The collapse of the housing market in 2006 was the point of origin for the current recession which started in 2007 and progressively worsened into 2008. Some of the cause can be attributed to reckless lending which led to an unrealistic rise in asset prices. There is rhetoric the crisis was over by mid 2009. Yet 3+ years later, we are still faced with high unemployment, low consumer confidence, a dormant housing market flush with inventory and declining values, escalating federal debt, unstable financial markets, an indebted US economy, et al.
Effect on Business Jets
There are a number of factors that affect aircraft values and market price, some of which are beyond our industry and control, such as economic fundamentals and the financial markets. For example, as we discussed at an industry conference in 2009, there seems to be a direct corollary between the movement of the DJIA and pre-owned business jet selling prices, as was the case from 2000 into Q1 of 2009. However, that changed by 2011 when the Dow nearly doubled from 6600 to over 12,000, yet business jet prices continued to decline.
Factors specific to the business jet markets that have an effect on value are percentage of the fleet on the market, days on market, number of transactions, and selling price. Usually when inventories decline, markets tend to stabilize. In our market, 5% of the available fleet is considered normal, as was the case in 2008. However, by 2009 the number had tripled and in some cases quadrupled, as shown in the random sampling of current generation business jets below. Year-to-date  the percentage of the fleet on the market is below that in 2009 and running slightly under 2010, which could be a result of the number of aircraft withdrawn from the market this year, which is 208 for this random sampling alone.
Although ‘percentage of fleet’ serves as an indicator for market timing and to some extent market pricing, there are other criteria more specific to value. Usually as time on the market increases, selling prices soften, placing downward pressure on market values. The average days on the market has increased by more than 55% from 2009 to 2011.
Days on the market can, to some extent, influence selling price and market value. However, the number of transactions has an equally important role and impact. Typically, increased transactions will absorb excess inventory, driving stability in pricing. The number of transactions YTD-2011 has increased over each of the last 3-years, and if sales activity continues on track, they could surpass totals from each of the last 3 years.
Another data point to consider is the number of transactions within a given timeframe. The summer months are typically the slowest time of the year for business jet sales. However, as we review 3rd Qtr transactions (2011) vs. first 6 months activity, we see a paradox and in some cases summer transactions comprise 50+% of the total YTD activity.
Applying age-based depreciation to aircraft, assuming a 30-year life cycle and calculating the impact of major airframe / engine inspections on value, current generation business jets are selling on average 22% under a normalized market.
What’s needed to normalize the business jet market?
- Low inventory
- Increased transactions
- Selling prices to align with market value
- Sound economic fundamentals
- Stability in the consumer and financial markets
- Availability of reasonable financing
What is actually happening? Some older aircraft are reaching economic obsolescence, where based on their age they cost more to maintain than they’re actually worth. With future air navigation regulations and criteria, many may be forced into retirement. The good news is the number of transactions over the summer months were up; year-over-year pre-owned transactions are on the rise; and the percentage of the fleet on the market is on the decline. On the flip-side, the financial markets continue to worsen by the day; economic fundamentals are in the tank; and selling prices of business jets continue to decline.
AircraftPost is an information service provider to owners of current generation business jets. The company tracks fleet statistics and transaction data and uses this intelligence, combined with economic factors and other data, to generate ‘real time’ and residual values specific to current generation business jets.