Down, down, down

A global pullback accelerates declines in preowned-aircraft values.

After several years of mixed signals and uncertainty, the preowned-aircraft market found its direction, if not its footing, in 2015.

“At the end of the day, we can make one statement: we are going down,” says Dennis Rousseau, president and founder of preowned-market data provider AircraftPost.com in Clifton Park, New York. “The rates of depreciation are extreme.” Andrew Bradley, president of global sales at Burbank, California-based brokerage Avjet, adds, “Price declines have accelerated drastically.”

Among the factors behind the drop in values are the slumping economies of Brazil, Russia, India and China and retrenchment of emerging markets, even as the U.S. market has staged a comeback.

Some see the plunge as a healthy acceptance of reality. “A year ago, people were still wishing and hoping” for a rebound in values, says Jay Mesinger, founder and president of Boulder, Colorado-based Mesinger Jet Sales. “Today it’s pretty clear where the market is and isn’t, and in my opinion, that makes for a more focused industry, [though] you might not like what you’re focusing on.”

On the positive side, demand has strengthened even as values have declined. “We should remember that 2014 generated the industry’s best-ever preowned volume [with 2,300 retail transactions],” says Rolland Vincent of aviation consultancy Rolland Vincent Associates in Plano, Texas. This year’s numbers are on track for a similar total.

Given the pullback in formerly hot international markets, where buyers are favoring new, top-of-the-line models, it’s not surprising that large-cabin and ultra-long-range business jets—market leaders at holding value in recent years—led the declines of the past 12 months. The 235 or so large-cabin, long-range business jets for sale worldwide represent an increase in inventory of about 20 percent year-over-year, according to JetNet.

But the scale of their drop in values caught experts off guard. “It would have seemed unfathomable to many in our industry this time last year that we are now on the precipice of seeing the first preowned G450 trade in the $12 million range or the first G550 trade below $20 million,” says Bradley.

Not all the value declines can be blamed on market softness. The impending introduction of new models such as Dassault Falcon’s 8X and 5X and Gulfstream’s G500 and G600 also put pricing pressure on current production aircraft. [See “In with the New…” in the Preowned column in our August/September 2015 issue. —Ed.]

Meanwhile, year-over-year inventory of other categories of business jets has fallen to about 11.2 percent worldwide, similar to pre-recession levels of 2006–07. Small-cabin aircraft, which took the biggest hit in the immediate aftermath of the 2008 downturn, have seen their values firm up.

The G150, for example, is finding favor at the high end of the owner-flown market, according to Bryan Comstock, managing partner at Jeteffect, a brokerage based in the Los Angeles area. Another small-cabin success story: less than 4 percent of Pilatus’s single-engine PC-12 turboprops are for sale, and five- to 10-year-old models have held 80 to 85 percent of their original list price.

In general, preowned aircraft that move quickly in today’s market are less than five years old with no damage history; are enrolled in cost-per-hour engine maintenance programs; are ADS-B and FANS compliant and equipped with Wi-Fi in the cabin; and have standard interior and exterior styling that appeals to a broad segment of prospects.

A bullish sign going forward: financial institutions, which withdrew from aircraft financing in the wake of the 2008 economic downturn, are “entering or returning
to the market,” says Rich Newton, an accredited senior appraiser with Cleveland’s Axiom Aviation. Moreover, institutions that already provide financing are loosening lending parameters that had limited deals to ones where the age of the aircraft and length of the loan added up to no more than 15 years. (For example, a loan for an eight-year-old aircraft would have to be repaid within seven years, and for a 10-year-old airplane in five.) “Maybe it’s increased confidence, or maybe it’s just that the sting of 2008 has gone away,” Newton says.

Brokers, meanwhile, have adjusted their fee schedules to compensate for the drop in values. Most have long charged a flat fee on the acquisitions side, and now many have replaced their traditional percentage-based sales fee with a flat rate as well, as declining prices have shriveled their take on revenue-dependent payouts. “I basically got my commission cut in half” as a result of the drop in values, says Brad Harris, president and founder of brokerage Dallas Jet International and chairman of the National Aircraft Resellers Association. “But my service is the same, and the transaction is the same.” Harris estimates that 75 percent of brokers now charge flat fees for both sales and acquisitions.

Market experts see little change in direction ahead. “The real annual depreciation going forward is probably not the 3 and 4 percent people saw for years, but more like 7 percent,” says Mesinger. “That will probably never stop, and we as an industry need to understand it, bake it into our residual-value calculations, and get about our business of a recovery with a more realistic view of values.”

For owners considering the sale of their aircraft, “Get out today and be realistic about the market, because it’s not going to get better,” advises Rousseau. “As a function of this global economic perspective, the value is going down further and faster because the base isn’t there to support normal age-based depreciation. If you wait two years, you’ll start kicking yourself.”

Buyers, while in the driver’s seat today, face a similar prospect. “The aircraft value is still depreciating,” says Harris. “In the past, an aircraft you bought for $30 million might be worth $34 million a year later. Now, instead of appreciating, it might drop in value in a year to $25 million. We don’t know, but I don’t see a recovery story.”

James Wynbrandt is a private pilot and longtime BJT contributor.