Business Aviation is Positioned for Another Takeoff
During the first quarter 2008 with available pre-owned business jet inventory low, demand for new business aircraft reached unprecedented heights. Throughout that period, aircraft manufacturers delivered nearly 800 new planes.
Months later at the end of 2008, that dazzling picture was grim. Economic tides turned, the stock market tumbled and soaring business aircraft sales nose-dived as new orders dried up and numerous existing orders were cancelled.
By the first quarter 2009, new aircraft deliveries plummeted to less than 500 aircraft –over a 40% decline. At the same time, pre-owned aircraft inventory rose by nearly 60%. With the increased supply, prices dropped sharply. This dismal market persisted for the remainder of the year with little sign of recovery.
Was the sky really falling or was this a market correction? In 2008, a five-year old, pre-owned Gulfstream G550 was selling for nearly 14% more than its new cost, but by 2009 that same aircraft value tumbled 17% below its original price. By early 2010, however, that same jet’s value stabilized, and it is currently selling for about 77% of its original cost.
So, look at it this way. If you took delivery of an aircraft in 2003 and calculated that the residual value in seven years was going to be 77% of original cost, my guess is your CFO would be delighted. In the midst of a global economic crisis, that’s an amazingly good residual value. The fact is, if you can discount the superheated period where ultra-long-range jet values defied economic gravity and often exceeded the cost of similar, newly-delivered aircraft, the current values of some business aircraft are remarkably good.
That’s one reason why I think the market is repositioned for takeoff again. Models like the new G550, acquired by a Jet Advisors client in June 2009, is worth millions more today than its buying price a year ago. Other attractive aircraft with strong residual values are five-year-old Dassault Falcon 900EXs selling at 77% of original list price and 2005 Bombardier Challenger 300s selling at 74% of original list. Despite the global recession, it is comforting to see that these aircraft have only depreciated by about 5% per year — a figure one might reasonably expect even in a much stronger economic climate.
Other promising indicators are that the number of aircraft available for sale that are five-years old and younger dropped below the 10% mark, and transaction volume recovered to nearly 86% of 2008’s peak levels. With reduced pre-owned late-model inventory combined with lower new-aircraft production rates, my view is that prices will strengthen, even trend upward, as demand increases. Keep in mind, however, that not all models will do as well. Pricing pressure on older aircraft will most likely persist.
While aircraft manufacturers delivered approximately half the number of business jets this year versus the same 2008 period, according to Aviation Research Group (ARG/US), flying activity continues to rise. That’s another encouraging sign. When travelers begin using business jets again more, buyers are encouraged to enter the market and that helps to stabilize prices even more.
With late-model aircraft inventories low, flight hours increasing and transaction volume growing, it looks like there are clearer skies ahead for the business aircraft industry. My view is that companies are realizing they need to get back to business – to meet with customers and suppliers more frequently and explore new markets. For those that want to beat the competition to recovering markets, this may well be a perfect time to acquire a business aircraft of your own.