Business Aviation

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.