Bombardier Global Express XRS jet
If any proof were needed that higher asset quality aircraft are the ones actively trading, last month’s transactions should provide it, Tony Kioussis draws conclusions from an October 30, 2017 market analysis covering 92 fixed-wing aircraft models and 1,744 aircraft listed ‘For Sale’.
The Quality Rating for the used aircraft inventory analyzed posted the lowest (worst) figure of the past twelve calendar months, while average Ask Price reached another record low.
Unsurprisingly, the ETP Ratio for listed assets was negatively impacted, posting the worst 12-month figure across all four aircraft groups. But which models fared the best, and which fared the worst?
Firstly, let’s explain the Exposure to Ask Price Ratio (ETP Ratio) and its relevance. The ETP Ratio calculates an aircraft's maintenance exposure as it relates to the ask price. This is achieved by dividing an aircraft's Maintenance Exposure (the financial liability accrued with respect to future scheduled maintenance events) by the aircraft's Ask Price.
The ETP Ratio is a useful indicator of an aircraft’s marketability. ‘Days on Market’ analysis has shown that when the ETP Ratio is greater than 40%, a listed aircraft’s Days on Market increases (in many cases by more than 30%). So, for example, aircraft whose ETP Ratio exceeded 40% during Q3 2017 were listed ‘For Sale’ an average 31% longer than aircraft whose Ratio was below 40% (229 versus 300 Days on the Market respectively).
Accordingly, as the ETP Ratio decreases, the asset's value increases (in relation to the aircraft's price). At the end of October:
Most Improved Models
All but one (the Beech 1900C) of the ‘Most Improved Models’ shown in the table below experienced a Maintenance Exposure reduction/improvement. All but one (the Learjet 60 at -$138,844) posted an Ask Price increase.
Price increases included:
The Bombardier Global Express’ swing to the top of the ‘Most Improved’ list from one of last month’s ‘Most Deteriorated’ models demonstrates what can occur when transactions swing the inventory mix from lower-priced, lower-quality aircraft to higher quality assets. The average Maintenance Exposure decreased $794k commanding – at least in sellers’ minds – higher ask prices.
Proving their aircraft’s price is justified (compared to the lower values accepted by recent traders) will be each seller’s challenge.
This can be accomplished only if sellers have their aircraft’s comparative asset quality facts to hand.
The Beech 1900C’s appearance as the second ‘Most Improved’ aircraft, meanwhile, demonstrates what can happen when a sizeable portion of a model’s inventory transacts. While the aircraft mix that traded impacted the average Maintenance Exposure for the still-listed aircraft ‘For Sale’ increasing it by $64k, an average Ask Price increase in excess of $211k easily compensated for the asset quality decrease.
Again, achieving that desired price in any actual transaction will depend on each seller’s ability to prove their aircraft’s higher asset quality.
In the case of the Learjet 60, whose average Ask Price decreased by nearly $139k, the $289k improvement in Maintenance Exposure is impressive, especially since the inventory fleet decreased by only seven percent (three units).
Most Deteriorated Models
Five of the six aircraft in the ‘Most Deteriorated’ category experienced a Maintenance Exposure increase. The one exception, the Hawker 800A, benefited from a Maintenance Exposure improvement (decrease) in excess of $24k.
Three of the aircraft were negatively impacted by an Ask Price decrease, including:
Two models (Falcon 20-5 and Learjet 31) saw no change in Ask Price, while the Learjet 35A experienced the only Ask Price increase (+$14,111).
With 84 aircraft listed ‘For Sale’, and none trading over the past month, the Ask Price decrease for the Cessna Citation II is hardly surprising. However, the Citation II vaulted to the bottom of the list by virtue of an additional penalty, an increase of $116k in Maintenance Exposure.
In its ongoing swing from one list to the other, the sale of a single Dassault Falcon 20-5 aircraft in a fleet of only six inventory assets moved this model from the top of the ‘Most Improved’ list to the second worst position on the ‘Most Deteriorated’ list.
Although the model posted no change in Ask Price, a Maintenance Exposure increase of nearly $103k led to the change.
The Lear 31 saw no change in Ask Price, but one higher quality aircraft did trade, leading to an average Maintenance Exposure increase of nearly $77k, and that kept the asset in the same position on the ‘Most Deteriorated’ list.
A Word to the Wise Seller…
It is important to understand that the ETP Ratio has more to do with buyer and seller dynamics than it does with either the asset’s accrued maintenance or its price. For any aircraft, maintenance can accrue only so far before work must be completed.
But as an aircraft’s value decreases, there will come a point when the accrued maintenance figure equates to more than 40% of the aircraft’s Ask Price. When a prospective buyer adjusts their offer to address this accrued maintenance, the figure is all-too-often considered unacceptable to the seller and a deal is not reached.
It is not until an aircraft undergoes some major maintenance that a seller is sufficiently motivated to accept a lower figure, or a buyer is willing to pay a higher price and the aircraft transacts, ultimately.
The wise seller will carefully weigh the offer of a buyer against the loss in value of their aircraft ‘For Sale’ as the asset spends more days on the market awaiting a better offer and simultaneously accruing a higher maintenance figure.
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