Mesinger Pulse – “Thunder Only Happens When It’s Raining”
Every once in a while, a song title or lyrics can be used to perfectly describe totally unrelated current events. Now, if you can break away from humming this Fleetwood Mac song, let’s move on to the topic. Is the market changing? Is it raining now and creating this discussion “thunder” or is change not really happening?
There are a few categories of planes, that upon closer inspection and culling of the available aircraft, are much less supply rich than they appear to be at first glance. So, take any list of the total aircraft and pare it down based on the criteria that either your client has for you or just general usual and customary criteria such as pedigree, equipment, total time, damage history, configuration and registration history. Now once you have created your internal checklist of items required to meet your clients mandate is there an aircraft that actually checks all of the boxes? Is there an aircraft that checks most of the boxes? Are the unchecked boxes criteria that can be checked with additional investment or are some unchecked boxes those that cannot ever be checked due to the specific criteria? For instance, you cannot buy your way out of damage history or history of corrosion and repairs. You will never be able to turn the hands of time back to make an otherwise great plane with just too much time fit your mandate. But what do you do with an aircraft that does check all the boxes? Is that a plane that perhaps you might be willing to pay slightly more for based on the aggregate of the offering?
My short answer to buyers is, yes, if you can get the mandate boxes checked with twenty-five or fifty cent dollars rather than having to buy the plane that has most boxes checked, but then spend one hundred cent dollars, do it. Why pay more for less when you can get what is no doubt a better buy with smart calculations made on a willingness to pay slightly more for the better plane? I do not think that residual loss, even quarter over quarter, is over. I am just saying that approaching markets with an attitude that there is so much inventory that every plane is a steal may be misleading. I always tell my clients that our goal is not to buy a cheap plane cheap, but rather to find and buy a great plane at the best price. This “Best Price” discussion means some consideration for benefits and value.
Back to the original question. Is the market changing? Again, the short answer is, yes. Is it shifting dramatically? The even shorter answer is, no! Prices are still trending down in almost every category. In a few, the residual loss rate may be slowing, but prices are not going up. In fact, let’s not forget that these pieces of equipment are just that, they are not investments like real estate or stock shares. These pieces of equipment get older, they suffer with time and they are impacted by use. What may be changing is the perception of the market. The perception cannot continue to be that markets are supply rich. The perception needs to shift to be that markets are still around 10% of fleet supply, however as I mentioned above, they are not all good and qualified to meet your clients’ mandates.
The transactions that are taking place are still predominantly in North America which means that much of the available inventory that is not US based is harder to contract and costlier to purchase. This continues to shift the focus on the available aircraft based here in North America. Don’t get me wrong, there are not inherent problems with aircraft based out of the US, however there are regions of the world who’s regulatory recording bodies do not track liens or identify owners and just focus on operators. These nuances create a more problematic and even risky situation to know with certainty that there are no liens lurking in the shadows.
Another significant development that is taking place now with respect to process and timing of a sale is that the service centers are slammed. It now may take as long as 30 days to get a slot for a pre-buy. Once in a facility, since there seems to be a lot of over promising with respect to labor availability, the inspection is also taking longer. One thing we all know is time kills deals! This is also holding true with modification timelines. What took three weeks can now take five weeks. Therefore, good planning and setting the right client expectations, are critical.
So, is that a sonic boom or is that thunder and is it really raining?