Mesinger Pulse: Is There Something in the Air?
Originally published as a blog for AINsight for Aviation International News on 12/2/22
It is not a change in the season I am contemplating, though it may seem a bit cooler. Rather, a change in the market environment of late. I am not here to declare a large swing in our market, but I am going to lay out the areas of change that I see and feel. I am always careful about shouting that change is here until it is.
The obvious and often discussed headwinds of recession, interest rate hikes and geopolitical challenges are all reasons that many of the prognosticators are guessing about our future. I want to talk about the effects of these indicators.
I looked at AMSTAT for 11 months of retail-to-retail jet sales for the period between January 2020 and November 2020. There were 1,795 units sold. In fact, that was up from the same period one year earlier. As we all remember this was the beginning of the Covid pandemic and none of us as industry professionals or our clients knew what the effect of this would be on our industry. But 2020 turned out to be one of the very best transaction years in our history. There was no issue yet with supply and since there was no supply issue prices had not started to increase yet. Those that bought in 2020 had great choice and good pricing. Next came the same January through November of 2021. That 11-month period netted 2,580 retail-to-retail jet transactions. What a jump! Most buyers in 2021 were first-time buyers. The result of their appetite for private aircraft was a dramatic depletion of available inventory. They started to pay more, have far less choice, and lose control in the process as sellers dictated the terms.
Now let’s look at the same period for 2022, January through November. This year we are down by 17% with total retail-to-retail jet sales of 2,132 units. Some would absolutely argue this was a result of far less supply; some might argue it is a result of some less demand; most could agree it is probably a sampling of both phenomena that created this number of unit sales to last year.
I was just speaking this month at CJI Miami. One of the questions posed to our panel was, “are we at the peak?” I asked the questioner what peak he was asking about, the peak in pricing or demand? I answered the question from both perspectives. I felt we had crossed the pricing peak in August or September of this year. I am not suggesting prices are falling, only that they have stopped rising. I went on to suggest that I believed in 2023 we would start to see what we as an industry have always experienced which is an annual residual loss rate of between 5-10% annually. That difference between rates is typically brought about by the age and type of aircraft. I have seen several price adjustments since August or September usually representing what may have been too aggressive and opportunistic pricing to start with. Many sellers this year have been drawn to this market to capture an upside to their aviation investment that has never been seen before, and now realizing that they may have stepped too far, are pulling back a bit.
One thing that I mentioned when discussing the idea that we may have also reached the peak in demand was a look at days on the market. This is increasing and allowing for a less frenzied approach on the part of buyers who no longer feel the aircraft that comes to market this morning would necessarily be gone by sunset the same day. I see in most categories of aircraft that more inventory is coming on for sale by the day. This is due in part to new aircraft deliveries, the rethinking of the size of a flight department, and owners feeling that capturing the profit that has been made on the value of the aircraft is opportune. I think many owners who have been lured to ownership feeling like charter revenue could really backfill the investment are now feeling that selling is where the real upside could be.
So, what is in the air? I think we will start to enjoy the continued increase in inventory. More choice is always a good thing. Slightly more favorable pricing and best of all less frenzy. This combination of outcomes will keep everyone’s investments sound. Bottom line, this change in the air is a mild shift. Probably just really good kite weather. Enjoy!