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Used Business Jet Sales Summary - Q2 2016

Today's main trend: the result of slow jet sales, or more sellers?

Dave Higdon   |   3rd August 2016
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Dave Higdon Dave Higdon

Dave Higdon writes about aviation from his base in Wichita Kansas. During three decades in...
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With an increase in Small and Mid-Size Jets on the used jet sales market, Dave Higdon talks to the dealers and brokers to find out what could be driving the slow-down in sales during Q2 2016…

The West Coast broker sighed. “Oh, it's just you…I was hoping you'd be the prospect who's looked at our client’s airplane twice and hasn't yet made me an offer.”

“So, are things slowing down a little,” I enquired.

“Slowing down? We're somewhere above idle speed, but nowhere near the posted speed limit,” he summarized.

“The pre-owned business jet market went up a full point during May and shows no signs of hitting a plateau. It's getting a little uncomfortable. I'm still waiting on my monthly tracking subscriptions to report, but at the latest recorded pace we'll be at or above the historic average by Labor Day.”

The West Coast broker’s sentiments told a broader story of used jet dealers and brokers nationwide; a tale repeated again and again across the market.

The Inventory Growth Issue

A breakdown of the market shows gaps changing between the available fleet of Small, Medium and Large-Cabin Jets. The most notable growth in unsold, available aircraft (and increasing fleet ‘For Sale’) is among the Small and Mid-Size Jet segments. The Large-Cabin Jet segment is static after seeing its previous market advantage progressively slip away.

“If you've been waiting on a buyer's deal on a Light Jet,” said a broker from the Southwest, “your options continue to grow as the inventory of ‘For Sale’ pre-owned business jets continues to increase.”

UBS’ May Business Jet Update revealed a gain in the inventory of business jets for sale, up to about 11.4% of the fleet. That’s up a full percentage point in May, and while the figure still falls short of the historical 13% average, it's a figure populated by more relatively new jets. The so-called ‘very young inventory’ edged up by 3%, a fraction of the 21% jump in aircraft aged six to 10 years old. That six-to-10 year old segment grew steadily in recent months, posting nine increases in the most-recent 11 months. That segment is now at an ‘all-time high’ on an absolute basis.

Age aside, pre-owned inventories grew to 10% of the Small Jet fleet and 11% for Mid-Size Jets. For comparisons, those numbers were 8% and 9% at this point last year. Of the Large-Cabin Jet fleet ‘For Sale’, the percentage plateaued at 12%, a welcome bit of stability.

Of course, with a growing pool of available aircraft comes the old supply and demand effect...

Softening Market, Softening Prices

Organizations supplying market forecasts have been engaged in a recent trend of backtracking – or ‘scaling down’ some of their predictions. Bombardier, for example, recently dialed back its business jet sales expectations, while JETNET revised its decade-long outlook for quarterly business jet sales. The new outlook follows five prior quarterly downgrades owing to a “tremendously oversupplied” market.

That oversupply may well continue, since forecasts for new jet deliveries, while down, are still hovering above 650. And most of those new jets will go to operators who, in turn, need to shed an aircraft, and includes some of the fractional orders that help to buoy new aircraft sales.

According to JETNET, the pool of available aircraft already sits at around 3,800 business jets.

Buyers, meantime, continue to move slower than the trickle of pre-owned jets coming onto the market. Nonetheless, with new aircraft deliveries exceeding old aircraft retirements the global fleet continues to grow generally.

Here in the US, operators report flying fewer cycles but about the same average stage length, tracking a trend of somewhat less business travel in general by American corporations until the past couple of months. Business flying has edged up in Europe (where operators are showing more interest in upgrading), but is down in Asia and India.

The Background

The growth in business aircraft ‘For Sale’ contrasts with utilization averages that have seen a small upswing in recent months. Increased flying in May offset an unexpected drop in April; and June’s numbers looked to be up slightly, though some observers pegged them as flat compared to May.

With gains earlier in the year, a couple of down or flat months, and fuel prices once again dropping for summer flying, most observers expect business flying numbers for 2016 to measurably exceed the levels of 2015. And that ‘good news’ is expected across the spectrum.

Stock markets remain solid despite the shockwave emanating from the UK ‘Brexit’ vote to leave the EU.

Reflexive actions and automatic trading sent stocks tumbling by nearly 900 points on Wall Street's Dow Jones Industrial Index, with other markets similarly plunging, but by the start of Independence Day weekend that began on July 1, all those stricken indexes had recovered to their pre-Brexit levels.

In truth, no brokers or dealers expected any lasting, long-term impact to be felt anytime soon. “Transactions of aircraft across international lines remain an area of activity subject to currency fluctuations,” a Pacific Coast international broker conceded.

“The ‘dance’ last month seemed to favor the dollar, which may slow some buyers for the short term, but it could make things a little easier for those looking to import from overseas. The currency won't be the volatile element some people fear. We're still open trading partners with the UK and Europe, and will be for a long time to come.”

The Capital Question

Even aircraft finance options have evolved to improve access to qualified borrowers with good credit or excellent collateral. With the United States' Federal Reserve keeping interest rates low and with the number of aircraft available high, would-be borrowers enjoy the broadest access to affordable capital since before 2007, noted several lenders.

Lenders continue to impose strictures that greatly narrow their exposure, mostly by limiting new additions in their loan portfolios to younger aircraft  – that is, aircraft no older than 10 years since first delivery.

What has changed is the growing availability of capital for aircraft older than 20 – with more than ample resources available to borrow at a competitive rate for aircraft between 10-25 years of age. In fact, some of today's busiest lenders focus mostly on aircraft older than 10 years, using their own capital resources to underwrite the loans they make.

So if buyers enjoy a large variety of choice, show good financial ratings and have access to affordable loans for buying, what's holding back sales at this time?

A ‘Human-Factors’ Dilemma

“If you forced me to pick a word for this sluggish business it would have to be 'uncertainties' – that's what holds up a big share of our business opportunities right now,” explained the Pacific Coast international broker. “Don't get me wrong, the country's economy points in the right direction right now - even if it's not exactly robust, it's gaining. But look around. Other elements influencing business and people aren't exactly relaxed.”

Others made similar observations. Their main worry? The political climate. A presidential election year, global insecurity, continued turmoil in the Middle East, tensions over refugees in Europe, and people stoking similar fears in the US.

Those uncertainties act like a brake on spending for things like business aircraft, even when the company has funds to spend on launching new businesses or expanding an old one, a financial consultant explained.

“These are people comfortable with funding a new restaurant (as risky as those are) but hesitant to invest in a transportation tool that would make them and their businesses more productive and, in turn, more profitable.”

“The only thing holding strong right now is the stock market – and that's high enough now to prompt worries about a 'correction', or worse,” offered a Northeast dealer. “Plenty of people are using Business Aviation, and for all the least-attractive reasons – safety and security. They fly privately out of paranoia, not convenience or productivity.

“It's not logic. It is emotion,” the financial consultant continued. “And when you can afford to indulge your emotions – without hurting your bottom line – you indulge your emotions. Hopefully, after this interminably long [political] campaign, people will come back to thinking sensibly. So check back with me in December.”

Read more about: Buying Jets | Aircraft Sales Trends | Used Aircraft Sales Trends | Jet Sales

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