How to Understand Current Market Dynamics

Is it possible for buyers to get an aircraft that fits their mission without overpaying in today’s market? General Aviation Services’ Don Spieth shows how he helps clients recognize the right opportunity…

The past year has been quite a ride for the aviation industry. Mid-March through June of 2020 necessitated attendance at every possible online industry meeting, followed, in mid-August, by the creation of a quarterly market report with AMSTAT and Bloomberg.

By the time it began dawning that the challenges induced by Covid-19 were creating a seller’s market, we had reached mid-September 2020.

The initial demand shock with the onset of Covid-19 produced a similar reflex to that of the great recession in 2009; values of pre-owned business jets and turboprops fell to just below -20% when you measure the group averages across the Large Jet, Super Mid-Size, Mid-Size, Light Jet, and Turboprop markets.

In Q3 2020, the downward trend began to stabilize, and the twelve-year-old buyers’ market finally turned. 

New Market Reality

At first, buyers didn’t want to admit that their leverage was lost, and were slow to react to the new market dynamics. Some insisted on making offers closer to last year’s discounted market, only to lose their place in the line as sellers’ attention turned to more attractive offers.

The reluctance to see the new market reality cost several buyers hundreds of thousands of dollars, since they would now have to pay even more for another aircraft with similar specifications.

Our advice to clients was to submit the right offer with an immediate sense of urgency to avoid chasing the market up. General Aviation Services works with several corporate clients who require data-driven evidence of where markets are, and how they evolved to the point they are at, and we’ll explore some of these within the following analysis.

Using high-level analytic tools and historic analysis has become commonplace in most businesses. When we support Flight Departments, we provide data that furnishes them with information to explain the current market conditions – and, at present, how the demand side of Business Aviation has accelerated at such a fast pace during the pandemic.

How to Use Big Data

The key to using big data is to build perspectives that allow the recipient to focus on the actual information, and how it changes over time. The ultimate goal of analytical information should be to give everyone – from the operational level, to C-level executives – the same understanding.

Utilization of aircraft is a key indicator of future preowned and new aircraft sales. Charter and Fractional Ownership are also entryways towards whole aircraft ownership. Understanding the relationships between Charter, Fractional, and Flight Department usage helps us understand Business Jet Demand, and why the Seller’s Market will continue in the foreseeable future.

Chart A shows the recent growth trend (by percentage) in domestic (US) travel. The baseline begins in 2016. Data through August 1, 2021 shows that if 2021 travel continues on its current trajectory, Charter activity will reach a record level of 700K hours (+43% compared to 2019); Fractional activity will reach 103K hours (+15% compared to 2019); and Flight Departments activity (Part 91) will reach 1.83m hours (+3% compared to 2019).

Note: The projections in Chart A were compared to 2019 to negate the distorting effect of 2020.

Are You Overpaying for Your Jet?

The biggest challenge clients are facing at present is assessing aircraft value, and whether they’re overpaying for the aircraft they would like to buy. Most buyers in the market today must realize that the deals of nine to eighteen months ago are gone, across the board.

Over the past several months, pre-owned jet and turboprop transactions have been happening at a record pace. They’ve also been happening off-market in greater numbers (i.e., aircraft are selling before they reach the open market).

Chart B and Chart C compare ‘Preferred’ business jet/turboprop to ‘Non-Preferred’ business jet/turboprop transactions. ‘Preferred’ refers to the models that are selling better on the market currently.

The Preferred business jet/turboprop population consists of 45 makes/models that have an average age of 17 years. They represent just 15% of the total business jet/turboprop population, yet comprise just over 50% of all transactions, currently.

In contrast, the Non-Preferred business jet/turboprop population consists of 246 makes/models that are an average 21.7 years old. These aircraft represented 6,058 transactions between January 1, 2018 and July 1, 2021 (or an average 143 aircraft transactions per month).

The challenge that record sales has brought about for the aircraft inventory is amplified by the accelerated rate in off-market sales among the Preferred inventory.

As highlighted in Chart B, transaction records from H1 2021 show that there has been a 24% increase in Off-Market Preferred business jet/turboprop aircraft sales. (In contrast, there has been no change in the percentage of Non-Preferred aircraft off-market sales.)

Buyers must also take into consideration that several makes and models were facing market-related headwinds that were suppressing their overall value. Because of this, buyers should enter the market with a good idea of the requirements for their next aircraft’s mission, as well as an agreed budget to avoid over-paying for an aircraft within this heated transactional environment, and also to ensure their broker can engage sellers without wasting time.

Fitting Depreciation Value into the Equation

For buyers, having identified the required model(s) to fit the mission need and budget, it’s important to understand the value of the aircraft in terms of its depreciation value to ensure you don’t overpay – especially in the case of one of today’s Preferred models.

In the case of sellers’ an understanding of the same is necessary to ensure an aircraft is priced to sell. Chart D examines the Gulfstream G550, which remains one of the top-selling aircraft on the market today, and it is one of the Preferred business jet models on the market.

Note: All of the data needed for this assessment can be downloaded using AMSTAT Premier+, which contains an aircraft valuation tool with sophisticated analytics.

The Gulfstream G550 represented in Chart D is a 2012 model that has an average total time of 350 hours per year. The blue area shows the number of new deliveries, while the gray bars show the number of retail resales, and the red line provides the number of G550s listed for sale on the pre-owned market. 

The green dotted line is the natural depreciation of the Gulfstream G550, while the solid green line represents the market value in US Dollars. From 2012 the value of the G550 has been impacted by:

• Age depreciation
• Market recovery for Large Jets (2013-2014)
• Crude oil and energy market disruption (2015-2017)
• Chronic Lifecycle Decay (Resale retail sales surpassing new deliveries 2015-2017)
• Market recovery for Large Jets (2018-2019)
• Pre-Owned listings increase (2020)
• Q2 2020 Covid-19 demand disruption
• Q4 2020 transactions, and continued demand through Q2 2021.

This furthers the importance of using historical data. The depreciation of a high-value asset, in the case a G550, is usually taken at a constant rate over an extended period. At any given time, the impact of macroeconomic drivers could impact the short-term value of the aircraft in negative or positive ways.

Once the short-term impact dissipates, the market value tends to gravitate back towards the historical value of the depreciation curve. Even though the Gulfstream G550 represented in Chart D has seen a tremendous recovery in a short period of time, the natural depreciation of the aircraft shows that there is still some locked value left in this aircraft make/model.

Although at the end of Q2 2021 there had been 37 G550 transactions, that number had risen to 42 at the time of writing, and transaction records had yet to be completed at the end of Q3.

In Summary…

In the near-term, we will continue to observe and compare key data, like Days on the Market, Total Time, and Age of the aircraft being sold from the remaining inventory. We’ll also monitor maintenance and other factors like paint and interior.

The bottom line remains, however: Increasingly buyers have had to become flexible in order to be considered as a serious buyer for the aircraft they seek in today’s seller’s market. Understanding the data with a diligent, informed broker will help ensure the right measure of flexibility is shown to secure the right aircraft for the buyer.

Don Spieth is Vice President of Sales and Analytics for General Aviation Services.

He has a solid background in specialized quantitative analysis that he honed in the financial industry with Van Buren Advisors, before applying it the business jet market for the benefit of buyers and sellers of pre-owned aircraft.

More information from www.genav.com