- 06 Apr 2022
- Brian Foley
- Market Insight
With inventory short and prices rising, can the values seen in Q4 2021 hold up in the face of new challenges in 2022? Jason Zilberbrand assesses the latest trends from VREF...Back to Articles
Looking back on 2021, it was undoubtedly one of the best years we have ever seen for aircraft values and market demand. Moving into 2022, the world seems to be on a hair-trigger, with extreme politics, inflation hitting its highest mark in 30+ years, increasing interest rates, and a war in Ukraine.
The business aircraft market has, for the most part, ignored it all and continued its march towards new record highs.
It has been challenging, to say the least, as asking prices increase quicker than most can track. VREF has kept tabs, though, and while the frantic pace of transactions kept us on our toes through the end of January, the transactional volume has started to slow.
This is simply a by-product of high demand and a deficient availability of pre-owned aircraft. New aircraft positions are being sold at an equally furious pace, and we are reminded of the mid-2000s with the premiums being tagged on to ask prices. It is true you can buy a future delivery position for less than a one-year-old used business jet, but the amount of time it will take for delivery could be three years or more.
As we know, many things can change in that amount of time. It is much too early to predict the outcome of war in Ukraine, or the highest level of sanctions ever levied against a foreign country, or if it will have any impact on General Aviation.
Based on the relatively low number of corporate jets impacted by the sanctions, there is little to no effect on values or the strength of the US market. However, it is difficult to gauge this early the number of aircraft being grounded or sold to cover the mounting financial pressure as a result of the economic impact of the war on Europe.
The coming weeks will play a significant role in the balance sheet of several leasing companies with substantial exposure if hundreds if not thousands of prominent companies vacate the Russian market, and the effect of this might be felt for many years to come.
Have we Hit a Values Ceiling?
Whether or not aircraft values have hit a ceiling is not easy to forecast. Each aviation segment will be impacted differently by inflation, increasing fuel costs, tight supply chains, and a somewhat unpredictable future.
Commercial aviation, for example, will have higher costs that are passed on to passengers. Fuel surcharges have already sent many round-trip ticket prices through the roof. According to some reports, airline tickets have been soaring at a rate of 7% a month, and that was before the Ukraine war.
Business jet operators will be sensitive to fuel prices. According to AirNav, the national average cost for a gallon of Jet-A for February 17th through March 14th was $5.45 a gallon. According to IATA the current price for a gallon of Jet-A is up 82% from a year ago.
Combined with increased costs for maintenance, and interest rate adjustments, operating costs are rising. Some first-time buyers who have entered the marketplace may rethink whole-aircraft ownership in light of these increases.
The current market environment and long working days are reminiscent of the boom in the mid-2000s, or even the crazy bull market of the late 1990s. It is also a lot different.
This market feels more sustainable than the previous bull runs. The purchases seem to be more justified, or at least understood by the masses as a necessity to combat Covid lockdowns (if you can afford it).
‘Affording it’ appears to be more of an afterthought, as more millionaires are created each year, and the stock market and other investments, have provided enormous returns.
The number of millionaires created over the last five years is astounding. Almost one in nine people in the US (8.8% to be exact) are millionaires. There were over 18.6 million millionaires in 2019, and that number has more than doubled since 2000. Indeed, the top 1% of the US population controls an estimated 158 trillion dollars.
Both the piston and jet markets have enjoyed a run that shows little (if any) sign of letting up any time soon. But it’s worth noting that for the first time in over 18 months, the price increases on the complex piston and high-performance piston aircraft are starting to stabilize.
While the asking prices might be tied to the season and the deep freeze much of the country has been experiencing, only time will tell if inventory levels are starting to normalize. After all, most sellers will say the main reason for not listing their aircraft is that they can't replace it.
The scarcity of inventory in the jet market has created a frenzy, while the same shortage in the complex single-piston market has sent some buyers to the side-lines. While much of this "taking a breather" can be attributed to weather and the lack of pre-owned inventory, some of it can be attributed to pure buyer frustration.
When a buyer gets to the point that they throw in the towel, the market should take note. There is no reason to be alarmed just yet, but there is a limit to how high things can go.
For the most part, the complex single piston market has hit the ceiling or plateaued. Still, it isn't easy to maintain the appreciation that many of these aircraft were witnessing, and it will be interesting to see what happens in the coming months as the flying season starts.
Hot markets attract more sellers, and between the bottlenecks at maintenance facilities, a shortage of labor, a shortage of parts availability, and supply chain nightmares, the time it takes to prepare an aircraft for resale, complete a project, or purchase a plane and refurbish it are taking much longer.
Inventory levels on the GA side have been particular to the aircraft model, but levels are low across the board. On the business jet side, inventory is pretty much non-existent. That isn't to say aircraft are not for sale, but more and more transactions are occurring without the need to list the aircraft for sale at all.
Q4 2021 Market Trend Report
During Q4 2021, VREF subscribers generated 20,000 valuation reports every 30 days. This is up over 7% from the previous quarter.
Single Engine Piston Aircraft: The market supply is tight across the board. Many popular single-engine piston aircraft are below 1% fleet availability. A prime example is the Cessna P210N, which has three aircraft for sale on the open market, with 441 in operation. Aircraft are selling in under 100 days.
Chart A shows the P210N recovery in value since the great recession of 2008. The current peak is similar to the run-up we saw in the late 1990s.
The Beechcraft Bonanza A36, meanwhile, has also been a stellar performer in residual value, with approximately 0.8% fleet availability. As you can see in Chart B, the A36 has been a better long-term residual value model, showing an increase in value year-to-year well before Covid.
The Piper Lance PA32R-300 had 12 aircraft for sale on average, with less than 2.5% availability. As you can see in Chart C, the spike in values has been steady through 2020. Appreciation like this has not been seen since the Dot-Com boom of the late 1990s.
Business Jets: The market for pre-owned jets recorded similar trends to those seen in the piston market, with some aircraft skyrocketing in value over the past 12 months. Five prime examples were the Hawker 800XP, Gulfstream G200, Cessna Citation Mustang, Bombardier Global Express, and Dassault Falcon 2000.
Each aircraft experienced dramatic price increases:
Turboprops: The turboprop market has also benefited from the current circumstances, with many buyers looking for alternatives to Light Jets. The recent market surge has seen many potential new buyers in the single-engine turboprop market.
Helicopters: The rotorcraft market also rebounded, and many operators who were idle during the Covid lockdowns are not only back in business, but having a hard time meeting the needs of the consumer.
Timber operators, as well as several utility operators, have been snatching up equipment to meet demand – and values have gone up about 15% since Q3 2021 for most Turbine and Piston helicopters.
The darling Piston market is, once again, seeing increased values: in Q4 2021, the Robinson R44 had less than 3.5% availability for the first time in years. This trend should continue with buyers paying premiums for overhauled aircraft in excellent condition.
As we head into spring, and flying season resumes, we will keep a close eye on interest rates, as well as the price of fuel. As inflation continues to creep into all facets of our lives, maintenance and refurbishment costs are also likely to escalate. But can anything derail the current market?
So far, the answer is ‘no’, but only time will tell if buyers are willing and able to pay more today than yesterday. With more uncertainty now than at this time last year, combined with volatility in the stock market, will consumers be willing to spend? Time will tell...
More information from https://vref.com
Jason Zilberbrand is the President and Chief Technical Officer of VREF.
He is an Accredited Senior Aircraft Appraiser with the American Society of Appraisers (ASA), and an Accredited Member of the Appraisers National Association (ANA), and he is also an Accredited Member of the International Society of Appraisers (ISA).
Jason is also an expert witness, broker, inventorying dealer, acquisition agent, aircraft owner, aircraft operator, contract negotiator, consultant, teacher, conference speaker, and author.