Paul Seidenman/SAN FRANCISCO
As little as six months ago, everybody was saying that the equity markets could only go higher and the resale value of pre-owned business aircraft would do the same. Today, world equity markets are dropping, and while nobody has claimed any significant drop in used aircraft prices at this point, it appears that some changes in market conditions are occurring.
One sign that prices of quality used aircraft may have peaked is the increasing quantity - and slower sales - of some popular business jets now appearing on the resale market. That is the opinion shared to some extent by representatives of the aircraft dealer community.
Bob Nygren, vice-president of Aerosmith Penny, a Houston-based dealer in pre-owned turbine-powered aircraft, has seen the availability of some aircraft types increase from an average of five to as many as 20 in the past several months. While prices are still holding firm, if this trend continues, he says, some price declines will almost certainly result.
"I am willing to predict that those who are buying used aircraft in October or November of this year are likely to get a better deal than they would have in July or August," he says. As of October, Nygren says, 20 Hawker 700s and 22 Hawker 800s were for sale worldwide. "But as recently as July and August, the numbers were eight to 12 -700s and -800s."
Nygren also notes that, six months ago, the average quality used aircraft remained on the market an average of 30 to 45 days. That, he maintains, is about to change. "I know of two Gulfstream IVs that have been on the market for the past six months," he says.
DOWNTURN PROBLEMS
In Nygren's opinion, the world downturn in equity markets and problems with much of the global economy are causing some potential buyers to take a "wait and see" attitude before making large purchases.
Others, he says, are getting out of aviation altogether. "I have seen some aircraft being disposed of by Asian operators, and a few that were sold into Russia starting to come back on the market. Some of those aircraft are finding buyers in Western Europe and the USA, where the economy is still strong." The increased number of used aircraft for sale has also been noticed by Skip Flint, director of pre-owned aircraft sales for Dassault Falcon Jet in Teterboro, New Jersey. "We had taken in almost no trade-in aircraft over the summer, but just within the past few weeks, we took in three Falcon 50s and one Falcon 900," Flint says.
"Based on the number of responses we've had to the ads we've placed in various business publications, interest is not what it was even six months ago when there was a feeding frenzy for used aircraft. At that time, I could have sold those aircraft inside of a week at extremely attractive prices."
Still, Flint says, it may be premature to anticipate any price reductions at this time. As an example, he notes that the only Falcon 900EX to come on to the used aircraft market had just been sold for more than it would have brought out of the factory. But he quickly attributed that to the heavy backlog of new-production Falcon 900EXs, which is extending well into the year 2000. "Lead times for new aircraft are still in the one to two year range. Until that drops below 12 months, people will be willing to pay premium prices for a late model used aircraft." Flint says that most of his trade-in aircraft are Falcon 50s, and older model Falcon 900s. Because of their excellent reputation, he continues to be optimistic about the demand for those aircraft.
"Even if we are going to go into a declining market, I don't see a sudden drop off of values [of used aircraft] as we've seen in stocks. Any decline will be more gradual, and it will not happen for at least a couple of years," Flint says.
Nick Cerretani, president of the US National Aircraft Remarketers Association, an Alexandria, Virginia-based trade body representing dealers and brokers in pre-owned aircraft, also feels that economic uncertainty has played a part in slowing sales of used aircraft. But, he adds, high prices may also account for the number available at this time.
PRICE STOPPERS
"The fact that certain models of aircraft have reached historically high prices is stopping some buyers. But because the asking prices are so high, more owners are putting their aircraft on the market at the same time, creating a slight glut," he says.
Cerretani, who is also vice-president of Miller Aviation, a dealer based at the Binghamton Regional Airport, New York, points out that even the popular Gulfstream III and Gulfstream IV are now showing up in larger quantities.
"Just 12 to 18 months ago, there were four or five on the market at any given time, while today, there are about 22," he says. "Looking just at the Gulfstream III, there are now 13 available, but two years ago, that number was six or seven. The value of those aircraft on the used market has increased by about 75% in the past three years."
Cerretani says Gulfstream IIIs that sold in the $9 million range two years ago now command prices of $11-14 million. A Gulfstream IV now resells for $24-28 million, about what it sold for new and comparable to the price of a new-production Gulfstream IV-SP.
Another reason for the increased availability of the used Gulfstreams, Cerretani says, is that many sellers are upgrading to the Gulfstream V. "Even though the asking prices for Gulfstream IIIs and IVs are holding steadily, some of us are predicting a modest reduction in the actual selling prices of those aircraft. But, if this trend continues, there may be a significant price drop."
Although the warning signs are there, the fact is that finding a quality used aircraft still remains a challenge. That was the experience of Tom Philips, director of flight operations and chief pilot for Washington Corporations, based in Missoula, Montana.
In September 1997, Philips was tasked by the company's owner, Dennis Washington, with the procurement of a suitable Hawker 700A within a specific price range. He was not successful. "After almost a year trying to locate one that would fit our needs and price requirements, we decided to go with a Hawker 800 because the price was not that much more than a high quality 700A," Philips reports.
The problem involved a combination of price and condition. "I would say that at one point, there were about 20 on the market, but about half of them had incomplete maintenance documentation, and some had a history of accidents and serious damage. It was hard to find a 'clean' aircraft with all of the documentation in place. Those were the ones that were expensive when we did find them."
Philips adds that, based on his experience, the Aircraft Blue Book Price Digest, the quarterly guide to used aircraft prices, was of little help. "A clean Hawker 700A was escalating at the rate of about $45,000 per quarter over the Blue Book value." Philips suspects that, because of the popularity of the Hawker 700A, many were purchased on speculation. "Also, I think the dealers keep those aircraft in their inventory until they get the price they want. In many cases, they were asking ridiculous prices," he says.
At the time he began the search, Washington Corporations planned to spend around $2.8 million. "But, as we shopped the market, we found that was unrealistic," Philips says. "As examples, a 1977 Hawker 700A was averaging $3.5 million. That was the first year the aircraft was produced. Those built in the final year of production -1984 - were priced at about $4.6 million; but some of the late models were selling in the $5 million range. The sellers were very firm and rarely willing to negotiate."
The Hawker 800 which Washington Corporations ultimately procured was purchased from an owner, rather than a dealer or broker. Philips believes there was some advantage to buying directly from an owner.
"We probably got some kind of a price break by negotiating on a company-to-company basis," he says.
Philips' experience was probably typical, since demand for quality used aircraft remains high. "In general, we are still in a situation where demand exceeds supply," says Randy Groom, vice-president aircraft sales for Piedmont Aviation of Winston-Salem, North Carolina. "There has been a steady increase in prices over the past five years, and I do not see the market softening."
After recent acquisitions, Piedmont is now the largest Raytheon Aircraft dealer in the USA, and enjoys a considerable resale business in Raytheon King Air turboprops and Cessna Citation jets. Groom estimates the selling prices of King Airs and Citations - with hours appropriate to their age and complete maintenance records - have risen by as much as 25% over the past five years.
"A1985 King Air B200 with mid-time [between overhauls] engines and complete maintenance records would have sold for $1.55 million in 1993," he says. "The same aircraft would sell for about $1.85 million in 1998. Similarly, in 1993 a 1981Citation II with mid-time engines and complete maintenance records would have sold for around $1.7 million. Now, it would command $2.15 million."
The King Air B200 and Citation II are the two most popular business aircraft worldwide because they appeal to the broadest customer base of turbine aircraft buyers, Groom reports. "They are not niche-type airplanes. They are popular because of price, flexibility and operational cost. And the trade-ins have included low-time, high quality aircraft as well as higher time aircraft. But, even for older, higher time aircraft, there is demand."
This, Groom says, represents a shift in the market. "Five or ten years ago, I wouldn't have looked at a King Air or Citation that was built in the early 1980s that had 7,000 to 8,000 hours on it," he says. "But today, as long as those hours are within the yearly normal average flown [by those types], there is a market for those aircraft."
For the King Air B200, utilisation averages 400h per year, and for the Citation II, about 350h, Groom explains. "Naturally, the lower time aircraft are scarce. Nearly new aircraft - five years old or less - now account for less than 10% of those available on the used market."
Despite this, Groom notes that he, too, is starting to see evidence that prices may not go much higher. "A growing number of customers feel that prices for used aircraft are artificially inflated. The result is, we are starting to see some resistance, even though the availability of lower time, clean, used aircraft is still not that great," he says.
On the other hand, Bob Dandeneau, president of Peregrine Aviation Services, a Hackensack, New Jersey-based specialist in Falcon resales, has not been that concerned about price resistance. "The market remains strong for the Falcon family," he says. "For example, we have orders for three Falcon 20Fs that we can't fill because they are unavailable."
Still, as Dandeneau notes, some pre-owned Falcon models are just now starting to show up in increasing numbers." There are now 12 Falcon 50s on the market, and that's a lot to be available at any one time," he says.
"Nonetheless, the market is very active and, on average, the older Falcon 50s are selling at or very near to what their original prices were when new. For example, we recently sold a 1988 Falcon 50. That aircraft sold for $11.55 million when it was new and we let it go for just $50,000 less than that."
On average, Dandeneau says, low-end Falcons average $9.5 million, while the high- end models are commanding $14-15 million. "High end Falcon 50s are those with a serial number of 140 or greater," he explains. "The 140th Falcon 50 - and all others after that - were built with an EFIS [electronic flight instrument system] cockpit as standard equipment; but the older ones built in the early 1980s, had analogue cockpits." He adds that, while some low-end models are selling for just over $9 million, they originally sold for under $5 million when they were new.
For Fred Moran, manager of sales and procurement for Cessna Aircraft in Wichita, Kansas, the market in used Citations also remains strong, even though more members of the popular business jet family are coming on the market.
Moran notes that Cessna accounts for about 20% of the sales of pre-owned Citations, and about 40% of all Citation sales are related to the disposal of an older aircraft.
"As of the first week of October, 13 pre-owned Citations were for sale. That's up from six or seven as little as six weeks ago," he says. "But I think this may be a reaction to the high prices the aircraft are commanding, which has given more operators the incentive to dispose of their aircraft earlier than they might have."
NEW AIRCRAFT WAITING LIST
Despite the increased availability, Moran feels that prices for pre-owned Citations will remain high because of the two-year average wait for comparable new aircraft. "The 500 series of Citations - which includes the Citation I and II, the S/II, V and the Ultra - are still commanding premium prices on the used market," he notes. "With a two-year wait for a comparable new aircraft, a lot of buyers are being pushed into the high-end [lower time] of the used market. But, as the high quality, low-time aircraft have sold, the demand has filtered down to the older, higher time aircraft."
To illustrate, Moran explains that only about 100 used Citations are now available that are less than 15 years old; while under more normal market conditions, that number would be nearly triple. Conversely, 80 Citations are now available that are over 15 years old. Of that number, 30 are Citation IIs that were built between 1976 and 1983; while 50 are among the oldest members of the family, and were produced between 1972 and 1976.
"If you look at the Citation III and the Citation VI, prices have increased roughly $1 million to as much as $1.5 million over what they were last year. A 1985 Citation III, for instance, had a $4.5 million Blue Book value back in 1996. Today, it is selling for between $5.7 and $6.2 million."
While lead times for new aircraft may be a contributing factor, there are those who believe that high prices of new aircraft have tended to lift resale values.
"The high cost of new aircraft gave sellers the impression that used aircraft were greatly undervalued," says Aerosmith Penny's Nygren. "There was too much of a differential, so in the past year, the gap has narrowed. For example, a 1976 Learjet 35 has seen its resale value double in the past year from $1 to $2 million. But you would be looking at $5 million to buy a comparable [in-production] aircraft, which is the Learjet 31."
Still, as Nygren adds, this narrowing of the price gap between used and new aircraft has probably been too much for the average buyer. "There is a growing feeling that prices may have gotten a little bit out of line."
Source: Flight International
