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Cause for Optimism

Cause for Optimism

NAFA member, Johnny Foster, CEO of OGARAJETS, talks to Business Aviation Magazine.

Q: What do you think of the market at the moment? How are potential buyers and sellers reacting?

JF: I am generally optimistic. This is particularly true in the heavy segment and the last 30-60 days has seen strong buying activity in all modern segments. There are some pockets of 
weakness; however, we are very bullish right now with respect to overall market health. 

We have been in a buyer’s market ever since the global financial crash, but it seems to me that we are now firmly transitioning into more of a neutral market. In fact, the market today seems to be edging towards favoring sellers, as quality supply is becoming thinner and thinner. 

No one believes that we are going to see a return to the mid-2000s any time soon, where we saw asset values actually appreciating instead of depreciating. But what we are seeing is a very distinct leveling out of what had been very steep annualized market depreciations. We will still see depreciation as the norm, clearly, but I expect it to settle somewhere between 5-10% as the annualized depreciation on new aircraft for the first five years or so after purchase. The curve will begin to flatten in subsequent years and, on average, settle around 3% annually post year-10.

Q: What kind of impact are the various new models and soon-to-be-released models having on the market? Are they stimulating demand?

JF: In my view much of the impact of new models, particularly the G500 and G600, has already been priced into the market. You can see it today in the way that pre-owned G450s in the 10 to 15-year range are now selling at amazing bargain prices. The depreciation suffered by those aircraft is a direct response to the market anticipating the arrival of new platforms and expectations that demand will shift towards those new models. 

Moreover, it is not just Gulfstream. Bombardier is experiencing the same thing with depreciation in Globals thanks to the new models they have in the pipeline. 

Dassault is rather different.  They have always been more stable, price-wise. You don’t see the heavy fluctuation in asset values that are more common to Gulfstream, Bombardier, and Textron. Dassault’s business model has always been very different from the other OEMs, with its focus on low volumes and high quality. Logic says that you should go for volume if you want a sustainable business, but Dassault has proved itself able to go against that model time a  er time. It will be interesting to see if the new leadership is as enthusiastic about bringing new models forward following the passing of Serge Dassault earlier this year. Is the passion still there? Will the new leadership be able to give the market enough confidence 
that a lower scale of production can still create very stable pricing?

In today’s tight market what is very clear is that Falcons are holding up very well. The Falcon 2000EX is an excellent example. There is virtually no supply. We have been engaged to purchase one for a US client and we are competing with five other very experienced US corporate buyers, all with virtually the same acquisition requirements. 

Q: What kind of pricing are you seeing on the Falcons?

JF: As an example, a 2008 model EX, which was delivered new at roughly $28 million is still making every bit of $12 million and perhaps more. So you are looking at just over a 50% depreciation rate for a 10 year old aircraft. That compares very well against ten-year-old Gulfstreams and Bombardier Globals. In my view, although Dassault argues this is because 
their aircraft is inherently better, it really comes down to supply and demand. Tight supply causes prices to stay stable. 

Q: So how healthy is the overall market right now?

JF: When we look at the health of the aviation sector in general and the pre-owned market in particular, we generally talk about the percentage of the overall fleet that is available for sale at any point in time. Typically, the industry has always embraced 7-10% as the normalized,  ‘healthy’ zone for the size of the pre-owned fleet up for sale. However, we think that a better indication of the market’s overall health is the pace of turnover of that supply. We use a ten-month period as the yardstick for this measure. If the for-sale fleet turns over in 10 months, we take it that the market is very healthy. If it takes 20 months we begin to get concerned. If we are a buyer, we know that there are going to be some great opportunities when the market slows like that. 

So, right now, as I began by saying, the market is transitioning over to a seller’s market. There are still bargains to be had, but every bargain is relative to what is happening around it. Some 40% of our business involves serving as the buyer’s agent in transactions. With the market as tight as it is today, we have to make sure that the buyer is prepared to move rapidly when an opportunity comes up. We help them with our data and analysis, but we impress on them that the very best opportunities will only be on the market for a matter of days or weeks.  Setting proper expectations from onset of the engagement remains paramount to our success with clients.

Q: Finding the best transaction opportunities doubtless needs deep market knowledge?

JF: Absolutely. A good part of our analysis goes into understanding the nature of the supply available on the market. Many aircraft will not be priced reasonably, or they may have some  adverse  history  of  damage or corrosion.  Many of the aircraft listed on the market today have been on the market for two or three years, which is almost an immediate no-no. There is no reason why an aircraft in good condition takes that long to sell, unless  the owner simply has unreasonable price expectations. However, even aircraft with an adverse story or that need some modernization are sellable, if the seller has been properly guided about the pricing expectations of the market with respect to their aircraft.

This article was originally published in the August 2018 issue of Business Aviation Magazine.


 December 11, 2018