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Indicators of various stripes these days act like windsocks in a vortex: pointing in conflicting directions and giving little sign of confidence in the indications given. The conflicts appear in the broad spectrum of the economy at-large and on a more macro scale in general aviation. For example- U.S. workers filed about 539-000 new jobless claims according to a report released in the first week of May. The number- large ...

Dave Higdon   |   1st June 2009
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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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Market Inertia

Signs of the slump easing? Maybe if you squint...

Indicators of various stripes these days act like windsocks in a vortex: pointing in conflicting directions and giving little sign of confidence in the indications given. The conflicts appear in the broad spectrum of the economy at-large and on a more macro scale in general aviation.

For example- U.S. workers filed about 539-000 new jobless claims according to a report released in the first week of May. The number- large and depressing on its own- came in much lower than expected – and it reflected a considerable decline in new filings from the levels reported regularly during the previous six months.

In a bit of ‘holding-their-breath’ crystal ball-gazing- some analysts see the numbers as a possible early sign of businesses getting to the bottom of their staff levels. In conflict with even the mildly upbeat views- however- was the accompanying total-unemployment rate including the new filings – high enough to push up the total jobless rate to 8.9 percent.

The more-sobering observations note that the 8.9 percent figure excludes jobless workers who exhausted their unemployment benefits- prompting reflections that the real jobless rate hovers well into the teens – as if either number reflects a healthy rate.

Other good news from early 2009 included reports that retail sales for some businesses grew in March and April- according to recent reports. Even some real-estate markets- among the root causes of the financial crisis- saw sales trend upward.

The dark secret of the sales gains hides in the roots of the upswing – new tax incentives coupled with a large availability of houses in foreclosure or repossessed and available at prices deeply discounted from values of just two years ago.

Elsewhere- measured consumer confidence stopped declining and seemed to turn upward slightly. And the stock market posted more closing-bell gains than declines in the past several weeks.

Against this backdrop came the not-unexpected sales decline in general aviation aircraft during the first quarter as reported by the General Aviation Manufacturers Association: Interestingly- the numbers still compare favorably with deliveries in 2006- when the market was well into an upswing unprecedented in its scope and strength.

Nevertheless- the big issue for many in business aviation remains the pre-owned aircraft for sale market. Plagued by a steep plunge in perceived value of pre-owned aircraft- a related huge surge in inventory on the market and a dearth of finance options- sales of pre-owned business turboprop aircraft for sale remain moribund.

Thankfully- some stirrings in the arena show signs of bringing some much-needed momentum back into the pre-owned market. But not until the market hits bottom – and few believe the market is there just yet... though the bottom may well be near- as in this year.

In the past 18 months the percentage of business-turbine aircraft listed for sale soared from about seven percent to nearly 20 percent – one of every five- a watershed share as well as an unprecedented high in raw numbers! During the market contractions of the latter 1990s and again following the 9/11 terror attacks- unsold percentages grew similarly high.

What makes today’s percentages more troubling is the significantly larger fleet on which it’s based - a pool larger by several thousand today than at the end of 2001- making today’s nearly 20 percent representative of a much larger number of aircraft than the 20 percent of a decade ago – or of even six years ago – by about 1-000 aircraft.

According to market analyst Brian Foley- this level of pre-owned inventory is likely to be the peak – or the deepest part of the trough- if you will – and stay at this level through the end of the year. The founder of Brian Foley Associates (www.brifo.com) predicted- “At the peak- inventory levels will meander for a few months before falling somewhat by year-end.”

Other outlooks offer similar views- with a consensus that even as stability comes to the pool of pre-owned aircraft on the market- prices may continue to deteriorate. And the pool of aircraft for sale available continues to struggle under the weight of a form of inflation – numbers inflated by owners listing aircraft they don’t actually intend to sell.

As Foley explained- this factor exacerbates the used market supply and contributes to depressed prices and confused values. “Some owners with no real interest in selling list them for sale anyway- either in hopes of getting an offer too good to be true or as a contingency in case things get worse-” Foley noted.

“Still others keep the plane for sale for political reasons. Either way they’re doing themselves and the real sellers a disservice by keeping supply artificially high which results in further depressed prices.”

A representative for a large broker knows the frustration of this problem- first hand. “Two of my clients ran for the door as soon as Congress started beating up on business aviation-” the broker’s representative confided to World Aircraft Sales Magazine. “They want to look good to customers- politicians and board members – none of whom actually matter- considering the value the planes deliver these companies.”

To complete the ruse- the broker explained- these supposed sellers both set a price floor well above current trading values. “They’ve declined the offers presented to them but no one is offering what they’re asking. The charade works perfectly for the aircraft owners but screws everybody else.”

And the broker got no arguments when he followed the most recent offer refused with a new billing schedule for his efforts. “They’ve got to pay as we go from here on- because I’m not wasting more time on trying to find buyers who’ll be politely refused.”

In the meantime- the inventory of pre-owned business turbine aircraft for sale listed is expected to remain at these historically high levels at least through mid-year and possibly until late 2009 before beginning to ease.

The recent quarterly delivery report from GAMA provided a stark view of the new plane market in today’s tortured economy. The GAMA report showed deliveries of general aviation airplanes totaled 462 units in the quarter that ended March 31- a 41.1 percent drop from the same quarter of 2008; industry billings fell 18.2 percent to $4.34 billion for the period.

Business jet shipments fell 35.7 percent in the first quarter with 191 airplanes delivered- as compared to 297 business jets in the first quarter of 2008. Shipments of piston airplanes also dropped- precipitously- by 55.1 percent in the quarter- with 179 aircraft delivered compared to 399 airplanes in the first three months of 2008. Only the turboprop segment showed any growth in the first quarter with 92 delivered- up by three from the 89 units shipped in the same quarter of 2008 – a gain of 3.4 percent.

“This is an extremely difficult time for our industry-” said GAMA President and CEO- Pete Bunce. “We are dealing first and foremost with the severe negative effects of a worldwide economic downturn- but also with unwarranted criticism focused on the industry. The result has been the cancellation of orders for new airplanes and the loss of more than 15-000 high-paying jobs for American workers over the last several months.”

In light of this and other depressing recession-related news in general aviation- a group of mayors with large aviation economies or reliance has written President Obama asking his help in ameliorating the government’s past criticisms of business aviation.

Wichita’s Mayor Carl Brewer went so far as to repeat his invitation to the president to visit the community and see first hand the expertise and economic potential of aircraft manufacturing and to meet with laid-off workers. So far- no response from The White House. But the forces aligned in support aren’t relenting.

“The reality is that the U.S. general aviation industry leads the world in innovation and remains one of the few American industries with a positive balance of trade-” said GAMA’s Bunce- who added- “We will continue to work with governments around the world to recognize that general aviation can play a key role in propelling the economic recovery.”

In six years- well over 5-000 new business jets entered service- growing from record high to record high until finally breaking the big bar of 1-000 deliveries per year – for two straight years- 2007 and 2008. The declines of the first quarter weren’t the first drop in the past 12 months – and there will be further declines- observers and insiders report.

Words trickling out in early May revealed some indicators improving within the business aircraft market – not a lot and not very quickly- but a bit. Insiders at three business jet makers seemed encouraged by some of what they’d heard from customers.

These executives at Cessna and Gulfstream in the U.S. and Embraer in Brazil are generally encouraged by recent input from customers and would-be customers. Some are renewing inquiries about placing orders after suspending talks late in 2008 and early in 2009.

With both trade-in inventory to move and some white tails in the production firing orders- business jet marketers are hearing a bit more from prospects interested in dealing on available delivery positions and a bit less from order holders scrambling to extricate themselves from deals.

“It’s by no means a tsunami – more like a small wave – but it’s a change we’re happy to be seeing-” said a marketing manager at one prime OEM who spoke on condition of anonymity. “The good news would be to see no further need to cut production and the jobs that go with it- but we’re going to be a long time getting back to the land-rush business of a couple of years back.”

In fact- some analysts predict that production will fall again- but less so in 2010- before backlogs again support production growth in late 2010 for 2011.

Meanwhile- one element in the cautious optimism among some planemakers seems to hinge on the availability of good deals for buyers willing to take an aircraft after it’s been specked and finished. And those deals won’t stay available forever.

If all the bright spots in these observations and analyses come to pass- the business aircraft for sale market still faces a long slow climb back to the levels of the past two years. Thankfully- it seems that resolution is coming to one component of the pre-owned market machinery that contributed to the values depression: Finance.

In visits with several aircraft finance units- it appears that lenders are starting to get their arms around the state of the market and adjust accordingly to keep their businesses fluid.

Cessna Finance- for example- is in the midst of advancing efforts to lower its rates and improve terms – but loans for Cessna airplanes are its only target for now- according to discussions in April. Interest rates are holding in the 6- to 7-percent range- longer terms are returning for prime customers buying prime aircraft- and down-payment requirements are easing a little.

“We’re more comfortable now that prices in the used business jets for sale market are stabilizing - or maybe it’s better said that we’re more comfortable that they’re not dropping further-” said a vice president of a national aircraft finance firm that loans on everything from high-end piston singles to large-cabin jets.

“Two- three months ago- we were uncomfortable with the prospect for continued decline in prices and- thus- values. But used jet values seem to have stabilized much as have some segments of the real estate market – and look to be holding – so we’re starting to get busy again.”

Even with buyers tiptoeing back to the market for new and pre-owned aircraft- the business aircraft business people note that a return to boom-times can’t begin until the overall economy begins to recover. And economic recovery remains the undiscovered country of this recession.

Until companies start to add workers- until consumers return to spending on more than absolute necessities- until the problems of health-care reform and energy transformation happen and deliver on the promise of creating new jobs- the underlying engine of the American economy is likely to stay at idle speed.

And we all know how long it takes to cover ground at that speed. Hopefully- though- as our analysts and insiders cautiously note- we’re at or near the bottom - with up being the next logical direction.

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