We appear to have ‘a tale of two markets’, notes Tony Kioussis. One favors young, low-time aircraft, while the other is negatively impacting older, high-time models. Which business jets and turboprops were the movers and shakers in August’s used aircraft marketplace?
Data collected during Asset Insight’s August 30, 2018 market analysis covered 93 fixed-wing aircraft models and 1,592 units listed ‘For Sale’ and revealed a 0.7% increase in the average Ask Price during the month. By group:
- Large jet values decreased an additional 1.7%, having lost 7% in July;
- Medium jet values dipped 3% (post a new record-low) after gaining 1.8% during July;
- Small jet values gained 4.8% (versus July’s 0.5% loss in value);
- Turboprops fell another 0.5% (following July’s 1.8% decrease).
The total number of used aircraft listed ‘For Sale’ for Asset Insight’s tracked fleet decreased by 0.9% (14 units). The Medium jet inventory decreased 5.5% (29 units), while Large Jets and Turboprops increased 3% (10 units) and 1.8% (5 units), respectively. Small jet inventory remained unchanged.
Meanwhile, average Maintenance Exposure (an aircraft’s accumulated/embedded maintenance expense) deteriorated 2.3%. By group:
- Large jets improved 4.6% (first improvement in four months);
- Medium jets deteriorated with an 8.5% increase to the group’s Exposure figure;
- Small jets deteriorated with a 7.1% increase to the group’s Exposure figure;
- Turboprops deteriorated with a 1.8% increase to the group’s Exposure figure.
All this led to a Maintenance Exposure to Price (ETP) Ratio increase [deterioration] of 7.3% during August, and a record high figure for our tracked fleet at 72.3%. As one might expect, buyers yet again sought to acquire younger, low-time aircraft leading to 66.8% of our tracked ‘For Sale’ fleet sporting an ETP Ratio in excess of 40%.
The current environment appears to be separating aircraft into three categories:
- Assets under 12 years of age that transact quickly and at good prices (from a seller’s perspective).
- Aircraft aged 15 years or more, whose future at any ‘reasonable’ pricing level is unlikely (from a seller’s perspective).
- Assets that are between ten and fifteen years old, whose ability to transact at a reasonable price depends heavily on the seller’s ability to demonstrate ‘good value’.
That third category is one reason the ETP Ratio can be a useful tool in distinguishing between ‘good value’ and ‘low price’ assets.
ETP Ratios Explained
For those not familiar with the ETP Ratio, this 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.
‘Days on Market’ analysis has shown that when the ETP Ratio is greater than 40%, a listed aircraft’s Days on Market increase (in many cases by more than 30%). So, for example, aircraft whose ETP Ratio exceeded 40% during Q2 2018 were listed ‘For Sale’ an average 72% longer than aircraft whose Ratio was below 40% (169 days versus 291 days on the market, respectively).
Accordingly, as the ETP Ratio decreases, the asset's value increases (in relation to the aircraft's price).
- Turboprops yet again posted the lowest (best) ETP Ratio, though it was the group’s second consecutive 12-month high (worst) figure at 53.2%;
- Large jets followed with a slight 0.4% improvement over last month’s 62.1%;
- Medium jets came in at 80%, representing a record-high for the group and a substantial degradation from last month’s 70.2%;
- Small jets worsened by posting a 12-month high 84% compared to July’s 76.5%.
Excluding models whose ETP Ratio has remained over 200% during the previous two months (considered outliers), following is a breakdown of which individual models fared the best, and which fared the worst in August 2018…
Most Improved Models
All of the ‘Most Improved Models’ shown in Table A experienced a Maintenance Exposure reduction (improvement). The Bombardier Challenger 601-3A experienced an Ask Price reduction of $26,433, while the remaining models posted price increases, including:
- Piaggio P-180 +$29,375
- Bombardier Global Express +$650,000
- Cessna Citation XLS +$281,429
- Beechcraft King Air 300 +$55,556
- Cessna Citation CJ2 +$7,946
Two aircraft transacted, both after we closed out July’s analysis, one via a lease. Neither aircraft was known to be on the market, and the inventory fleet stood at 11 assets as we closed out August.
The model’s spot on the Most Improved list was due to the lowest-priced aircraft trading. The two inventory departures also proved useful in lowering the average Maintenance Exposure, thus helping the P-180 attain top spot in August’s Most Improved list.
Bombardier Challenger 601-3A
No transactions were recorded and there were 23 Challenger 601-3A jets listed ‘For Sale’ when we closed our August market analysis. Maintenance Exposure decreased based on completed maintenance, while the model’s pricing dropped due to one aircraft reducing its Ask Price. Meanwhile a second asset posted an Ask Price versus last month’s invitation to ‘Make Offer’.
The CL601-3A’s appearance on this list might be viewed as a positive by sellers. However, the aircraft’s 165.8% ETP Ratio, along with 17.7% of the fleet being listed ‘For Sale’ does not bode well for transaction values – unless you are a buyer.
Bombardier Global Express
The Global Express posted three sales and one lease during August. However, additions to the fleet left 15 aircraft listed ‘For Sale’ by the end of the month (that’s 10.4% of the active fleet).
The substantive change to the inventory mix favorably impacted Maintenance Exposure, but Ask Pricing is another story. There were only two published Ask Prices in August. One entity lowered its price in excess of 13%, while the second went from “Inquire” in July to an actual Ask Price in August.
The Global Express ‘technically’ earned its spot on this list, but the limited pricing data and the model’s 100.7% ETP Ratio offer little hope and limited insight for sellers.
Cessna Citation XLS
Two Citation XLS jets traded in July (after we closed out the month) and two more in August, while one aircraft joined the inventory. Those changes in the fleet mix positively affected Maintenance Exposure, while the Ask Price increase was primarily driven by the sale of the lowest-priced asset from inventory.
With only eight units listed ‘For Sale’ (just over 3.3% of the active fleet), sellers are in the driver’s seat here.
Beechcraft King Air 300
A King Air 300 turboprop transacted too late to capture in our July analytics, and another transacted in August. Two new assets joined the inventory, keeping availability at 16 units (8.7% of the active fleet).
Maintenance Exposure increased nearly $47k based on those changes, while Ask Price increased due to a higher priced asset moving from an Ask Price to ‘Inquire’, while a new addition to the fleet posted an even higher Ask Price figure.
Sellers should be able to capitalize on the limited availability, while buyers will need to run detailed analytics to identify good values.
Cessna Citation CJ2
The CJ2 was on this list in July and returned this month just one position lower. Three aircraft transacted in August and two joined the inventory fleet leaving 12 assets listed ‘For Sale’ (5% of the active fleet).
The model’s presence on this list was driven primarily by its Maintenance Exposure decrease, complements of the inventory changes. An Ask Price change due to inventory departures also helped, and the aircraft’s ETP Ratio is well below the 40% mark.
Sellers are in command of the deal here, especially if they know how to justify their aircraft’s value compared to its limited number of competitors.
Most Deteriorated Models
All six aircraft on the ‘Most Deteriorated’ list experienced a Maintenance Exposure increase in August. The Bombardier Learjet 55 posted an Ask Price increase of $2,692 while the remaining five models incurred the following Ask Price decreases:
- Bombardier Learjet 35A -$16,865
- Beechjet 400 -$22,333
- Gulfstream G200 -$452,500
- Cessna Citation X (MSG3) -$158,750
- Hawker 800A -$1,176
Bombardier Learjet 35A
One Learjet 35A transacted in August but two joined the inventory fleet, increasing total listings to 40 units. While the ‘For Sale’ figure represents only 7.3% of the active fleet, the model’s 235.6% ETP Ratio, and the number of competing aircraft, is unlikely to produce exciting offers for sellers.
The Lear 35A’s place on this ‘Most Deteriorated’ list was earned through a Maintenance Exposure increase in excess of $251k, while pricing also fell nearly $17k, due to one owner revising their relatively high Ask Price to ‘Inquire’.
Bombardier Learjet 55
The Learjet 55 appeared on this list in July and worsened further during August. Although it posted a nominal price increase of $2.7k due to two entities revising their Ask Price, the model’s $243k Maintenance Exposure increase was far too high to keep the Learjet 55 off the Most Deteriorated List.
Three aircraft transacted, and the available fleet totaled 20 units (7.7% of the active fleet) at the end of August, following the addition of one asset. Similar to the Lear 35A, we anticipate Learjet 55 buyers and sellers to have difficulty reaching pricing consensus due to the model’s 224.5% ETP Ratio.
The Beechjet 400 occupied the top spot on the Most Improved list last month, and its appearance on the latest Most Deteriorated list is almost accidental. No aircraft traded or joined the inventory fleet, but a Maintenance Exposure increase of nearly $42k was due to the normal maintenance progression. A $22k reduction in average Ask Price resulted from one entity revising its ‘Make Offer’ to an Ask Price figure in August.
However, the eight aircraft listed for sale equate to 14.8% of the active fleet, and with an ETP Ratio of 154.2% closing a deal may require a reality check for some sellers.
Statistically, the G200 earned its place on this list through a Maintenance Exposure increase approaching $371k and an average Ask Price drop nearing $453k. However, the market for this model was quite active in August, with six aircraft trading (one through a lease), one being withdrawn from inventory, and three new units joining the ‘For Sale’ fleet.
The 16 remaining inventory assets represent only 6.9% of the active fleet, and with an ETP Ratio of 66.5%, we expect many sellers will secure some decent transaction figures, especially if their aircraft’s engines are enrolled on an Hourly Cost Maintenance Program (a factor that would improve their Adjusted ETP Ratio, probably lowering it below the 40% ‘excessive’ rate).
Cessna Citation X (MSG3)
One Citation X transacted in August, and with only four such assets listed ‘For Sale’ as we closed out the month, prospective buyers may have to entice existing operators to sell their aircraft via enhanced pricing.
Nevertheless, the model gained access to the ‘Most Deteriorated’ list through a $616k Maintenance Exposure increase, along with an Ask Price decrease nearing $159k.
While an ETP Ratio of 59.3% is not stellar, we expect sellers that have their aircraft’s engines enrolled on an Hourly Cost Maintenance Program to experience greater marketability for their asset than the figures would seem to indicate.
This model experienced a minor Ask Price decrease in August, but a Maintenance Exposure increase nearing $117k – and that moved the ETP Ratio of the Hawker 800A up to 159%, earning it a place on this list.
There were 41 units (15.8% of the active fleet) listed ‘For Sale’ as we closed out the month, with one aircraft trading, one withdrawn from inventory, and two new assets joining the pool.
With that sustained, high-level of competitive selection, entities that have not enrolled their aircraft on an Hourly Cost Maintenance Program will likely find generating any offer, let alone a reasonable one, to be very challenging.
A Word on HMCPs…
The potential improvement to an aircraft’s marketability through Hourly Cost Maintenance Program enrollment, especially when the majority of that model’s fleet is enrolled on HCMP, cannot be overstated.
With all but two of the twelve models discussed above exceeding the 40% excessive ETP Ratio point, it is understandable why some aircraft brokers are now refusing to represent sellers whose aircraft engines are not enrolled on a Program.
Some might argue that HCMP enrollment at time of sale is expensive and time-consuming, and some brokers even recommend simply deducting the HCMP enrollment fee from the aircraft price. That often leads to an additional penalty, though, in terms of the buyer’s offer price, primarily to address both their potential exposure and inconvenience.
The Seller’s Challenge
As we’ve discussed numerous times, every aircraft has a price at which it will trade. The challenge for sellers is understanding how their asset compares to competitive models, enabling them to place offers received into market context.
Knowing the true current and near-term Residual Value and Asset Quality of any aircraft is the only way one can justify an Ask Price or know if an offer they receive is the best likely to be achieved in the existing market environment.
It’s 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.
A wise seller needs to consider the potential marketability impact early maintenance might have on their aircraft, as well as enrollment on an Hourly Cost Maintenance Program where more than half of their model’s in-service fleet is enrolled on HCMP.
Sellers also need to carefully weigh any offer from a prospective buyer against the loss in value of their aircraft ‘For Sale’ as the asset spends more days on the market awaiting a better offer while simultaneously accruing a higher maintenance figure.
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