Asset Quality remained largely unchanged in May 2018, though the number of aircraft ‘For Sale’ increased 1.1% while overall Ask Prices decreased 4.6% (posting a record low figure). Which aircraft were the big movers and shakers? Asset Insight’s Tony Kioussis explores…
Data collected during Asset Insight’s May 31, 2018 market analysis (covering 92 fixed-wing aircraft models and 1,633 units listed ‘For Sale’) revealed that Ask Price changes for our tracked fleet were mixed. While Large and Medium jets lost 7% and 5.2%, respectively, Small jet Ask Prices increased 0.7%, while Turboprops moved up 3% in May.
The total number of used aircraft listed ‘For Sale’ increased 17 units in May. Large Jets led the way with a 4.6% increase (15 units), Small Jets were next with a 1.5% increase (seven units), Turboprops remained unchanged, while the number of Small Jets listed ‘For Sale’ decreased 0.9% (five units).
Asset Quality Rating figures were also mixed, with Large jets improving 0.72%, Medium jets improving 0.25%, Small jet quality decreasing 0.89% and Turboprops remaining virtually unchanged.
Average Maintenance Exposure (an aircraft’s accumulated/embedded maintenance expense) worsened 2.3% to $1.411m, the highest (worst) figure posted during the past three months. Large jet Maintenance Exposure posted a 12-month high figure while Medium jets posted a 12-month low (best). Small jets worsened by 1.2%, while Turboprops were marginally improved (0.4%).
All of these changes resulted in a slight Maintenance Exposure to Price (ETP) Ratio increase to 64.8%, while nearly two-thirds of the tracked models posted an ETP Ratio in excess of 40%.
The market has definitively been divided into two groups. Aircraft below ten years of age, whose availability is sparse and whose prices have firmed-up (if not increased), and the rest of the market where aging aircraft continue to see price decreases along with extended times required to consummate a sale.
For those not familiar with the ETP Ratio, let’s review its derivation and 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 increase (in many cases by more than 30%).
So, for example, aircraft whose ETP Ratio exceeded 40% during Q1 2018 were listed ‘For Sale’ an average 61% longer than aircraft whose Ratio was below 40% (189 days versus 303 days on the market, respectively).
Accordingly, as the ETP Ratio decreases, the asset's value increases (in relation to the aircraft's price). By aircraft group:
- Turboprops posted the lowest (best) ETP Ratio at 49.0%, an improvement over last month’s 52.2%, and the only bright spot;
- Large jets followed at 62.6%, a 12-month high (worst) figure compared to last month’s 58.0%;
- Medium jets also worsened to 67.0% from 65.3%; and,
- Small jets worsened to 72.8% from 72.5%.
Excluding models who’s ETP Ratio has remained over 200% during the previous two months (such aircraft are considered outliers), following is a breakdown of which individual models fared the best, and which fared the worst in May 2018…
Most Improved Models
All six ‘Most Improved Models’ shown in Table A experienced a Maintenance Exposure reduction (improvement). The Learjet 55, Citation ISP, and Challenger 601-3R all registered price decreases (-$25,721, -$8,128, and $132,917, respectively); pricing for the Learjet 31 remained unchanged, while the remaining two models posted the following price increases:
- GIV-SP (MSG3): +$201,667
- GIV-SP: +$157,995
Bombardier Learjet 55:The number of available Learjet 55s decreased by one during May, thanks to a lease transaction. The model earned first place on this list primarily because of the $134k decrease in Maintenance Exposure. However, with 22 aircraft still listed ‘For Sale’, it is unlikely that sellers will experience an improvement in transaction values.
Gulfstream GIV-SP (MSG3):Listings for this model increased by two in May. The additions to the fleet were of higher Asset Quality, which helped decrease the Maintenance Exposure figure and increase Ask Price. Whether or not the price increase, based on the age of this fleet, is attainable in the current market environment remains to be seen.
Bombardier Learjet 31: Of the six units that were listed ‘For Sale’ during May, an early production Learjet 31 was written off leading to a $50k drop in average Maintenance Exposure and earning this model a place on this list. The single aircraft’s departure from the fleet did not change the average Ask Price.
Cessna Citation ISP: This model held the top position within the ‘Most Improved’ list in April and managed to make the cut again in May. While this would appear to be good news, the model made the list more on technical grounds than true improvement.
Four retail sales transactions occurred in May, but six additional units entered the ‘For Sale’ pool. With 43 units to choose from, buyers are likely to hammer sellers with low offers. Recognizing this, some sellers have decreased their transaction value expectations, with Ask Price registering a drop of over $8k.
Some of the new units ‘For Sale’ are carrying a lower Maintenance Exposure, thereby improving the average by over $50k, but the sheer number of available inventory is unlikely to allow this fact to matter.
Gulfstream GIV-SP:While two aircraft transacted in May, the available inventory fleet stands at 20 units. That is likely to make the Ask Price increase posted in May unsustainable. However, between the $315k Ask Price increase and the $158k decrease in Maintenance Exposure, it is understandable how this model earned a spot on this list.
Bombardier Challenger 601-3R:One aircraft was sold in May, leaving seven listed ‘For Sale’. The single unit’s departure decreased Maintenance Exposure by $376k, helping place the Challenger 601-3R on this list.
However, one owner changed their pricing strategy from ‘Inquire’ to what is now the lowest listed Ask Price for this model. If this seller is successful, it might encourage others to follow suit, since values for these assets are unlikely to improve.
Most Deteriorated Models
All aircraft in the ‘Most Deteriorated’ category experienced a Maintenance Exposure increase in May. While the Hawker 1000A and the Citation X (MSG3) posted Ask Price increases ($15,833 and $321,500, respectively), the remaining four models incurred Ask Price decreases:
- GIV: -$390,278
- Challenger 601-1A: -$189,000
- Hawker Beechjet 400: -$32,667
- Citation V Ultra: -$39,341
Gulfstream GIV:Six aircraft entered the ‘For Sale’ fleet in May and, with only two aircraft trading, the inventory ended May at 19 units (hardly what sellers would like to see). Maintenance Exposure increased nearly $529k, and the average ask price decreased >$390k. It is not difficult to see why the GIV model earned top spot in the Most Deteriorated category.
Bombardier Challenger 601-1A: There were no recorded trades during May, but one aircraft was withdrawn from the ‘For Sale’ pool while a second was listed as ‘Make Offer’ (as opposed to the Ask Price posted in April). By virtue of these changes, the ten-inventory aircraft saw a $110k Maintenance Exposure increase that, along with the model’s average Ask Price drop, earned the model a place on this list.
Hawker Beechjet 400:No Beechjet 400 transactions were recorded during May, while the highest priced aircraft was withdrawn from inventory. Between a nearly $52k increase in Maintenance Exposure and the drop in price resulting from that single withdrawal, the five remaining units listed ‘For Sale’ managed to earn a position on the ‘Most Deteriorated’ list.
Hawker 1000A:Again, there were no transactions in May, but five units remain in this inventory after one was withdrawn from the ‘For Sale’ pool. Maintenance Exposure increased by nearly $267k as a result of the one aircraft change and, even though average Ask Price increased somewhat, it was insufficient to keep this model off the ‘Most Deteriorated’ list.
Cessna Citation X (MSG3): Two of these aircraft transacted in May. Following some additions to the ‘For Sale’ fleet, the inventory totaled seven at month’s end. Clearly, higher quality aircraft were the ones transacting, while lower quality aircraft entered inventory, which is the reason Maintenance Exposure increased by more than $494k.
While the change in inventory assets did increase the average Ask Price, the impact was insufficient to move the model into the >40% ETP Ratio figure Asset Insight considers to be ‘excessive’.
Cessna Citation V Ultra:One additional aircraft transaction was posted in April after we conducted our market analysis, while in May, one aircraft transacted and one was withdrawn from the ‘For Sale’ pool. There are presently 39 inventory aircraft, which cannot be good news to sellers.
During the past month, three sellers reduced their Ask Price, while one moved from ‘Make Offer’ to a posted Ask Price. All these changes have led to a $77k Maintenance Exposure increase, along with an Ask Price decrease.
With the model’s average ETP Ratio now resting at 63.6%, sellers able to demonstrate how their aircraft improves on these figures are the ones more likely to secure a deal.
Even though the number of aircraft listed ‘For Sale’ from our tracked pool increased in May, the overall inventory continues to shrink. As mentioned earlier, buyers are divided into two groups:
- Those interested in aircraft below ten years of age, whose availability is presently very limited and whose prices have increased in some cases; and
- Buyers willing to invest in older aircraft but often at prices unacceptable to sellers.
While every aircraft has a price at which it will trade, many sellers simply do not know how their aircraft compares to competitive models and are thus unable to place offers into market context.
For such sellers, the cost will continue to be more Days on Market along with an additional pricing penalty as maintenance comes due.
Knowing such facts is the only way one can justify an Ask Price and know if an offer received is the best likely to be achieved in the present 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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