Historically our industry has watched business aircraft values fluctuate more like commodities than pieces of equipment. Today, this is no longer the case. Many owners, sellers and other industry participants still talk about aircraft values as though they might one day go back up, and many buyers often say that they are going to wait to buy because prices will continue to fall. This is changing and more and more people are starting to realize that prices won’t go up and at some point buyers just need to step in. Why have our markets changed? What does it mean to buyers and sellers? And, how do we deal with it?
Our industry has matured and we have more inventory than demand. This is the result of:
- A changing global economic environment,
- Manufacturers producing more makes and models and more units of each than ever before over the previous decade*,
- The ability to upgrade and improve aircraft extending their useful lives.
Prior to 2004 most business aircraft were sold in the United States. Between roughly 2004 and 2010 that shifted and the majority of business aircraft, particularly new, were sold outside of the United States. Manufacturers increased production to meet growing global demand and our industry thought the future was limitless as emerging markets grew rapidly. Today, most countries’ economies are contracting and the vast majority of business aircraft, new and used, are again sold to buyers in the United States.
According to the multiple listing service AMSTAT there were 8,203 business jets in active service in the end of 1995, 13,946 in the end of 2005 and 21,311 in the end of 2015. JetNet iQ reported a few weeks ago that they predict 744 new business jets will be delivered in 2016. And, the general consensus in our industry is that 9,000+ business jets will be delivered between 2015 and 2025. Honeywell’s 24th Annual Business Aviation Forecast published in November 2015 predicts up to 9,200 new business jets will be delivered by the end of 2025. Even if manufacturers slow their production numbers significantly we are not retiring aircraft in any mass number at the end of their lifecycle to maintain equilibrium in the supply/demand balance.
At the same time, we do need a healthy manufacturing sector, refurbishment businesses and aircraft upgrade/modification businesses. Aircraft and component manufacturers are innovating new technologies like vastly more efficient engines which will significantly lower the cost of operations for new aircraft as well as other major improvements. It is this innovation that will promote new aircraft sales and we need new aircraft being delivered into the market at the start of their lifecycles to replace aging aircraft. And, other companies are innovating new technologies to upgrade older aircraft as they move through their life cycles. This provides owners opportunities to keep aircraft longer while still fulfilling their missions and meeting new mandates as well as for buyers entering the market to purchase pre-owned aircraft that are still viable with long useful lives.
Today, it is thought by many leading brokers, lenders and aviation attorneys that aircraft with average total time, maintenance programs, no major damage, average equipment and commonly desired interior configurations will reduce in value by roughly 8% to 10% annually. Once an aircraft is over 10-year-old the reduction in value may slow down slightly. Note that this annual depreciation is a percentage of the prior year’s value, not the original value.
Our industry has matured and our supply/demand balance has shifted. As an industry we need to acknowledge a realistic and predictable annual residual loss rate. Mission, functionality, reliability, initial cost, and strength of the marketplace should be the driving factors for aircraft purchase and ownership decisions. We need to start accepting this new reality to establish accurate expectations and make good informed decisions.
*Note that some manufacturers like Bombardier have recently reduced aircraft manufacturing plans to better align production with future demand.