By Don Dwyer, Managing Partner Guardian Jet
At EBACE 2012, I presented on the state of the aircraft marketplace. If I asked the group for a consensus on our future economy, they would have likely said they didn’t see a near term recovery. But, if I asked them about aircraft values, I’m fairly certain they would have said (like a lot of aircraft pros) that values had hit the bottom, and might not recover, but they probably wouldn’t decline further.
In hindsight, we all would have been wrong.
The role of the Dow Jones and aircraft values
For years at Guardian Jet, we’ve said that the best predictor of aircraft residual values is the Dow Jones Industrial Average. If the Dow remained static, airplane residual values would decrease in a predictable linear fashion.
When the Dow went up, so would aircraft values (and vice versa).
As you can see in the graph, when the DOW dropped in 2000, the values of various vintage Gulfstream V’s fell with it. There was a lag, but as the DOW recovered in 2002, the GV market mirrored the recovery about a year later.
Fast-forward to the end of 2007 and the same behavior repeats itself on the way down.
About a year later, Bluebook values began to fall.
Where the disconnect happens is in the middle of 2009. As the Dow climbs, the value of the GV remains static and begins a slow decline. Remember, this is in the only part of the market that has performed reasonably well — large cabin, ultra long-range jets such as the GV.
If we look at the Citation Excel over the same period, we see a continuing drop in value through 2013.
One school of thought holds that the DOW has become disconnected from the U.S, economy.
But I think it is a lot more than that.
As the aircraft market becomes increasingly global, values are probably tied to the global economy more closely than to just the U.S. economy.
Europe is still in the throes of their economic crisis. And while China will be a big player in the global marketplace, it is still a number of years before Asia will drive values across the aviation markets.
Another factor was the bankruptcy of Hawker Beechcraft. The uncertainty of ongoing product support drove Hawker prices to unprecedented levels. The impact of this has been felt across the light, mid, and super-midsize fleets.
Three Aircraft Marketplace Predictors
So what’s in store for aircraft values? Truthfully, my crystal ball has been broken since Q2 of 2008.
But I do predict three changes:
1. Increased activity levels typically drive pricing to stabilize or improve.
In 2012, there were a record high number of resale business jet transactions. Certainly the number of transactions was fueled by depressed pricing, but it is still a positive sign. If we’d seen pricing continue to drop — and the quantity of transactions drop — we would have a far more serious situation.
2. An increasingly healthy U.S. market is a positive sign for the entire industry.
For the last 2 years, a shade more than 50% of new business jets were delivered in the U.S. This reversed a 7-8 year trend of more new airplanes being delivered outside the U.S.
3. Hawker owners can breathe easier.
Those who already own a Hawker will find that continued maintenance and technical support is a virtual certainty due to the size of the existing fleet.
In the short term, we aren’t predicting any seismic shifts in aircraft values. This leaves us in a situation where there is a tremendous amount of value (depressed pricing) in used aircraft. This in turn puts pressure on OEM pricing of new aircraft.
So whether your business aviation flight department is considering a new or used aircraft, today is a good time to purchase or upgrade.
What are your predictions for aircraft values in 2013 and beyond? We encourage you to share your thoughts in the comments below.