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The Not-So-Great Depression

by Jeremy Cox 1. March 2009 00:00
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THE NOT SO GREAT DEPRESSION.

 

Much of the data contained in this article is very courteously and kindly provided by the folks from AMSTAT CORPORATION http://www.amstatcorp.com/. For this I would like to especially thank Mr. Andrew Young, AMSTAT Sales Director, for the use of their data in the production of this article.

 

Sadly none of us could have predicted what I now like to term, the "Not so great, depression" of 2008 and 2009. There were possibly a few wispy clouds noticed way off above the horizon (Inordinately high prices for new and large, transcontinental capable aircraft; extremely low cost financing options; and extremely high petroleum prices); these clouds gave no real notice of the rapidly approaching storm front that carried with it, bank and finance institution insolvency on an unprecedented scale, a cliff diving stock market, inept industry chief executives, corrupt and morally lacking elected officials, politically fed - airline spun - open public derision of the general aviation industry, and worst of all, mass unemployment. No, I defy anyone to have been able to predict any of this, so truly virtually no-one has escaped the vicious claws of this global financial collapse.

 

Speaking from the trenches within the turbine and jet used aircraft sales industry, everything was extraordinarily good until mid August, and then everything screeched to a halt. Many of us adopted the position that the traditional summer holiday slowdown was the real cause. People had been working so fast and furious that maybe the movers and shakers were finally taking a good long overdue rest. Once the schools went back to work, we started believing that the lack of activity was wholly due to the up-coming presidential election that was on our early November horizon. No matter where you looked or listened, the entire planet was election mad. Well this too passed us by, but before any oaths were sworn by our first African American President, the banks went poof! The automotive manufacturing industry went zap! And before we could catch our breath and even begin to understand what was happening, we were in an economic depression so big, that all anyone could do was compare it to 1929.

 

During the first week of December, 2008 many of us were aghast to see the 4th and the 7th from the top, of the Fortune 100 list (GM and Ford) closing both of their flight departments, after they had travelled to Washington, caps in hand to ask Congress for money out of the Troubled Assets Relief Program (TARP) that had passed into law after the election, by the outgoing administration. By early January the general aviation industry was breathing a sigh of relief after the political attacks that were being focused against us all, seemed to have been silenced when the highly damaging language against corporate ownership of business aircraft was removed from the proposed 'government to corporate aid program' before our 44th commander and chief was sworn-in. Unfortunately though, there were still some surprising big names from industry being added to an ever growing list of companies that are were still choosing to close their corporate flight departments because of self enforced austerity out of fear of public and investor backlash. Unfortunately this disjointed 'knee-jerk' mentality appears to show a complete lack of common sense, or even anything close to the expected level of intelligence quotient, that the men and women, who are the top industry management figures in this country, should have. I won't even mention the outrageous legislation that the Gestapo-like Department of Homeland Securities, Transportation Security Administration is attempting to foist upon the general aviation industry with their ill-conceived Large Aircraft Security Program. The threat of user fees being introduced to fund the Federal Aviation Administration is minor compared to this latest serious of threats laid on the doorstep of our general aviation industry.

 

While all of this was taking place, sales of aircraft mostly dried up. Even the manufacturers, who before the whole world had jumped off the prosperity rock into the abyss of darkness and pain, had been enjoying a burgeoning order book that had them pre-paid for deliveries several years out, were now seeing their pre-order clients bailing out of their new aircraft positions, left and right, faster than rats leaving a sinking ship. Cessna, Hawker-Beechcraft, and Bombardier Learjet all announced lay-offs. Eclipse, which was the unconventional leading light of the groovy light jet business, was forced to shut its doors for good, thus abruptly ending the publically perceived viability of this exciting new sector of general aviation.

 

With this overnight bag full of woes rapidly filling up to take on the proportions of international-travel-steamer-trunks, we started seeing a significant number of lowering values and asking prices all across the board. New, mid-size and larger aircraft that were the bleeding edge of demand and premium pricing all slumped. A normal, every-day healthy market exists when about 10% of each aircraft model is available for purchase on the used market (number available / total number of the model in existence X 100 should = 10%.) The bleeding edge aircraft that are in high-demand usually see 1% to 2% in a normal market. Today we now see half of the market (147 models out of 301 models) above 15.5% for sale. While the bleeding edge aircraft, for example:

As a comparison, the worst selling propositions today, ordered by worse to worst:

What does all of this mean? Well generally speaking, if it is 'old', 'burns a lot of fuel', has a 'high maintenance cost', and/or is 'noisy', it will either not sell, or at best, it will sell for a very low price.

Surprisingly, low prices are not the exclusive domain of the 'old' and 'loud.' In fact some of the largest value drops (percentage wise) seen, have all been with the bleeding edge - top echelon aircraft. The following are examples of this phenomenon (Percentage drops are from April 3rd, 2008 to mid January, 2009) are:

  • GV, average was $45,000,000, it is now $26,000,000 which equates to a 42% drop.

  • Falcon 7X, average was $62,000,000, it is now $45,000 which equates to a 27% drop.

  • Falcon 900EX, average was $40,000,000, it is now $30,000,000 which equates to a 25% drop.

  • GIVSP, average was $30,000,000, it is now $24,000,000 which equates to a 20% drop.

"Cash is King!" Sellers are only looking for offers, not condolences; asking prices are now pretty much becoming obsolete.

 

At the end of the second week of January, 2009, we in the used aircraft market, I firmly believe, hit-bottom. This was signified by the sudden entry of many opportunist buyers who decided that the all-time low prices were too juicy for them to resist any longer. It is factual to state that any commodity like an aircraft is only worth what someone is willing to pay for it. Obviously the lower price-bottom buyers (some call them 'bottom-feeders') chose in mid January to enter the market after a very long wait, and have been making offers ever since. Some aircraft models are still seeing their prices dropping as we enter the last month of this years-first quarter. However I believe that they are only truly 'right-pricing' themselves. There will be other aircraft models that will still drop, but again this is because they are over-priced and over-valued (my opinion, again.) So if you really have the need to sell for whatever reason, don't scoff at the low offers, instead be glad that there are actually offers coming in now.

 

Are there still deals out there? Absolutely! In fact it stands to reason that this buyers market will stay like this more at least another quarter or more, unless of course the market players that are sitting and waiting due to the fear that they feel is waiting for them in June/July, don't do anything until they have crossed this mental barrier, then we shall see this buyers market live to the last quarter of 2009.

 

More aircraft are still being poured onto the market; as of the middle of February there was a grand total of 4,659 turbine/jet, business aircraft that were available for purchase, worldwide. However under the new set of ethical rules that have been vocalized by our new commander and chief, President Obama, I have to seriously ask the sensitive question of whether 'Are all of these aircraft really for sale?' I am now questioning this because both the Troubled Assets Relief Program (TARP) and H.R. 1 which is the American Recovery and Reinvestment Act both have language that is detrimental to business aviation, thus making personal and business jet aircraft ownership passé. It now appears that the politically correct thing to do is to at least put the aircraft onto the market and pretend that it is for sale. Others who have had their aircraft on the market for a long period of time are now either 'biting the bullet' and taking their sometimes 50%+ loss/drop in value from 18 months ago, by selling today. In some less painful instances they are buying down their debt, which is possibly 75% less than what it was when they first took the debt on, eliminating it all with the proceeds from the sale of their aircraft, regardless of how paltry the sale price may be.

Like have stated in this article above, in mid-January our activity within the business aircraft sales marketplace, quite literally 'across the board' has jumped from 'nought to sixty in all of five seconds.' The deals have been popping, and buyers have once and for all, stepped off the fence. I will again reiterate the physical fact that in mid-January we hit bottom.  More interestingly since the beginning of 2009, almost 200 aircraft have been withdrawn from sale. This statistic might seem pathetic especially when it is held up against the 332 additional aircraft that have all come onto the market as 'new-for-sale' regardless of their physical age. However when a longer term analysis of the 'Withdrawn From Sale' statistics is performed, it is easy to see that we are in a 'higher-than-normal' situation with respect to withdrawns', or no-sales. The actual number is 25% than normal. Normal can be defined as follows: Between January 1st, 2006 to December 31st, 2008, there were a total of 2,586 aircraft that were withdrawn from sale. This equates to 862 aircraft per year, or 72 aircraft per month. We are now averaging about 100 per month which is 25% more than the past.

This seems to further support the theory that we are at the bottom, as 25% more people have left the marketplace because their threshold of acceptable pain has been crossed by the highly depressed, current market pricing that is en vogue today. One broker made me laugh with his advertising today, as I will try to quote his work: "....Our prices have hit bottom, and yet they keep on getting lower and lower..." I guess that if we all wait long enough we should be able to buy his aircraft for the equivalent of the price for a cup of old, stewed and merely luke-warm coffee? Actually no, because this broker may find that many of his sellers might take the alternative route by with-drawing their aircraft from the marketplace.

 

Let's hope that the 'Not So Great Depression' is short lived and does not instead, grow horns and manifests it into the father of all Depressions. Let's all drink to that from our commiseration cups! What is your opinion? Any input that you care to make will be of great interest to all of the readers here at Globalair.com. So please don't be bashful and go ahead and write your comments and suggestions here. Please don't forget that whatever you write here, can be seen publicly by everyone that visits this page, so please be funny, be inspired, but most importantly of all, please be nice.

 

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Jeremy Cox



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