Mesinger Pulse – “Still More Questions Than Answers – 2016 Globetrotting”
During this past year, our Pulse Newsletter has touched on many topics mostly related to aircraft residual loss rates and accurate valuation conclusions. I have circled the globe speaking to audiences and reporting on our industry’s current challenges and realities, including at the 2015 Abu Dhabi Air Expo in December, the 2016 ABACE in Shanghai, 2016 EBACE in Geneva, the NBAA Regional Forum in White plains and of course NBAA 2016 BACE in Orlando. We are also privileged to be a part of a very select group of Dealers and Brokers that are invited by the major OEM’s to participate in what they consider their Key Players and Industry Influencer groups. No grass growing under my feet! This globetrotting gave me a broad and deep view of the industry not just seen through the eyes of North America but truly the eyes of the World.
My travels help me report on the global supply of aircraft, the regional reasoning for the oversupply and the deep trials and tribulations of the industry. I am able to speak through this newsletter from first hand experiences and conversations with industry leaders around the World and I want to take this month’s edition to tidy up the perspectives and distill the data points with some questions and answers. Often, I would leave the key meetings and conversations with more questions than answers.
When will the oversupply of global inventory catch up with demand? Will demand come back to the once demand rich emerging markets? Is there a magic number for a barrel of oil that will start the capital spigots flowing again? Will a continuing strengthening of our economy in the U.S. create a collateral uptick in the rest of the world? What follows are the answers gleaned from my interactions with industry leaders in 2016.
Rather than answer the oversupply question as a standalone, let’s look at what is to be considered the cause of the oversupply. If we all think back to 2003 running all the way into 2008 as a professional community, we would ask ourselves how long could this growth run last? This run was the dramatic increase in demand brought about by the explosion of business for us all based on the emerging markets coming to life. Russia, the Middle East, China, Asia and South America were all awakening seemingly at once. People that came into the aircraft market during those years actually thought, for good reason, that aircraft went up in value each year rather than going down like any other depreciating asset or piece of equipment. People were actually paying premiums for new deliveries and like new aircraft. All of a sudden in 2008, seemingly in one day, it was as if the brakes were applied globally and it stopped. Between 2008 and 2009 aircraft lost 50-70% of their value. It was catastrophic. This halting effect with very few transactions lasted throughout 2009. Starting in 2010 markets began, albeit with a complete value reset, to awaken again. Slow but steady activity picked up. Valuations remained low and trends for pricing stayed in a downward direction. By 2013 Industry analysts and the dealer broker community began to adjust for what would be likely an annual residual loss rate of between 7-10% which was an adjustment from what had been traditionally believed to be 3-4% annually.
Next came 2015. And again, in what seemed like a one day catastrophic event, the price of oil went from record highs down to around $25.00 a barrel. Almost overnight energy producing countries, energy producing companies and all the ancillary suppliers of goods and services to those segments stopped all capital expenditures. Hence the emerging markets ceased to be a factor in our now Global industry. So that, along with a few other International issues, like sanctions against Russia due to incursions into Ukraine and the anti-corruption crackdown in China put renewed braking on growth. This is where we still find ourselves today. North America seems to be the only area of transactional certainty in the world.
Prognosticators might say this over supply will last 2-5 more years. My personal sense it will not be cleared up during 2017 at the very least. OEM’s are working feverishly to curtail and manage production. The aging aircraft which we as an industry would have mentally begun to write off still provide safe and reliable transportation to many. Therefore, supply remains rich and demand remains low at least against the old days of globalization in our industry.
Those in the oil know would say that a sustainable price per barrel of oil for growth in the emerging markets to kick up would be in the high $70’s. Will a continued strengthening of our U.S. economy spill over to the rest of the world’s economies? I think we have to wait and see. It would seem if we begin to build our U.S. Infrastructure and do so without foreign products like steel from China or labor from other countries the effects of our growth will probably not spill over across borders. Of course, our demand in North America could continue to increase with this strengthening of our economy but not to a place where supply will be reined in and the downward trend of pricing curtailed.
A looming question regarding emerging market demand returning is, to what level was the thirst for growth in aviation for each of these countries satisfied before the 2015 downturn. In other words had there not been the event of oil going down in price so rapidly might demand have naturally slowed down. We won’t know that answer for sure until oil goes back up to a sustainable number.
As we close down 2016, we at Mesinger Jet Sales wish everyone a wonderful and safe holiday season. I have my schedule set for 2017 travel. I will be visiting the same international markets and will continue to report to you all. Thank you so much for reading and commenting on my articles. I appreciate the readership so much!