Dealer Broker Market Update

Dave Higdon | 1st May 2012

Dave Higdon

Dave Higdon writes about aviation from his base in Wichita Kansas. During three decades in...
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Going...Going...Gone?
The signs point toward recovery as memories of the bad old days dim.

It didn’t happen suddenly and without warning. The signs were there: Dealers and brokers handling pre-owned business- turbine aircraft called the signs of a slow decline in transactions- but by the time the economy started its tire-screeching collapse in late 2008- the slowly developing slump in pre-owned sales morphed into a fully-fledged rout.

By the time world stock markets and the American economy felt the hits of a recession beyond anything seen in decades the pre-owned market sometimes viewed those years of gradual slowdown as “the good old days-” given the stronger sales even of a slowing market.

Since those baleful times- the Business Aviation world takes the views of that cadre of brokers and dealers of pre-owned aircraft who freely shared the signs they saw back then even more seriously. They’re looked to for affirmation – of signs of the market reaching the bottom of a deep trough; for hints of a returning transaction growth.

Positive signs exist. Perhaps not enough to fire enthusiasm for current times- and certainly not yet enough to ease fears of worse still to come - but they are there to be read. What is certain is that no one should experience whiplash from the rate of change ahead. The positive signs for recovery today share similarities to the slow start of the decline in pre-owned sales occurring back in late 2006 and onward.

The Tip of the Wedge

Slowing sales of pre-owned aircraft started producing longer average times sitting around on the market before aircraft sold- which added to the pool of available aircraft and undercut values- which undercut financing- which - in turn - worsened on market times and added to the pool (a vicious circle).

And when the markets and the banks began to chill to home and business loans and revolving credit accounts- finance options for business aircraft caught the same chill. It didn’t happen suddenly – on the pre-owned aircraft side- at least.

“We can only hope that’s how the whole thing reverses itself-” said one Northeast business-turbine aircraft broker at this year’s Sun ‘n Fun event in Florida. Not all of the world’s market headed to Shanghai or Chile during the last week of March. Numerous domestic players - such as our Northeastern broker - focused on prospects in what one described as “a renewed domestic market” with hopes of moving airplanes state side. And the OEMs (of jets- turboprops and pistons) were also out in force at Sun ‘n Fun- and all seemed satisfied with their activity there.

Specifically- OEMs offering piston aircraft - through which many a business operator transitions before moving into turbine aircraft - were pleased. Some reported solid sales. A couple were left sold-out for the year. Interest was brisk- and finance companies were out in strength with competitive terms.

“Here’s hoping this is the tip of the wedge-” our Northeastern broker noted. “Give me some steady- gradual growth any day.” His view was echoed by a West Coast dealer helping a client compare single-engine turboprops. “The last thing we need (those of us in General Aviation and the country at-large) is another boom that leads us to another bust like this last one. We are enjoying what feels like a steady- gradual resumption.”

The conversation with these two brokers- some dealers and aircraft-finance personnel didn’t produce a universal consensus on the strength and vitality of this nascent recovery – but it certainly produced a consensus that the worst is past and better times have started to arrive.

“We expect good- solid gains over last year – and we hope those will be all the way back up to 2001-2002 levels-” offered an independent business jet broker (attending with a client considering a move into a light jet from a twin propjet). “My client’s business is up for a third year straight – and now his bank is asking him to do business…needless to say- he’s been pre-approved at a level that gives us some latitude in shopping and some leverage in deal negotiations.

“If that doesn’t make you smile- nothing will.”

Separate But Unequal Rebounds

Pre-owned business-turbine sales started showing some renewal in 2011 – or- as one observer put it- “We stopped seeing the curve all downhill last year in the resale of existing hardware.” That observation (from an East Coast dealer) came with a caveat: “The same can not be said for new aircraft orders or deliveries.

“Companies are holding back – waiting for next year…particularly when you talk about light and medium jets.”

Others offered similar observations. They’re struggling to close deals on new airplanes- but the time they have pre-owned aircraft in their inventory is shrinking in tangent with increases in finance availability. Yet one aspect of finance remains an impediment to the sales of older turbine-powered aircraft: Age.

Five years ago good customers with decent balance sheets could find financing for practically anything with recent engines and a half-way modern panel and cabin; for others- the so-called 30-year-rule applied for financing on more-or-less standard terms; that is- the total of the loan-term and the age of the aircraft at the start of the note could not exceed 30 years. And that sill allowed prospects to finance 20-year-old airplanes for normal seven-10 year terms.

Today the rule of thumb tops at 20 years; so the goalposts have shifted to 10 years on a 10-year-old airplane- with normal down-payment and interest rates. And according to a recent report on aircraft finance from Citi Private Bank- five years is by far preferred by many financing companies – unless the finance institution has a strong relationship with the client- one that extends beyond the realm of aircraft finance.

“We put a prospect into a 15-year-old jet last month with a nominal 15-percent down payment with a 10-year term-” explained a Southeast broker. “But that happened only because the buyer uses the same financing outfit to handle his company’s revolving credit line. They know him- they already make good money off the guy. They decided to give him a break.

“Otherwise- the best we could offer was 5 years with 25 percent down-payment – and at two points higher on the interest.” Some finance companies did such robust business in 2011 that they exhausted their available funds before year’s end- leaving some brokers and dealers scrambling to find alternatives. “We found that we could do business with non-traditional lenders – often the buyer’s regular banker-” said a Midwest-based attorney who handles aviation finances for a core of clients.

Global Markets & Backlogs

A variety of brokers and dealers pointed to growing international demand as a component in the reduction of the available pool of pre-owned aircraft – and that reduction as an element in the willingness of some finance companies to stick with the pre-owned market.

“There’s no question that China- India- Pacific-Rim customers- South America – almost anywhere but here – are helping pre-owned sales-” a California-based broker explained.

Large-cabin and long-range aircraft have been the biggest sellers in China but- as noted by analysts- small- and medium-cabin aircraft are destined to be the growth leaders over time. “As the demand in Asia for the mid-size and light jets begins to grow expect to feel some impact in the traditional markets – and the newest of those jets will be prime picking-” the West Coast broker continued. “That should help boost prices in those segments- as well as help demand for the next-older hardware.”

But growth in China has limitations on its real market impact- noted several analysts – among them Brian Foley of Brian Foley & Associates. Foley observed that the General Aviation industry has good reason to be excited and encouraged by recent sales and future prospects for China.

He cautioned not to confuse an early spike in orders with any market's long-term character which- he stressed- may be very different. “That's particularly true in the case of China. Dreams of a limitless upside must be tempered with realism. The current order rate cannot be sustained indefinitely - but there'll still be plenty of activity to keep the industry contented.”

Longer term- however- the Asian market – China- in particular – brings the potential for becoming an established market much like North America to the benefit of the entire community of manufacturers- sellers and operators.

“It should also help make up the industry’s sales deficit caused by the steep fall-off in fractional deliveries-” Foley noted. But the full impact of China’s growth and transition to a private-aviation-friendly nation won’t be fully felt until the next decade. And that achievement depends on whether China develops the airport- airspace and regulatory infrastructure needed to support a more-robust growth curve and- more importantly- underpin unfettered use of private aircraft.

The Return to Growth

Brokers and dealers- analysts and observers see the recent signs – higher asking prices and lower inventories of business-turbine aircraft – as positive- remembering that the double-digit gains seen in the past few months come from a low water mark in valuations.

Even new airplane orders seem to be gaining some steam – still predominantly within the larger jets arena- but with some smaller gains in the light and medium segments.

Coupled with admittedly weak operational growth (less than 1.5 percent last year by most accountings) the trends are the best seen since the downturn began four years ago…and a welcome new point of encouragement in a market ready for better days.

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