Otherwise- economic weakness continues to restrain many prospects. But even when prospects appear there’s plenty of competition for the deal – and no certainty that they’ll take even an outstanding opportunity should one arrive.

Prices should be more attractive- considering reports that asking prices dropped another 10 percent through the first three quarters of this year- but the added value potential failed to translate into more closures – though the further price deteriorations may be prompting more inquiries- according to a number of independent brokers and their marketing staffs.

According to one Wichita-based demo pilot- “We sometimes find we’re trying to make a new sale while competing against a fairly new version of the same plane. It can be tough to sell new when the competition isn’t the ‘other guy’- but a unit we sold once – one that still has warranty remaining... and a smaller invoice.”

That problem seems on the wane- analysts say.

“We believe the supply of pre-owned aircraft less than a decade old is drying up- or at least incrementally dropping-” observed a west coast broker.

Within the pre-owned segment sales seemed to slow in the third quarter compared to a market that showed very slight gains in the two quarters prior. “Before they started getting scarce- planes under 10 years old weren’t staying on the market as long as other- older units. Airplanes 20 and 30 years- or older clog up the market-” the west coast broker said- adding that 16 to 18 months on the market is not uncommon for those older aircraft.

“We’ve got a couple of older airplanes in decent shape with useable life remaining- but at 25 to 30 years- the finance houses are hesitant-” the west coast broker observed. “Some of these planes will never come back… they’ll become transplant donors-” he added- noting the very real potential for the value of their parts.

Dealers and brokers elsewhere concur. Some excellent- old- aircraft are out there – some of them owned by operators waiting on their sale to move up…often to a newer pre-owned jet.

“Back at Sun ‘n’ Fun I actually thought we were starting to turn the corner-” a southeast broker’s representative explained recently. “The phones rang- we actually booked appointments to show planes…interest seemed to be growing.

“By the time of Oshkosh we’d even sold a couple more planes than last year…but the phones rang less in July- less in August – and I’ve yet to actually show something this month that wasn’t because of a prospect who first called last spring and now wants to know if the price is lower.”

Financing is- to the extent it’s available- still accessible and still relatively inexpensive; terms- however- remain tougher than three years ago – and those terms make prospects tougher for the ‘over-10 set’…even impossible for the ‘30-and older’.

By and large- insurance hasn’t gone up – and accidents declined- partly- some say- due to reduced aircraft use…unwelcome news. Bonus depreciation came back – maybe too late in the year to do the good it could have back in January or even July.

“What happened? The low-hanging fruit got picked – it’s gone-” the southeast broker observed. What’s left may be still available because it’s not the bargain another copy was a few months back. “It may be for sale to satisfy an image issue.”

It may be for sale- but the seller never likes the deal- or the price is a nonstarter… or it’s getting work and the bonus depreciation “suddenly made that work more valuable to the owner – who now doesn’t want to sell…- until 2011.”

It’s apparent- however you look at it- that demand remains low for even the lowpriced goods- and some contend that’s because too few new people consider owning an airplane and many aren’t interested in a horizontal move without identifiable need. As a result- the inventory of under-10 airplanes dropped more than other age groups- which means- the dealer said- “The biggest bargains aren’t what’s available.

“Now its stuff the seller hoped would move while they had a shot of flipping the money into something newer – and now the newer is gone.” Now- he added- the seller is having second thoughts about whether to keep trying to sell – and sending mixed signals about plans to buy.

The gap between ‘For Sale’ numbers of 10- years-and-under and 10-and-older aircraft defines the state of the market. According to various observers- about 10 percent of the 10-years-and-under fleet has a “For Sale” sign on it; among the 10-years-andolder set that percentage is approximately double.

Many of these older airplanes haven’t moved despite 12-18 months of availability; and the closer they get to the age of 20- the lower the apparent interest among today’s identified buyer prospects – “real buyers” as our southeast broker called them- as opposed to “tire kickers”.

If you think there are challenges in finding a buyer for a 20-and-over model- they can’t compare to the difficulty of finding financing – an issue that for business turbine aircraft begins to impact its value years before it hits ‘drinking age’.

Lack financing? Cash still works- and buyers still exist with the means of paying cash – if- that is- you can convince them of the wisdom of the deal. “Then it becomes more difficult to compete with 15-andunder models; why take money out now to pay cash on a twenty-something aircraft when an under-15 airplane can be financed without penalizing your investments-” asked a Midwest accountant with a practice teeming with private aircraft operators. “Best-case scenario-” he offered- “would be to loan yourself the money and pay it back with interest.”

A couple of independent brokers shared that they’ve “hit a vein of new interest to mine” from the bonus depreciation treatment signed into law in late September – the waning days of the third quarter.

The bonus depreciation allows a “bonus” 50 percent increase in first-year write-down available for up to $2.5 million in business equipment; depending on the normal depreciation schedule for a covered investment- the one-year write-down bonus can account for the vast majority of its purchase costs.

“We had a couple of calls requesting information from people we’d already qualified…folks who’s interest went up the day the language cleared Congress-” one broker related.

Noted another- “I started calling – actually- re-calling – prospects who hadn’t moved on anything to my knowledge. One of them was now interested and asked for more information; the other wanted to speak to his accountant before talking to me – so we sent the details to his accountant.”

Sending along the aircraft and bonusdepreciation info landed this southeast- U.S. broker a ‘show-and-tell’ appointment a couple of days after our initial conversation. We visited the last time a bonusdepreciation program existed-” he recalled- “but never got to the show-and-tell. I’m encouraged.”

A few others voiced the same sentiment- with one clarifying- “I’m newly optimistic for 2012…that’s when I think it’s going to grow again – in measurable terms.”

According to reports- aircraft sales aren’t enjoying any coattail effect from the incremental gains in the economy at-large – where the stock market- profits and the GDP are all fairing better than a year ago.

“When you see car-makers doing better- you sort of expect to see some of that confidence rub off on airplane sales-” said our broker’s demo pilot. “Whatever’s happening- there’s not much trickling our way. And I’m not expecting a lot out of the bonus depreciation this year. The option came along too late in the year.”

We’ll check in again from time-to-time to see whether brokers and dealers see any change in the fourth quarter.

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