Anthony Kioussis, A National Aircraft Resale Association Member and President of Asset Insight, recently wrote an article for Professional Pilot Magazine spelling out the market forces at work to determine prices for new and used aircraft. It is reprinted here with permission of Professional Pilot.
I was listening to an experienced, NARA-certified aircraft broker recently, who told me about how sellers unrealistically keep hoping to secure values they achieved during “the good old days,” while prospective buyers continue to sit on the sidelines not wishing to overpay for aircraft whose prices appear to be continuously decreasing. After thinking about this market phenomenon, I concluded that both buyers and sellers need a reality check.
Sellers: No matter how enamored you are with your aircraft, your machine is a depreciating asset. Get over it!
You may have spent a ton of money to make your aircraft perfect for your operational needs, but buyers will not pay you for what you have enjoyed. They will only pay you for what they hope to enjoy—and only if they cannot obtain it for less through another source. This is capitalism at its core, where the laws of supply and demand rule.
Buyers: No matter how long you wait, prices for high quality aircraft will never reach bottom. Get over it! It’s true that prices have dropped on many models, and still continue to do so. But if you want to acquire an aircraft at today’s lowest price, it’s up to you to create the lowest priced transaction by locating a desperate seller. It may not be fair to both sides, but the rules of capitalism do not cover “fairness”—that is unless your proposed acquisition requires you to sell an existing asset, at which point the “do onto others” adage is likely to apply.
The reality is that the good old days are actually here. Granted, our industry did experience a couple of memorable delivery and pricing peaks during the past 20 years, but those spikes were due to “irrational exuberance.” Remember that phrase? They were not the norm!
As quantitative proof, let’s examine new aircraft deliveries between 1994 and 2014. The black line in the Total Units Delivered graph is the trend line for aircraft delivered during the 21-year period. The red line represents the trend excluding figures for 5 “peak years.” Shown in lighter blue, those 5 years are 1999 through 2001, along with 2007 and 2008. Not only are the trend lines close to each other but, more significantly, the red line—which excludes the 5 peak years—is actually a bit steeper, possibly signifying the trend is improving. The same can be said about new aircraft in terms of total dollars delivered, except that the red trend line here is steeper. This is not surprising considering the high prices achieved by some of the large corporate jets during the past few years.
Could the statistics be telling us that the good old days are actually here? Could the information be telling us the market is improving? The answer to both questions is yes. Then what is the problem? There is none really. We’re simply back to that nagging supply and demand equation forced upon us by capitalism.
Consider the number of new aircraft models available to prospective buyers. It’s not as if everyone can afford to buy a new aircraft, and the group financially able to do so is not growing as quickly as production figures. Additionally, many potential buyers are availing themselves to block charter and jet cards because simplicity sells, further culling the purchasing pack.
The effect: OEMs have to sharpen their pencils in order to sell new aircraft, placing downward pressure on used aircraft values. Further complicating the market are owners who used financing to acquire their aircraft during the boom years, and are now unable to absorb the difference between what they owe and the price they can attain. Remember the housing boom? How many aircraft owners would like to “short-sell” their aircraft? Does anyone think if that were possible it would help aircraft values?
The reality is that there is nothing wrong with the current market. Based on the laws of supply and demand, it is behaving as it should. Will there be spikes in the future? Possibly. In fact, if one examines the Total Dollars Delivered chart figures for 2013 and 2014, one might conclude that we’re in another boom market right now—if it wasn’t for used aircraft prices.
Anthony “Tony” Kioussis is president of Asset Insight. He is a licensed pilot, an active industry association member and a published author who has provided marketing, sales and financial consulting services to companies in the Americas and Europe. Tony developed JSSI’s Airframe HCMP and Asset Insight’s proprietary Asset Grading System Process tool for evaluating and grading an aircraft’s maintenance condition.