Timing a Used Jet Transaction
Timing isn’t Everything…
If you are considering the acquisition of a business aircraft and have some flexibility, when is a good time to buy? David Wyndham addresses this classic question as the used aircraft community emerges from its decade of decline.
While aircraft are not real estate or stocks, they are valuable assets and their pricing may be affected by significant changes in market dynamics. When the overall economy is strong and growing, can the general movement in asset prices put upward pressure on aircraft values?
Also, what impact does the introduction of a new model with performance superior to the current model have on prices? Let’s look at each scenario in turn. For examples of turbine aircraft, we reference the selling history of three popular business aircraft using data published in Vref, an industry standard. These include:
These reference aircraft remained popular in spite of two significant economic corrections, and each was superseded during that period by new models. So we are able to observe trends over a quarter century.
National Bureau of Economic Research Data
Officially, the last two US recessions were from March 2001 to November 2001 and of course from December 2007 through June 2009. The 2001 recession is termed the “Dot-Com bubble” while our most recent “Great Recession” although over in terms of the definition of a recession, still has lasting effects on our economy.
Charts B through D show the prices of the 1992 King Air B200, the 1993 Citation Jet and the 1992 Falcon 900B. Although in different market segments, each aircraft followed a similar trajectory. The strong economic growth of the late 1990s fueled price increases for the models by almost 20%. The 2001 recession started in Q1, and by Q2 2001 prices were falling, and continued to fall into late 2003.
As the US economy strengthened in the mid-2000s, business aircraft sales took off dramatically. According to the General Aviation Manufacturer’s Association (GAMA), deliveries of new aircraft through 2006 were the highest in total dollars ever recorded, driven mostly by the business jet segment (Chart A).
After falling during the latter half of 2001, used aircraft selling prices rose as the lead time for new aircraft deliveries grew to as long at 18-24 months for popular models prior to 2008. Rather than wait, buyers looked for good quality used aircraft, and many of them saw selling prices close to - or possibly above - what their target used aircraft sold for new.
The average selling price of a 1992 Falcon 900B (represented in Chart B), which sold new for $22.75m, rose from $15.2m in 2003 to $21.3m at the end of 2007. The used market for nearly all quality used aircraft models behaved similarly (as supported by Charts C and D, representing the value trends of the King Air B200 and Cessna CitationJet, respectively).
The Great Recession brought with it a significant decrease in demand for business aircraft, and used prices dropped. Part of the drop was attributed to normal aging - used physical assets like aircraft should decline in value as they age. But significantly greater declines continued in response to general economic conditions. Today these early 1990s aircraft sell for 20% to 30% of their original prices.
Is Another Recession Coming?
Trees do not grow to the stratosphere. Economists know that eventually there will be another correction, but predicting when such an event will happen or the character of the correction is difficult, if not impossible.
In 2015, some forecasters predicted a better than 50% chance of a US recession in 2017. So far that has not happened. But betting your bottom dollar that one is not coming in the next few years is risky.
For buyers of business aircraft, the issue should not be timing the next recession. Rather, the focus needs to be how to react now.
When there is another recession, it is likely that demand for new and used aircraft will decline. As part of that decline, it is also likely that prices for used aircraft will fall. However, timing the market is often referred to as a fool’s errand: If you try to time the bottom of a used aircraft’s selling price, you will need a lot of information and a modicum of good luck, two qualities that are often in short supply.
Business aircraft are productivity tools, not investment stocks or even real estate. My recommendation is to buy when you need efficient and effective transportation, deal with short-term market trends tactically and ignore the less predictable long-term trends.