Which used business jets and turboprops were the big movers and shakers in June? Asset Insight’s Tony Kioussis explores the ‘Most Improved’ and ‘Most Deteriorated’ models and analyses the market forces that put them on the respective lists…
Asset Quality of the ‘For Sale’ fleet experienced a 3.5% downturn in June, as higher quality, younger assets became increasingly scarce. At the same time, Ask Prices for Asset Insight’s tracked inventory fleet increased 7.8%.
Data collected during Asset Insight’s June 29, 2018 market analysis (covering 93 fixed-wing aircraft models and 1,599 units listed ‘For Sale’) revealed some dramatic Ask Price changes to the tracked fleet. Large jets increased 18.2% during June, Medium jets decreased -7.1% (new record low figure), Small jets increased 2%, while Turboprops increased a nominal 0.3%.
The total number of used aircraft listed ‘For Sale’ decreased by 58 units at the end of June. Large jets led with a 7.3% decrease; Small jets were next with a 3.9% decrease; Turboprops decreased 3.5%; and Medium jets decreased 0.9%.
As a result of higher quality assets transacting, average Maintenance Exposure (an aircraft’s accumulated/embedded maintenance expense) worsened 1.9% to $1.438m.
- Large jet Maintenance Exposure worsened 2.2% to post a second consecutive 12-month high (worst) figure;
- Medium jets posted a second consecutive 12-month low (best) figure, decreasing 1.2%;
- Small jets worsened 3.3;
- Turboprops jumped 6.5% to a 12-month high (worst) figure.
With so much statistical turmoil, the Maintenance Exposure to Price (ETP) Ratio was bound to be affected, increasing to 67% from May’s 64.8%, to post a 12-month high (worst) figure that was only 0.2% below the all-time worst figure. Additionally, 62.5% of the tracked ‘For Sale’ fleet posted an ETP Ratio in excess of 40%.
While the overall Ask Price increase will be favorably viewed by sellers, the market reality is that older, lower Asset Quality aircraft are simply not selling. Of course, every asset will sell at some price, but older aircraft sellers are all-too-often opting to keep flying what they own rather than incur the double impact of a low selling price and an increased transaction value for a newer, higher quality asset.
Since older aircraft are continuing to depreciate, the present differential between sale and purchase values is likely to widen for many owners. That is why, whether buying or selling, the ETP Ratio can be a useful tool to help distinguish between assets offering ‘good value’ versus a ‘low price’.
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 increase (in many cases by more than 30%).
So aircraft whose ETP Ratio exceeded 40% during Q2 2018 were listed ‘For Sale’ an average 72% longer than aircraft whose Ratio was below 40%. Accordingly, as the ETP Ratio decreases, the asset's value increases (in relation to the aircraft's price). By aircraft group:
- Turboprops continued to post the lowest (best) ETP Ratio at 52.4%;
- Large jets followed at 59.8%, an improvement over May’s 62.6%;
- Medium jets posted a record high (worst) figure at 72.1%; and,
- Small jets worsened to 74.5% from 72.8%.
Excluding models who’s ETP Ratio has remained over 200% during the previous two months, following is a breakdown of which individual models fared the best, and which fared the worst in June 2018.
Most Improved Models
Four of the six ‘Most Improved Models’ shown in Table A experienced a Maintenance Exposure reduction (improvement). The Hawker 1000A, Learjet 35A, and Hawker Beechjet 400 all registered price decreases (-$50,000, -$8,038 and $40,667, respectively) while the remaining three models posted the following price increases:
- Citation Excel 560XL +1,136,923
- Falcon 900 +$800,000
- Citation VI +$162,500
Cessna Citation Excel 560XL: Three aircraft transacted during June, but twice as many joined the Citation Excel inventory fleet that has now grown to 32 units. Higher quality assets joining the fleet helped reduce Maintenance Exposure by $569k, while some of the fleet additions pushed the average price up, substantially.
Whether or not the desired prices are achievable remains to be seen, but the combined effect of these actions placed this model atop the ‘Most Improved’ list for June.
Hawker 1000A: A transaction closed in May after we completed our market analysis, and no transactions were registered in June. Of the four remaining inventory assets, however, one owner elected to reduce their aircraft’s price. That along with a $438k Maintenance Exposure decrease secured second position for this model on June’s ‘Most Improved’ list.
Regrettably, with an ETP Ratio of 69% sellers are still likely to have trouble swallowing the offer prices they receive.
Dassault Falcon 900: The Falcon 900 did not post any sales in June, and there are only two units listed ‘For Sale’. With a substantive increase in one listed aircraft’s Ask Price, the model made the list even with a nominal $31k increase in Maintenance Exposure.
As with some other models, the jury will be deliberating for a while before dispensing a verdict on whether the Ask Price is achievable, but an optimistic pricing environment is something sellers have been seeking for some time.
Cessna Citation VI: This model may have made the ‘Most Improved’ list, but its 97.3% ETP Ratio leaves much to be desired. One asset transacted last month but another joined the inventory. With eight available aircraft, buyers probably have an edge over sellers.
At least one seller may be sensing this leading to an Ask Price reduction, while another seller posted a price in June versus ‘Make Offer’ in May. Inventory changes also created a $60k Maintenance Exposure increase that, while relatively minor, does not help the model’s marketability.
Bombardier Learjet 35A: Keeping in mind that the Learjet 35A’s ETP Ratio ended June at a staggering 189.6%, one has to wonder how it made this list... The answer lies in a $77k Maintenance Exposure decrease.
Having said that, with Ask Price decreasing, and with 38 units available ‘For Sale’, the successful seller will understand how their asset compares to the inventory fleet and price their aircraft correctly, seizing on an offer that’s in line with market reality.
Hawker Beechjet 400: In May, this model occupied a spot on the Most Deteriorated list. There were no transactions in June, while three more aircraft joined the inventory. As with the Citation VI, buyers likely have an edge over sellers with eight available aircraft.
The model did experience a Maintenance Exposure decrease in excess of $89k, but a 10.2% Ask Price decrease still leaves a very challenging 148.8% ETP Ratio. Differentiating their aircraft from the fleet and accepting their aircraft’s ‘age reality’ will determine success or failure for Beechjet 400 sellers.
Most Deteriorated Models
All aircraft in the ‘Most Deteriorated’ category experienced a Maintenance Exposure increase in June. The Piaggio P180 and the Citation V Ultra posted Ask Price increases ($41,653 and $16,119, respectively), while the remaining four models incurred Ask Price decreases:
- Learjet 31 -$100,000
- Learjet 60 -$278,333
- Global Express -$450,000
- Hawker Beechjet 400A -$40,571
Bombardier Learjet 31: If you consider that the six assets listed ‘For Sale’ (one more than in May) represent 17.6% of a well-aged fleet, it should not come as a surprise that the Lear 31 is heading up the ‘Most Deteriorated’ group.
The model held a spot on the ‘Most Improved’ list in May and the $16k Maintenance Exposure posted in June was relatively minor. However, a substantive Ask Price reduction for even a single unit (as was the case here) can make a significant difference when prices are this low.
Piaggio P-180: There were no recorded trades during June, while two assets entered the inventory (now totaling 14 units). The model’s Maintenance Exposure increased nearly $301k, while Ask Price increased nearly $42k due, in part, to the repricing of an existing asset.
With an ETP Ratio of 110.9%, it is questionable whether the current market ‘pricing tide’ can help this model. Sellers need to consider offers carefully, as buyers are likely to be few and offer prices that fall short of expectations.
Bombardier Learjet 60: Four aircraft transacted in June, but with 39 assets still listed ‘For Sale’, you would think the drop in Ask Price reflects seller desire to create demand. That is not the case… it was primarily fueled by one higher-priced asset now listed as ‘Make Offer’, a second higher-priced asset transacting, and one new, lower-priced aircraft entering the inventory.
Considering the 15% Ask Price decrease and the additional, albeit nominal, $9k Maintenance Exposure increase, the ETP Ratio increase to 110.8% will likely challenge sellers, which should surprise no one.
Bombardier Global Express: Four aircraft transacted in June, none of them were listed ‘For Sale’. Three retail sales occurred following termination of leases, while the fourth aircraft was placed on a lease. Two assets entered the inventory pool increasing it to 13 units. All this jockeying increased the model’s Maintenance Exposure by over $579k.
While this model ‘technically’ posted an Ask Price decrease of $450k, it was due to the one and only priced asset posting a $450k price reduction. Accordingly, the Global Express’ ETP Ratio, and its spot on this list, may not accurately represent this model’s marketability.
Cessna Citation V Ultra: Two aircraft transactions were posted after we completed our May survey. Four aircraft transacted in June, and one unit entered inventory, resulting in 35 aircraft being listed ‘For Sale’. The model’s $174k Maintenance Exposure increase was the primary reason the Ultra landed on this list, while the $16k Ask Price increase was the result of many factors, not the least of which was repricing of certain listed units.
There appears to be much activity surrounding this model, so the ETP Ratio’s increase to 76.5% may be a temporary challenge.
Hawker Beechjet 400A: While the Hawker Beechjet 400 occupied the final slot on the Most Improved list, the Beechjet 400A secured the final slot on the Most Deteriorated list by virtue of a Maintenance Exposure increase exceeding $84k and an Ask Price decrease approaching $41k.
Between the time we closed our May market survey and the end of June, this model experienced three sales, one lease, one aircraft withdrawn from the ‘For Sale’ fleet, while five assets joined an inventory totaling 54 units (16.9% of the operating fleet).
Finding a buyer willing to make a reasonable offer for this model will require each seller to differentiate and justify the value of their asset. Those whose aircraft exceed the model’s 62.7% average ETP Ratio are likely to receive offers that are particularly difficult to accept.
The inventory of young, low time assets has decreased to the point where some buyers have resorted to pursuing aircraft not listed ‘For Sale’, and such transactions have a tendency to increase values. This is particularly true with respect to the Large jet category at present.
Sellers of older aircraft are seeking to ride the price wave, but that is likely to be challenging. Clearly some moderately old aircraft will secure higher values due to lack of newer/younger model availability, but most older assets will not, and some are presently with their final owner.
While every aircraft has a price at which it will trade, many sellers need to better understand how their aircraft compares to competitive models if they hope to place offers into market context. If they do not, their lack of understanding will lead to more Days on Market along with additional pricing penalties for ongoing maintenance, insurance and other fees.
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 received 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.
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