“Don’t play games that you don’t understand, even if you see lots of other people making money from them. ”
Preowned: February-March 2007
Like a train pulling out of the station, preowned-aircraft sales chugged at the start of 2006 but gathered speed as the year unfolded. By the fourth quarter, it was full steam ahead and now the sales surge looks poised to roll well down the tracks of the new year.
Factors favoring continued vigorous activity in both new and used markets remain largely in place. Inflation fears, while omnipresent, seem in check at the moment. And interest rates, which ratcheted up in quarter-point notches for quite some time, have stabilized; based on historical measures, they remain attractive. Another potential market killjoy, oil prices, on the last trading day of the year were reported to be only one cent above where they began 2006-hardly a reason for immediate concern. While a tilt in the wrong direction can seemingly happen in a heartbeat and derail or at least alter the course of the market, it would be surprising to see this occur before summer.
Consider, too, that manufacturer backlogs are extending delivery dates in some cases to 2009. That has caused some to jack up prices of delivery positions to previously unheard-of levels. For some reason, a $300,000 to $400,000 premium on a Cessna Citation CJ3 position seems palatable, but a nearly $7 million premium on a Gulfstream G550 seems gluttonous-though, in percentage terms, it's not quite as different as it appears.
If a $7 million premium surprises you, you aren't alone, at any rate. Recently, a G550 operator contacted me for market data to help him bolster his case for a new aircraft (not another G550). He wanted to show management that aircraft values don't always go down and asked what his G550 is worth.
Plenty, as it turns out. "Only one '07 delivery position is available and it's priced just under $52 million," I told him. "Meanwhile, one nearly 350-hour G550 is available and it's being offered at $52 million." Considering a new order today would be priced somewhere in the mid-forties, depending on how it's equipped, current sellers are seeking a $5 million-plus premium, though they may settle for something less.
What's amusing-but of little relevance to a sale-is the oft asked question by the prospective delivery- position buyer, "How much of a premium will the owner make?" The logical answer (though some might use a less conciliatory adjective) is, "As much as he can." Interestingly, a buyer will typically not ask a manufacturer what its profit delta is, much less begrudge its deserved return; yet pit an individual against another and the dynamics change-it gets personal and a game of brinksmanship begins.
The bottom line is that positions will continue to trade and many, though not all, will continue to command healthy premiums. As a byproduct, used aircraft that are less than 10 years old will remain the beneficiaries of never-before-seen backlogs and what looks to be a building momentum and greater acceptance of business aviation.