Numerous factors affect the market for used business jets. This article reviews some of the major drivers and explains how they are affecting the current market.

Maintenance Exposure to Ask Price Ratio ("ETP Ratio")

One of the most intriguing market dynamics is the ETP Ratio. Computed by dividing an aircraft embedded maintenance (the expense an aircraft has accumulated toward future scheduled maintenance events) by its Ask Price, the ETP Ratio is very useful in determining an aircraft's remarketing opportunities and, possibly, if the existing operator might be the aircraft's final owner.

Consider that maintenance cost exposure can only reach a certain level before work must be completed for the aircraft to continue flying. As an asset ages, its resale value generally decreases. When it comes to aircraft, analysis has uncovered that when the accumulated maintenance - or Maintenance Exposure - equates to 40% or more of the aircraft's value, the asset's remarketing period increases by thirty percent, if not more.

Curiously, this has less to do with the aircraft's maintenance condition and more to do with buyer and seller dynamics. What occurs is buyers will seek to discount their Offer Price to account for the aircraft's Maintenance Exposure, while sellers will find the offer unacceptable, electing instead to continue operating the aircraft. As of September 30, 2016, over fifty percent of the "for sale" fleet had an ETP Ratio greater than 40%, and during the month of July 2016, Days on Market increased by 58% for such assets.

Following are some additional examples of ETP ratios, by way of explaining why certain models are trading less, or slower, than others (Source: Amstat (www.amstatcorp.com; August 30, 2016):

 Gulfstream GV  40.1%    Citation VI  73.6%  
 Learjet 45XR  44.4%    Learjet 60  88.9%  
 King Air B200  45.1%    King Air C90  94.8%  
 Learjet 45  52.1%    Citation II  117.5%  
 Citation V Ultra  53.1%    Gulfstream GIV  130.8%  
 Gulfstream GIV-SP  54.9%    Learjet 55  186.9%  
 King Air 300  55.6%    Gulfstream G-III  439.9%  

Trickle-Up Economics

As a broad general rule, most aircraft buyers are existing aircraft owners. Additionally, many people believe that an active used aircraft market is dependent on new aircraft sales. While the former is statistically accurate, new aircraft sales are currently influenced more by the lack of old, used aircraft transactions.

The problem starts with the owner of an old aircraft who is unable to sell the asset due to its age, its ETP Ratio, or because the owner owes the bank more than the aircraft is worth. Making things worse, the pool of available buyers is limited to those interested in acquiring (what is likely to be) a "disposable" asset. When an existing owner cannot sell, they are unable to "step up" to another aircraft.

The owner of the "step up" aircraft thus has few opportunities to sell their asset - due to the lack of buyers. The "step-up" aircraft's primary hope now rests with "new entrant" buyers and there are precious few of those available. Therefore, the "step up" owner is also unable to acquire their next aircraft, which in turn, stymies the opportunities of the seller above him.

Eventually, this inability to buy and sell reaches the new aircraft buyer, who usually already owns an aircraft and is forced to discount it heavily to the few available client pool, including the "new entrant" buyers everyone below them is pursuing. The effect of all this? Prices are forced downward for everyone downstream by virtue of the heavily discounted asset, further exacerbating the problem for sellers on the bottom.

Available Jet Models

The number of available models has increased significantly over the last 15 years, rising by over 75%, from 95 models in 2000 to 166 models in 2015.

Greater selection may be good news for buyers, but not necessarily if they already own an aircraft, as greater selection also softens per model demand. Airframe OEMs may benefit short term by capturing market share, but it is becoming increasingly clear this is being accomplished through lower pricing - further weakening used aircraft values.

New Aircraft Production

Related to the number of new models above, the absolute number of business jets in operation has grown significantly, up 99% over the last 15 years. Absent some novel way of creating additional demand, how will airframe OEMs maintain current production levels?

FANS cost

FANS are avionics systems which provides direct and automated communications between the pilot and the air traffic controller. They replace verbal position reports made using radios, which can be unreliable and hard to understand.

The majority of commercial aircraft have been equipped with Future Air Navigation Systems (FANS) for some time, while business jet installations have been lagging, primarily due to cost. This retrofit expense was anticipated to result in some airframe retirements, with Jetnet iQ recently estimating that retirement figure to be around 2,928 business aircraft between 2016 and 2025.

However, several less expensive FANS "solutions" may be coming that would allow "older aircraft" to continue flying. While this might please some existing aircraft owners, it would not help reduce the used aircraft glut - nor do anything to improve aircraft values.

Global Net Worth

The potential customer base, measured by the global population of HNW and UHNW people, continues to grow. For instance, according to the Credit Suisse Global Wealth Report 2015, in North America between 2010 and 2015, the population with a net worth of $10m+ has grown by 118% to 869,803 and those with $50m+ has grown 58% to 61,306. The story around the rest of the world is similar as shown by the numbers below:

 $10m+ Net Worth Population Change
 North America  Europe  Asia Pacific  Global
 +118%  +31%  +10%  +72%
 869,803  318,497  152,167  1,461,560
 
 $50m+ Net Worth Population Change
 North America  Europe  Asia Pacific  Global
 +58%  +39%  +22%  +53%
 61,306  29,921  15,923  123,838

This increase in size of the wealthy population, particularly among the UHNW, could spur demand for business aircraft. Perhaps.

The "Shared Ride" Economy

Research from "YouGov Affluent Perspective; Among The Wealthy Q3, 2016" shows that 40% of those with $10m+ in assets participate in the sharing economy. They use ride shares such as Uber and Lyft, do home rentals through Airbnb and VRBO, and they purchase luxury goods by subscriptions and memberships.

Furthermore, 67% agree with the statement "I like the convenience of 'pay-as-you-go' for access" and 48% agree with "I increasingly prioritize having access … to owning."

When they are asked about private jets, and specifically asked to consider access on demand (through lease/rental) versus ownership, they tend to prefer access on demand.

This trend is even more pronounced among those who are younger and newer to wealth. Again looking at data from the "YouGov Affluent Perspective" that asked about private jet subscriptions, 17% of those under 45 said they were current users compared to only 6% of those over 45. The full results for this questions are:

 Private Jet Subscription  The Wealthy $10m+   Age    Years with Wealth 
 Under 45  45+ Years   10 or less   More than 10
 Current User  10%  17%  6%  19%  6%
 Consider in Future  18%  28%  13%  20%  16%

All this research suggests that they are more likely to want to charter aircraft, rather than own them, thereby lowering the likely demand for aircraft ownership.

Market Summary

Excepting the increase in the number of affluent people, these trends and factors are either increasing the supply of aircraft, reducing the demand for aircraft ownership, or both. Their combined effect has, in fact, suppressed values to an all-time low point. But that is not all bad news.

If you are a first-time buyer, you have the opportunity to acquire some of the highest-rated aircraft in terms of Asset Quality, and at some of the lowest prices the market has ever seen. For those that already own an aircraft, the same is true - unless they have to sell one to buy one. That may end up being expensive math.


The author is President & CEO of Asset Insight LLC, the company established the “Asset Grading System Standard” for aircraft.


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