Dealer Broker Market Update

On balance- the signs in the used aircraft market seem to concur: business people are moving back to using their business aircraft. They are reducing their use of the airlines and charters in favor of using airplanes they own or share.

Market Insight

Dave Higdon | 1st August 2011

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Dave Higdon

Dave Higdon writes about aviation from his base in Wichita Kansas. During three decades in...
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Better Times? Business Aviation activity edging upward.

On balance- the signs in the used aircraft market seem to concur: business people are moving back to using their business aircraft. They are reducing their use of the airlines and charters in favor of using airplanes they own or share.

Many managers of corporate aircraft report a jump in hours flown by their customers. Fractional flying activity has surged- while hours flown on privately owned business-turbine aircraft gained overall. So where’s the downside? Reportedly- chartered flight-hours dropped for a variety of reasons. According to charter sources- one reason is that some customers are keeping their airplanes that were previously for sale and/or parked-up. Others are snapping-up some of the still-excellent deals available for pre-owned aircraft.

Nevertheless- Brian Foley- principle of Brian Foley Associates cautions: “Things are really not any different than six months ago. Things are wavering – moving sideways more than up or down. Some stuff is better- some is not.”

Many sources sampled gave solid marks to many of the indicators of economic recovery: profits- strong stock-market prices- slow (but definite) job creation and increases in wholesale orders. Wall Street numbers confirm the profits- while share price recovery confirms some latent confidence in future profits- Foley explained.

The stock market - after suffering some jitter-induced hits - continues to report profitable times for many industries. But consumers aren’t yet freely opening their wallets. Higher gas prices continue to hamper travel - whether personal- recreational- commercial or business.

A softening of aircraft-price gains made earlier in the year- an expiring accelerated depreciation deal from Congress and cash in the bank - and an opportunity to merge these factors - amounts to a “grand convergence” unlikely to last far into 2012.

“This convergence means some people- some companies can fulfill their now-and-future transportation needs- do so at a bargain price- and lower their tax liabilities - precisely at a time when they would otherwise face higher liabilities-” a Midwest broker opined. “Because their businesses are doing well- the market’s good- airplanes are cheaper and they have more reasons to use them- and money that - if spent - they can write off against this year’s profits.

Not everyone feels the joy- however. Foley outlines- “There’s really no direction to this market. Thankfully- it’s no longer getting worse; but it is sort of stuck in neutral.”

Ripple Effects…

According to a sampling of aircraft dealers and brokers- the last few months have been better for a lot of people - just not as good for the charter or the finance people.

“Some of the recent buyers are using their own resources – tax free- interest free- or at really favorable rates because they (the buyers) have cash in their accounts-” explained a representative of one aircraft finance firm.

“Finance businesses wanted higher down-payments. Buyers waited – and then found that with the tax benefits they could do more- with less financing (if any).

“We’re even doing some shorter deals- financing a smaller percentage for only two or three years. Some borrowers even expect to pay off early. It’s not a lot of business- but it’s better than no business.”

The charter business- which particularly took a hit in turboprop use according to reports- is far from any danger- operators say. “So it goes-” summarized the executive of a Midwest company dealing in sales- brokering- chartering and managing aircraft. “We made up for some of the charter loss by winning some of the new owners we sold to as clients for our management services - it somewhat balanced out overall.”

Limited - Time Offers

The percentage of pre-owned business-turbine aircraft actively for sale dropped further in the past three months – even as prices dropped back from early gains. According to various reports- the percentage of pre-owned turbine aircraft stands near to what it did at this time in 2008 – well off the peak- but still higher than early 2007 (and higher than traditional levels).

The decline partly reflects the higher sales and partly the withdrawal of aircraft from the market – both of which are reflected by the continuing increases in flight hours.

“This looks to me like the great market buyers have had - and the good pickings are continuing to dry up-” one buyer’s consultant observed. “The time is nearing when buying a jet or propjet will look and feel like it did seven or eight years ago: Not artificially depressed or inflated- reasonable financing terms – normal times- essentially.

“People interested in a new or different business airplane and looking for bargains – used or new – should start thinking now about when they are prepared to act. Otherwise they’ll be looking at a more-expensive deal- whatever it’s for…and maybe with nothing like today’s unusually generous tax breaks.”

Foley- however- observed “The pool of pre-owned aircraft is shrinking - slowly - slightly. But prices continue to drop a little at a time. We could see a little retrenchment in the coming months because of Greece and word of debt problems in China- but there should be some good news later.”

Incentives - Depreciation and Politics

Business Aviation operators- General Aviation pilots- planemakers and support-business people by now all know that President Obama chose a late-June press conference to pressure Congress to act on extending the statutory debt limit. By the time you read this- that extension question should be resolved- mostly.

What is unlikely to be resolved is the sting Business Aviation operators and interest groups expressed at the President’s contention that “people who’ve done pretty well in the current economy pitch in a little more.” The “little more” turned out to be to return business aircraft purchases to a seven-year depreciation schedule from the current- normal five-year schedule.

Prematurely ending this year’s bonus depreciation was not the target- according to White House information; the current bonus-depreciation schedule is actually an extension of one granted in 2009 and extended in 2010.

The previous seven-year schedule was shortened to help the industry after the attacks of 9/11; the net effect included the potential to use special depreciation rules to reduce the net cash needed to own and operate a new business aircraft to zero for the first several years. The current bonus depreciation offers the opportunity to move the entire depreciation schedule into one year – potentially yielding carry-forward losses to apply to future years’ tax liabilities.

Whether special depreciation rules will continue for business aircraft and other industries depends on the outcome of efforts to reign in federal deficits and reduce the national debt.

Good Opportunities Remain

“They’re not the fire-sale prices of two years ago – but they’re much lower than the hotter- than-the-Fourth-of-July prices of 2007-” outlined an East Coast broker specializing in propjet and light jet hardware. “We’re fielding more phone calls and more people are looking to get in [to aircraft ownership] without a specific model in mind- but with a specific solution in mind.

“One client had to send six people to a convention 600 miles away (13-14 hours of driving at best) so he shopped for air fares…six months out. When he called me- he first wanted to know what we could offer in terms of charter to take that party of six- their equipment and luggage. We got that contract.”

After the third such need in four months- the broker mentioned the client could almost keep a plane at-the-ready for the money spent on charter. “We showed him some numbers and defined some needs (we knew them from the previous charters and a list of upcoming trips). We’ll get a management contract- and put the airplane into Part 135 for charter use - once- that is- we close on the deal for the airplane we found.

“It’s great when you make a customer for one business- make them a convert and then get more business from them with an airplane that they own. We pointed to fuel costs- air fare costs- check-bag fees- payments for extra weight…that wasn’t hard.”

Additionally- the broker outlined the costs for the individual charters versus the costs for owning the airplane- pointing out the benefits of acting this year.

“In two years the numbers won’t work the same for them – or for anyone else- for that matter-” summarized the broker. In conclusion- Foley reiterated his expectation that some signs point toward improving sales and orders- flight hours and charter bookings – near to year’s end.

“The good news is that this (plateau) should be temporary – a lazy- crazy summer- with a nice little pop in the light- and midsize ends around the end of the year-” he stressed. “Pistons are churning along – they haven’t slowed down further- but they continue to climb a little - and there’s hope that will continue right through the summer.”