The rapidly declining residual values in many segments of the business jet market remain one of the major industry concerns, and that topic was the primary focus of the 6th Annual JetNet iQ Summit, held last month in New York. According to data from JetNet, the pace of depreciation, particularly among young, large-cabin aircraft, has accelerated over the past two years.
“It used to be that the typical airplane at the end of five years was at 75 percent of value based on constant dollars,” said panelist Robert Zuskin, president and owner of Virginia-based aircraft appraisal firm Jet Perspectives. “Today the norm is 50 to 60 percent at the end of five years, and the best airplanes I think right now are probably at 75 percent at five years, but those are few and far between. In terms of the big airplanes, the residual value depreciation is significant.”
Brian Proctor, president and CEO of Dallas-based aircraft brokerage and advisory firm Mente Group, crunched the numbers using the G550 as an example. In his scenario the $50 million airplane flies 400 hours a year for five years. “The market depreciation on that airplane [is] roughly $5,600 an hour, at a 5 percent depreciation rate,” he noted, adding that such rates will cause downstream changes in the market. “What’s going to end up happening over time is that the operators are going to get smarter, and they are going to realize that the aircraft are losing value faster than they can fly them. So charter rates are going to have to go up.”
“There’s been a change in behavior,” noted Paul Cardarelli, JetNet’s vice president of sales. Before the recession, he explained, usage cycles outpaced the growth in gross domestic product (GDP). After the trough in 2009, cycles began to rebound, but this time, steadily underperforming GDP growth. While the usage levels in the U.S. continue to slowly improve, this year they are expected to approximate the number of cycles recorded in 2003. Back then, there were approximately 9,500 business jets in the U.S.; today there are 12,500, according to JetNet statistics.
“There’s just such an unbalanced supply-and-demand curve the likes of which, maybe, no industry in the history of the world has ever seen,” said industry veteran David Labrozzi. “It’s a problem that is not going to get any better until we somehow address the supply-demand curve.”
The prospects of an industry resurgence are clearly tied to an increase in utilization, as JetNet’s current forecast calls for approximately 7,400 new-jet deliveries worldwide over the next decade, with approximately 2,900 retirements. Yet, owners of older borderline-obsolete airplanes are loath to recognize that they are likely the last owners of their particular aircraft, which are destined to make their final flights to the boneyard, even though they are still able to fly.
Lenders Remain Cautious
This uncertainly in the market, aside from causing jitters in owners and uncertainly in buyers, is also creating turmoil among the appraisal and lending communities. In one particular example, David Crick, a partner and senior appraiser with Lloyd’s Asset Services, noted one model with more than a dozen units on the market, all of them listed as “make offer.” “There’s no real clarity about what the take price might be, there is so much mud in the air that to actually put a value on that aircraft from evidence is nigh impossible,” he told the audience. “How can you do a forecast of residual value if we can’t even work out what the current value is?”
“What is going to have to happen is that the market is going to have to recognize the new realities, and I think once the manufacturers start to play the game properly in terms of their deliveries, their production and, most important, their pricing, then I think the market will stabilize,” said Zuskin, adding that the current U.S. aircraft prices are being influenced somewhat by continuing softness in the international market. According to Dassault Falcon Jet president and CEO John Rosanvallon, in 2011 fully one half of his company’s new aircraft sales were to so-called BRIC emerging markets (i.e. Brazil, Russia, India and China). Today that number has dwindled to 10 percent. “I have been with Dassault for 41 years, and I don’t think I have ever seen a market where the pre-owned market has influenced new aircraft sales this much,” he said.
“I think it’s really simple,” said Robert Spingarn, Credit Suisse’s director of equity research for aerospace and defense. “The used market is too large, and until we clear the used market, I don’t think the new-build aircraft market is going to recover.”
Such oversupply, as evidenced by the lowering delivery rates, has caused OEMs to make the hard decisions to curtail production. “In 2015 as we started looking at all the factors associated with demand profiles, we made a conscious choice and the tough decision to reduce our production rates in 2015 to make sure that they would be aligned going into 2016,” said David Coleal, president of Bombardier Business Jets, speaking in response to a question on what steps the OEMs are taking to address the oversupply issue. “The way that’s manifested itself right now is we have a book-to-bill of one in the first six months of 2016. We have to be disciplined about that and make sure that we are protecting our residual values, and make sure that we are aligned for the demand that’s out there.”
For those with a need for a business jet, there likely has never been a better time to buy a corporate jet, panelists agreed, as low capital costs, inexpensive fuel and the tremendous bargains currently available create opportunities for buyers to get more airplane for their money.