Andrew Bradley served in the US Navy as aircrew for a P3 Orion squadron before joining a leading... Read More
Is The Global Back?
Investigating ‘irrational’ behavior of the pre-owned ultra-long-range market
In the world of finance- the term “irrational markets” is meant to describe conditions where asset prices do not match the underlying fundamentals.
In other instances it is used to refer price discrepancies between two very similar assets. Conventional wisdom states that eventually speculators- investors and buyers will discover this apparent discount and bid up the price of the “undervalued” asset until both assets are in sync. But what does this have to do with the general Business Aviation markets? As a matter of fact- plenty!
Since the 2008 market meltdown- the two leaders in the ultra-long-range large cabin business jet arena- Bombardier and Gulfstream- have taken two very divergent paths. This divergence started to appear in the summer of 2009 when the Gulfstream markets began their long path back to recovery. The market leaders within the Gulfstream fleet were the GV- G450 and G550.
For the purposes of this discussion- we will focus on the modern large cabins such as the GV- G450 and G550 and contrast them with equivalent offerings from Bombardier -the Global Express- Global 5000 and Global XRS.
Comparing December 2008- at the cusp of the financial meltdown- to the end of last year- the number of transactions and sale prices show a huge disconnect between the Gulfstream aircraft (GV/G450/G550) and Bombardier aircraft (Global Express/Global 5000/Global XRS). As an example- prior to 2008 the competing Global XRS and G550 respectively tracked each other fairly close with regard to pricing and number of sales.
Following 2008 to the present- this relationship broke down as evidenced by over 34 sales of the G550 (factoring in pre-owned sales and resale of new positions) compared with just 13 sales of Global XRS aircraft.
In total the numbers look somewhat staggering- with 90+ sales of Gulfstream large cabin aircraft versus 30+ sales of equivalent Bombardier large cabin aircraft. In essence Gulfstream out-sold Bombardier products by three-to-one during this time period. The question on everyone’s mind for the past 24 months: Why?
While 2009 was a tumultuous year with a substantial decline in sales suffered across the board- 2010 saw the stabilization of most of the large-cabin markets- and in the case of Gulfstream a strong return back to stability and the road to recovery.
GLOBAL EXPRESS VERSUS GV - THE SPECIFICS
We can dismiss 2009 as an anomaly from which no amount of statistical analysis can yield any recognizable historical trends. The year 2010 should (on the face of it) have regressed back to the norm with regards to pricing and sales of each respective OEM’s large-cabin offerings. Looking at the numbers between the GV/G450/G550 in comparison with the Global Express/Global 5000/Global XRS- however- this was clearly not the case.
Not until late last year- and extending into the first half of this year did Bombardier’s Global Express line of aircraft start to recover - and if the current sales pace is any indication- they are quickly making up for lost time.
This disconnect in these two markets can be most vividly seen in the straight Global Express market. The Global Express competes ‘pound-for-pound’ with Gulfstream’s GV. Both went into production within two years of each other- with similar payload and range- and both were at the time the cream of the crop in ultra-long-range large cabin aircraft.
While the GV experienced steady sales since the abyss of the 2008-2009 crisis- the Global Express saw very sporadic activity interspersed with long periods of inactivity. During the first half of 2010 very few Global Express aircraft traded. A dry spell of almost six months passed without a trade followed by another three month dry spell of no sales.
Heading into December of last year the Global Express market appeared destined to close the year out on a whimper with only four sales for the year. However December brought a huge swell in Global Express market activity with numerous aircraft placed under contract- and several year-end deals closing. A further four Global Express aircraft had closed and nine more were currently under contract as of this writing. Should all nine close- the sales gap between the two models will significantly narrow.
So what was holding things up for the Global Express? That market was overpriced by at least USD$2-3 million when compared to the GV for much of the past two years. Once GV supply dried up and Global Express sellers got more aggressive on pricing- activity in the Global Express market skyrocketed at year’s end.
GENERAL YEAR-END STRENGTH
Similar trends appeared in December of last year with regards to the Global 5000 and Global XRS markets. Prior to December of last year- no pre-owned Global XRS aircraft had traded in 2010 with sales confined to a few delivery positions being resold. In fact buyer demand was so weak that our analogy at the start of this article about “irrational” markets proved very true in the pre-owned XRS market.
Heading into December 2010 the XRS market looked very weak. A 2007 Global XRS with 1-500 hours and no engine program could be purchased for around USD$37 million- while a comparable 2007 Gulfstream G550—would take at least USD$41.0 million to acquire. This type of discount between two 2007 models from each OEM had persisted for most of 2010 and was indicative of the difference in demand for the two products.
Ironically in the new delivery position market- the G550 and Global XRS mirrored each other in terms of pricing at about USD$46.0 million to USD$47.0 million respectively.
Since December- the Global XRS pre-owned market has made a similar 180 degree turn with two aircraft trading at the onset of this year- and a further four aircraft under contract. The Global XRS market now mirrors the tight supply of late 2007-(early) 2008- with only four pre-owned aircraft for sale and one delivery position.
The Global 5000 market currently has more aircraft under contract than at any other point during the past two and half years. Clearly Bombardier is back in the game and fast closing the gap on Gulfstream again.
During the last major business jet downturn- following the 9/11 attacks- the large-cabin markets mostly recovered in sync- as we would expect them to. However the current crisis has proved difficult to understand in the context of the large disparities between Gulfstreams and Globals. As much as I’d like to point to a clear factor- there simply isn’t one. Many theories have sprung up and all bear some validity but none indubitably explain the big picture.
First and foremost in any down-market the focus becomes pricing: after the 2008/early 2009 financial shocks- owners of large-cabin Bombardier aircraft appeared to stand like deer caught in the headlights. Throughout most of 2009- sellers of Bombardier aircraft (especially Global XRS aircraft) could not- or would not accept how quickly prices had eroded.
We had a client unaffected by the financial turmoil looking for an XRS or a G550. We presented offers on multiple Global XRS aircraft based on what few G550 trades were taking place- and each time the counters we received were behind the marketplace by anywhere from one to two months. Global sellers were simply behind the curve on pricing in 2009 and 2010.
A second factor may have had more to do with the geographic location where most Bombardier large-cabin aircraft are based. Historically Global aircraft have been slanted towards Europe- Russia and the Middle East- while up until recently Gulfstreams have sold well everywhere- but with a heavy bias stateside.
The characteristics of the global financial crisis and their impact here in the US and in Europe in particular were felt very differently. In the US- the crisis hit with an immediate urgency unparalleled in our history (or anywhere else on the globe for that matter). The drop-off in the US economy- and the ensuing pain that took place was sharp and quick. The reaction represented the one time in our nation’s history that everyone—private or government sector—acted with speed and clarity.
Europe on the other hand was hit by the crisis at least two months later- and authorities there were slow to react to the crisis. Thus the pain may not have initially been as great- but it was more prolonged. Sellers of Global (and to a lesser extent Gulfstream) aircraft on the other side of the pond simply weren’t in the same urgent mindset to sell their aircraft.
While most can agree that the US is on the road to recovery in the short term- Europe and to a lesser extent Russia are still looking for a balance between stabilization and recovery with places like Greece- Ireland- Italy- Portugal and Spain proving troublesome.
GLOBAL SUPPLY AND DEMAND
Two additional factors that have come into play also concern geographic location - but in this instance it is not the supply- but the demand side. Demand for Gulfstreams in 2009 and the early part of 2010 saw a heavy bias from US-based buyers searching for good deals on GVs- G450s and G550s. This was less the case with regards to sales of Global Express- Global 5000s and Global XRSs.
The other factor surfacing in early 2010 and taking hold in the second half of the year was a spike in demand out of Asia for large cabin aircraft. This took a very precise and defined path with Asian buyers focusing on large cabin aircraft- late model-2009 or newer- and heavily tilted toward offerings from Gulfstream. There was practically no interest in the GV - due to its age - despite the performance offered at an attractive price.
Asian - especially Chinese - buyers wanted new or near-new G450s and G550s. At the onset of this wave of buyers- Bombardier’s Global 5000 and XRS aircraft were rarely mentioned- but this began to change in late 2010/early 2011 for several reasons including the scarcity of late model G450 and G550 aircraft for sale.
Another factor brought to light by one wealthy Hong Kong industrialist currently searching the market: “Everyone—all my friends—have a Gulfstream…I want something different.”
The confluence of all these events- more aggressive pricing- stabilization in economic regions outside the US and better understanding in Asia of what the Bombardier Global line offers prospective buyers has reinvigorated the Global fleet of aircraft in recent months. I firmly believe that the price discrepancies will narrow further- and sales numbers for each of the OEMs will converge back to the average.
Recent news that Dassault’s Falcon 7X gained recognition as the winner of the Business Aviation category at the 2011 Asian Aerospace Expo reveals another potential candidate in the large cabin segment- though at present Asian buyers are still mainly inquiring about Gulfstream and Bombardier products.
Competition and choice of aircraft is always good for both owner and manufacturer- and I have no doubt that the Globals are back on the path to recovery.