Aircraft Values Climb Again, Despite Economic Jitters

On the one hand, things have never been so good in aviation; demand for aviation is back, with little-to-no end in sight for high charter utilization. On the other hand, will the current aircraft market withstand the number of obstacles ahead?

So far, the answer has been an amazing yes. But is the sentiment shifting, and the bubble about to burst? While a downturn is unlikely, we have probably hit the ceiling regarding escalating aircraft values. Despite the continued talk of a downturn, I believe one is doubtful because our current market has little to nothing in common with previous recessions, especially the ‘Great Recession’ of 2008, and today.

I mention 2008 only because it was the fastest and scariest race to the bottom ever witnessed for many seasoned veterans in Business Aviation. With that recession engrained and embedded in our memories, many tend to fear the worst today. However, there are several key differences between previous downturns and today's economic jitters.

1. Inventory: First, pre-owned aircraft inventory remains extremely low. Although inventory has risen slightly since Q4 2021, the increase is barely noticeable. For the most actively traded models, supply is still nowhere near normal.
   
   Take, for example, popular aircraft like the Cessna Citation Excel/XLS and the Citation CJ3/CJ3+, which are trading at (or above) asking price. Even with a slight uptick in aircraft for sale, these models still have fewer than 2% of the total fleet available for sale. Even if off-market listings swelled the number closer to 3%, that’s still not enough to move the meter into a buyers’ market.
   
   The same holds true for just about every popular, actively-traded aircraft model. Despite a slight uptick in the number of aircraft for sale, there’s no slowdown in sight regarding buyers' appetites.
   
   
2. Healthy Balance Sheets: Secondly, the banks and their respective balance sheets are healthy, as is their desire to fund aircraft. While interest rates have risen, they’re still low compared to the past thirty years.
   
   
3. Loan-to-Value Rates: Thirdly, aircraft owners have skin in the game this time around. The loan-to-value requirements for aircraft lending has remained at approximately 75%, allowing most borrowers to stay far away from foreclosure and build equity.

While there may have been a cooling for refinancing, the uptick in rates has not lessened offer purchasing. Lenders are more selective over the equipment, age, and several other factors, including enrolment in engine and airframe programs.

So, What’s Ahead?

Summers are historically slow in aviation – especially Business Aviation. This summer will be no different. We expect a ‘stalling’, but certainly not a crazy plunge into the abyss.

The worst-case scenario of flat values for the upcoming summer can be attributed to most aircraft models' abnormally small fleet sizes and static populations. Between maintenance issues, including the need for modernization, and high costs, many of the older aircraft are realistically headed for the ‘parts bin’.

While it will simply become too expensive for many aging aircraft to remain in service, it will also be nearly impossible for the manufacturers to build enough aircraft to offset the attrition, while producing them at a low enough purchase price to be competitive with most buyers.

From a business jet perspective, if there’s one negative to this booming market it’s the fact that the $1m business jet is all-but-extinct. The higher the values of entry-level jets, the more buyers look for alternatives. Turboprops and Twin Piston aircraft have benefited significantly from the sharp increase in jet values.

It will be interesting to see if the increased operating costs change the trend, however. One look at the Beechcraft King Air market would quickly reinforce this: Most models are up 25%, and inventory is lower than I can ever remember it.

Surprisingly, I have only had one comment from a new Cirrus SR22 purchaser complaining high fuel costs will force him to park his airplane or fly much less than planned. For now, most operators are choosing to ignore fuel prices.

Time will tell how long things can continue at the current pace. Charter operators, for example, will only be able to pass along so much of the inflation before demand is impacted.

Sales of Russian-owned aircraft has been slow, not significantly impacting the market. Many buyers are wary of purchasing airplanes through Back-to-Back deals, along with the Russian ties that may, or may not, be sanctioned. Scrutiny is at an all-time.

On the other hand, commercial leasing companies face billions in losses due to the nationalization of a good portion of the leased aircraft fleet within Russia. Unfortunately, insurance premiums will be taking the brunt of the hit once again as claims get filed, resulting in everybody paying more for insurance.

From my perspective, the current market is ‘complicated’ and remains pretty much unchanged from my last update (‘What’s the Latest on Aircraft Market Values?’).

• Transactions remain steady.
• The finance community is healthy.
• It has become increasingly difficult for anyone to find the ‘perfect’ aircraft. Most buyers are making concessions to close deals.
• For many buyers, the word ‘frustration’ sums things up. Aircraft buyers have ‘features’ and ‘budget’ wish lists, but it has become impossible to check off every box on those lists.
• Good markets allow bad aircraft to sell, and some first-time buyers may be hoodwinked into purchasing some of these. I’ve seen many deals fall apart after initial due diligence, so buyers take heed.
• The supply chain logjams, and wait-times to schedule maintenance, will worsen before improving.

The fast-paced, frenzied market from Q4 2021 created a need for many buyers to forgo a pre-buy inspection or lose the aircraft. While I continue to hear this issue being brought up in many deals, it would be wise to resist, completing proper due diligence before closing.

Granted, due diligence today requires near-sleuth-like skills, but it appears the message is getting through: It’s better to walk away from a potentially harmful deal than try to unwind it after you own it.

Market Trends for Q2 2022

Business Jet Market: Demand for business jets continues to outpace supply, inflation, and fuel prices. The only thing that can slow down the market is the lack of available aircraft for sale. More and more transactions being reported are off-market, unlisted aircraft.

Entry-Level and Light Jets continue to see price rises, creating a few opportunities for the twin-piston and turboprop markets, and some of the vintage jets.

For example, Bombardier Learjet 35s were up 20% over Q1 2022, while Learjet 45s and Learjet 60s rose 30% as buyers battled for the few available units not being devoured by management/charter operators.

Embraer Phenom 100s and Phenom 300s are up 15% and 10%, respectively. The Phenom 100 is highly attractive to first-time buyers, and the lack of inventory suggests things will stay that way for the foreseeable future. 

The Phenom 300 is now one of the go-to models for the charter market, making it almost impossible to find one, let alone a deal. Cessna Citation CJ1 values increased 10% since Q1, while CJ2s and CJ3s were up 15%.

Mid-Size Jets have also done incredibly well this past quarter, with Hawker 800 series jets up between 20% and 45% since Q1. Since operating costs are typically higher for these aircraft, it is possible buyer and operator sentiment could change with increased prices at the pump.

The Gulfstream G200s and G280s, which benefited from a considerable price increases in Q1, were up roughly 5% in Q2, and pricing appears to have settled. Meanwhile, Dassault Falcon 50EXs were up 30% in Q2 over Q1. This popular Mid-size, wide-body aircraft was tremendously undervalued, and buyers have subsequently been quick to pounce on opportunities.

Cessna Citation Sovereign and Sovereign+ have also benefited from popularity in the charter market, both having seen 15% price increases since Q1. The Citation X, meanwhile, was up 10% since Q1.

One surprise was the Citation Ultra’s, Citation V’s, and Citation Encore’s market rebound in Q2, by as much as 60%.

These older jets have become the ‘go-to’ for dealmakers seeking opportunity and relief from an over-picked market. Large Jets such as the Gulfstream GIV/GIV-SP were up 17% since Q1, with management and charter companies buying as many as they could find in good mechanical condition. This combined with brand name recognition and ramp presence created a run on these aircraft.

Nevertheless, the potential dark cloud of fuel prices and heavy maintenance costs could prove problematic for profitability.

Embraer Legacy 600s and Legacy 650s were up 35% as the market again recognized value in an over-depreciated model. It was not long ago that a decent Legacy 600 could be bought for less than $6m. Today, you’d be lucky to get one under $8m.

The capable, over-depreciated Bombardier Challenger 601, 604, 605, and 650 were up between 20% and 35% since Q1 2022, rebounding nicely in Q2.

For the Gulfstream G500 and G600, airworthiness directives (ADs) has become the hot topic, and for good reason. Following two hard landings, the fleet is restricted until a software update is distributed later in the year. Both hard landings involved erroneous activation of the angle-of- attack ‘limiter’ function, which is designed to prevent stalls.

Owing to the AD, G500 and G600 values have remained unchanged since Q1 2022.

Turboprops: The Piper Meridian has benefited from several other markets’ tight inventory levels, and entry-level jet prices exceeding buyers’ budgets. The net result was a 17% increase in value since Q1 2022. With lower operating costs and a modern cockpit, we see increasing values continuing for some time in this market.

The Pilatus PC-12 market continued to be the darling of the segment, once again demonstrating the best residual values in the single-engine turboprop market. In Q2, all variants were up 20% over Q1 2022.

The Cessna Caravans also benefit from scarcity, as utility, cargo, and commercial operators can’t seem to buy enough of them at present. Market values were up 15% and should continue to perform well over the coming months.

Various Beechcraft King Air models also shot up in Q2, and King Air B200s were up 25% since Q1, while the King Air 350 market was up 20%. Between charter demand and pressure from entry-level jet prices moving beyond many buyers’ budgets, the tried-and-true workhorse of aviation has benefitted tremendously.

Assuming operators are not affected by higher fuel prices, this segment seems to be gaining popularity. Modernized aircraft with refurbished avionics are selling in record time.

Piston Market: The Cessna 182 market was up another 10% over Q1 2022, and based on closing numbers and activity levels, this market continued to tick. The same held true for Cessna 172s, up another 10%. Market demand remained far greater than supply, and inventory was meager at best. 

Columbia 300, 350, and 400s were up 40% from Q1 2022 as many potential buyers sought to purchase high performance aircraft. Demand rose as competing models (primarily Cirrus) priced buyers out of the market.

For a while, Cirrus values were rising daily. SR20 prices were adjusted by 15%. This is one Piston Single market to watch – many buyers are frustrated with the escalating values. Will the numbers stall in Q3? The SR22 was also up 15%, with backlogs growing and premiums paid for newer aircraft. 

With many new aircraft finally delivering from the pandemic orders, we may see an uptick in newer pre-owned aircraft inventory.

Diamond models were up 20% on average, with little or no inventory available. DA40 inventory remains low across the board for all variants. DA20s, like other trainers, are benefiting from crazy demand. The DA62 is almost impossible to find, with only one aircraft listed for sale at the time of writing.

Helicopters: The helicopter market is more of a mixed bag. While Enstrom and MD pre-owned models continue to struggle, many others have benefitted. Firefighting season starts earlier every year. EMS, timber, and other utility aircraft are also seeing an uptick in valuation and activity levels.

As with the fixed-wing market, many buyers seek older aircraft to combat higher asking prices that often exceed budgets. Specifically, Bell 407, 429, and 427 helicopters continued to increase in terms of price, rising roughly 15% in Q2, vs Q1 2022.

The Agusta A109 and Leonardo AW139 markets have benefitted from their multi-use mission profiles and beaten-down values. AW109SP values were up 14% compared to Q1, and the AW139 short- and long-nose markets were up roughly 20%.

However, the popular offshore models continue to lag as operators seek out leasing alternatives instead of outright purchases.

During Q2 2022, the Robinson markets picked up where they left off in Q1, and were up another 15%, on average, as buyers’ appetites, combined with a lack of global inventory, pushed values higher. Aircraft fresh out of annual inspections continue to benefit from quicker resale times.

Whether you’re in the market for a fixed-wing airplane or rotorcraft, enjoy the summer – and get some rest. It looks like we’ll be in for a crazy Q4 as buyers look to make purchases before the 100% bonus depreciation finally comes to an end at Year End.

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Jason Zilberbrand is the President and Chief Technical Officer of VREF.

He is an Accredited Senior Aircraft Appraiser with the American Society of Appraisers (ASA), and an Accredited Member of the Appraisers National Association (ANA), and he is also an Accredited Member of the International Society of Appraisers (ISA).

Jason is also an expert witness, broker, inventorying dealer, acquisition agent, aircraft owner, aircraft operator, contract negotiator, consultant, teacher, conference speaker, and author.