NAFA member, Tony Kioussis, President of Asset Insight, shares Asset Insight’s July 2020 market analysis.
Asset Insight's Juluy 31, 2020 market analysis revealed a 1.2% inventory decrease to the tracked business aircraft fleet – the first monthly reduction since January – along with an Ask Price decrease of 1.5%. Which models were impacted the most?
As July ended, Asset Insight’s tracked fleet of 134 fixed-wing business aircraft, and 2,331 aircraft listed for sale equated to a 1.2% inventory fleet decrease compared to June, and a year-to-date (YTD) increase of 6.8%.
The tracked fleet’s Quality Rating dipped a bit from June’s 12-month best figure, and the latest ‘for sale’ fleet mix increased the anticipated cost for upcoming maintenance events close to the 12-month high (worst) figure. However, July’s 5.293 Quality Rating kept the inventory within the ‘Excellent’ range on Asset Insight’s scale of -2.5 to 10.
July’s Aircraft Value Trends
Average Ask Price decreased 1.5% in July, leading to a 5.0% value decline since the start of 2020. By aircraft group, the figures were as follows:
- Large Jets: This group fueled the loss with a reduction of 2.4%, and a total value loss during 2020 of 11.8%.
- Medium Jets: Ask Prices increased 1.5% during July but were still down 3.7% YTD.
- Small Jets: The group posted a 12-month high figure through a 0.3% gain in value and is now up 9.2% for the year.
- Turboprops: Ask Prices gained 2.8% but are still off by 2.4% during 2020.
July’s Fleet for Sale Trends
The tracked fleet’s total number of aircraft listed for sale decreased 1.2% in July (29 units), reflecting a YTD inventory increase equating to 6.8% (149 units).
- Large Jet Inventory: Decreased slightly by 0.4% (two units), but remains up 14.8% (64 units) YTD.
- Medium Jet Inventory: Availability was down a substantial 2.7% (18 units) for July, bringing the YTD increase down to a single unit (0.2%).
- Small Jet Inventory: Decreased 2.6% (18 units) in July but was still up 6.4% YTD (41 units).
- Turboprop Inventory: The only group to post an increase, Turboprops were up 1.2% (nine units) for the month, and inventory has now grown 9.6% (43 units) YTD.
July’s Maintenance Exposure Trends
Maintenance Exposure (an aircraft’s accumulated/embedded maintenance expense) increased (deteriorated) 3.1% in July to $1.419m, signaling upcoming maintenance for the latest fleet mix would be close to the 12-month high (worst) figure. The last time our tracked fleet posted a higher (worse) Maintenance Exposure figure was in October 2019. Individual group results were as follows:
- Large Jets: Worsened (increased) 1.0% for the month, but the figure was better than the group’s 12-month average.
- Medium Jets: Worsened by 0.7%, but the figure was only slightly above (worse) than last month’s 12-month best number.
- Small Jets: Suffered greatly from the reconstituted inventory, increasing 15.3% to set a 12-month worst (high) figure.
- Turboprops: At the other end of the spectrum, Turboprops posted a 12-month low (best) figure through a 3.6% decrease.
July’s ETP Ratio Trend
The inventory’s ETP Ratio rose (worsened) to 71.2%, from June’s 69.9%, following three consecutive monthly improvements (decreases), bringing our tracked fleet to just below its worst (highest) 12-month figure.
The ETP Ratio calculates an aircraft's Maintenance Exposure as it relates to the Ask Price. This is achieved by dividing an aircraft's Maintenance Exposure (the financial liability accrued with respect to future scheduled maintenance events) by the aircraft's Ask Price.
As the ETP Ratio decreases, the asset's value increases (in relation to the aircraft's price). ‘Days on Market’ analysis has shown that when the ETP Ratio is greater than 40%, a listed aircraft’s Days on the Market (DoM) increases, in many cases by more than 30%.
During Q2 2020, aircraft whose ETP Ratio was 40% or greater were listed for sale nearly 53% longer than assets with an ETP Ratio below 40% (251 days versus 384 days). How did each group fare during July?
- Turboprops: For the eighth consecutive month, Turboprops registered the lowest ETP Ratio at 41.8%, a 12-month low (best) figure that continued earning them the top spot among the four groups.
- Large Jets: Improved for the third straight month, this time to 61.4% from June’s 64.0%, thereby remaining in second place.
- Medium Jets: Deteriorated (rose) slightly to 73.7% from June’s 73.4%, with the figure remaining better (lower) than the group’s 12-month average.
- Small Jets: Made the environment for many sellers even more challenging through a Ratio increase to 96.5%, a 12-month high figure that was substantially worse than June’s 85.8%.
Excluding models whose ETP Ratio was over 200% during one of the previous two months (considered outliers), following is a breakdown of the business jet and turboprop models that fared the best and worst during July 2020.
Most Improved Models
All six ‘Most Improved’ models posted a Maintenance Exposure decrease (improvement). Ask Price, on the other hand, was not as uniform, with the Beechcraft King Air C90, Bombardier Global Express, and Cessna Citation II, posting decreases of $5,976, $101,143, and $23,789, respectively. The remaining models experienced the following price increases:
- Gulfstream GIV-SP (MSG3): +$2,102,500
- Dassault Falcon 50: +$84,286
- Beechcraft King Air B200 (pre-2001): +$9,247
Gulfstream GIV-SP (MSG3)
Eclipsing all models in July is the one that occupied the ‘Most Deteriorated’ spot during our June analysis. It earned the top position through a Maintenance Exposure decrease exceeding $852k, along with an Ask Price increase exceeded $2.1m. But that does not bring visibility to the full story.
There were two aircraft listed ‘for sale’ in June carrying Ask Prices. When the asset carrying an Ask Price approximately one-third lower than the remaining one sold, the figure naturally shifted dramatically.
Still, there’s no getting around the model’s substantial improvement in Maintenance Exposure, derived through the single July transaction and three additions to inventory. With an ETP Ratio of 55%, and with inventory at only five units (5.6% of the active fleet), sellers should have some realistic opportunities to trade their aircraft, assuming price expectations are sensible.
Beechcraft King Air C90
Our research uncovered two aircraft trades in July, and the 47 units comprising the latest inventory mix equated to 12.1% of the active King Air C90 fleet – hardly the stuff of legend.
While the model’s Maintenance Exposure decrease of $71k far exceeded its Ask Price reduction, the resulting 116.6% ETP Ratio does not hold much promise for sellers. Buyers, on the other hand, have their pick of the litter.
Dassault Falcon 50
Two units found new owners in July. The remaining inventory of 23 aircraft equated to 12.3% of the active fleet. While the ‘for sale’ fleet saw Maintenance Exposure decrease over $33k and Ask Price increase more than $84k, the resulting ETP Ratio still exceeded 126%.
Although statistically deserving of its spot on the ‘Most Improved’ list, it is doubtful that sellers will experience a dramatic change in fortune although, for some buyers, this may still be the perfect solution for their geographic operating environment.
Beechcraft King Air B200 (Pre-2001 Models)
The second King Air model to occupy a spot on this month’s ‘Most Improved’ list definitely belongs here. Four units traded in July, and the 55 aircraft listed for sale create good selection for buyers, while sellers can benefit from availability only equating to 7.1% of the active fleet.
The model’s ETP Ratio, at 46.2%, is also a great deal more conducive to deal-making and resulted from a Maintenance Exposure drop exceeding $70k and a slight Ask Price increase.
Bombardier Global Express
By no means a stranger to this list, the Global Express gained its position in July following a Maintenance Exposure decrease approaching $393k that was overshadowed an Ask Price decrease exceeding $101k.
We did not record a sale during July, and the model’s 21 listed units equate to 14.6% of the active fleet. However, with an ETP Ratio of 67%, and considering the aircraft’s capabilities and industry following, sellers should have more opportunities than sellers of many other models posting such figures.
Cessna Citation II
Occupying the final slot on July’s ‘Most Improved’ list is a model whose constituents range in age from 25 to 42 years, and whose 83 inventory units equate to 16.5% of the active fleet. For buyers not afraid to become the final owner of an asset within the Small Jet range, the Citation II might be worth considering, as Ask Price fell nearly $24k in July while Maintenance Exposure improved (decreased) over $55k.
Of course, the aircraft’s actual Maintenance Exposure could make your acquisition a bit more expensive that planned, considering the ETP Ratio stood at nearly 128% when last calculated.
Most Deteriorated Models
All six models on July’s ‘Most Deteriorated’ list registered a Maintenance Exposure increase. The Bombardier Learjet 36A posted no Ask Price change, while the remaining models experienced the following decreases:
- Cessna Citation ISP: -$58,192
- Bombardier Learjet 55: -$26,071
- Gulfstream GIV-SP: -$348,000
- Hawker Beechjet 40: -$75,000
- Gulfstream GIV: -$11,111
Cessna Citation ISP
The best aircraft among July’s ‘Most Deteriorated’ assets held the second-highest position on June’s ‘Most Improved’ list. Its dramatic change in stature came from a $7k Maintenance Exposure increase, along with a $58k drop in Ask Price.
As if the model’s 128.5% ETP Ratio posed an insufficient challenge for sellers, inventory stood at 20% of the active fleet (55 units) as we closed out July. Three aircraft did trade last month, but this model’s fleet is aged between 35 and 43 years of age, so prospective buyers need to keep in mind that any future resale is unlikely to generate a price much above salvage value.
Bombardier Learjet 55
First the good news: One asset transacted last month and we did not record any additions to the Learjet 55 inventory.
Now the bad news: The 14 units listed for sale equate to 14.6% of the active fleet for an asset whose ETP Ratio is 188% (by virtue of Maintenance Exposure increase exceeding $55k and an Ask Price decrease of more than $26k).
Ask Prices for this model range between just below $500k to just below $1.0m. For an aircraft aged 33 to 39 years, even the low end of the pricing spectrum will be challenging for sellers to achieve, unless they can effectively monetize their aircraft’s Maintenance Equity.
Three transactions took place in July proving, yet again, this model’s strong following. However, with a Maintenance Exposure increase approaching $487k, along with an Ask Price decrease of $348k, the GIV-SP, unlike those operated under MSG3 Maintenance rules (see above), found its way onto the ‘Most Deteriorated’ list.
While the 19 aircraft listed for sale represent only 9.1% of the active fleet, the model’s 97% ETP Ratio will make selling against its MSG3 brethren challenging for most existing owners, especially if the aircraft’s engines are not enrolled on an Hourly Cost Maintenance Program.
Hawker Beechjet 400
This 31 to 34-year-old model joined the ‘Most Deteriorated’ list having completed no transactions during July. It did so on its Maintenance Exposure weakness which increased (worsened) over $25k, along with a $75k reduction in Ask Price.
Only four units are listed for sale. Unfortunately for sellers, that equates to 12.1% of the active fleet, while the model’s average ETP Ratio, at over 131%, equates to a challenging selling environment.
The third Gulfstream model to make either list finds itself in the second worst position among July’s ‘Most Deteriorated’ group.
Two aircraft transacted in July to lower the number available for sale to 21 units (12.4% of the active fleet). Unfortunately, at the ripe old age of 27 to 34 years, this superb aircraft is beginning to reach its financial obsolescence through an ETP Ratio approaching 185%, due to a Maintenance Exposure increase exceeding $477k, along with another Ask Price reduction.
Bombardier Learjet 36A
With an ETP Ratio approaching 185%, and units that are as much as 44 years old, it is not difficult to understand why this model occupied the most deteriorated spot on July’s list. What might be surprising is that one aircraft did trade in July, and only four are listed for sale.
Unfortunately, those listings equate to 10.8% of the active fleet whose Maintenance Exposure increased by more that $306k by virtue of the latest inventory mix.
While air ambulance work has kept this model flying, it, too, is staring at financial obsolescence with some units probably already at that destination.
The Seller’s Challenge
It is important to understand that the ETP Ratio has more to do with buyer and seller dynamics than it does with either the asset’s accrued maintenance or its price. For any aircraft, maintenance can accrue only so far before work must be completed.
But as an aircraft’s value decreases, there will come a point when the accrued maintenance figure equates to more than 40% of the aircraft’s ask price. When a prospective buyer adjusts their offer to address this accrued maintenance, the figure is all-too-often considered unacceptable to the seller and a deal is not reached.
It is not until an aircraft undergoes some major maintenance that a seller is sufficiently motivated to accept a lower figure, or a buyer is willing to pay a higher price and the aircraft transacts, ultimately.
A wise seller needs to consider the potential marketability impact early maintenance might have on their aircraft, as well as its enrollment on an HCMP where more than half of their model’s in-service fleet is enrolled on one.
Sellers also need to carefully weigh any offer from a prospective buyer against the loss in value of their aircraft for sale as the asset spends more days on the market awaiting a better offer, while simultaneously accruing a higher maintenance figure.
More information from www.assetinsight.com.
This article was originally published by AvBuyer on August 14, 2020.