DECLARING A MARKET BALANCED
Whether you are describing a market as dynamic or static, a buyers-market or a sellers-market, supply rich or demand rich, the pendulum always swings and markets are always in flux. We have enjoyed balanced markets in the past. In fact, I know I could find and dust-off a past article that would speak to any of these market dynamics. What makes that the lazy way out is everything in the market affecting it at this moment. For instance, the last time I probably wrote about a balanced market was at least 5 years ago, if not longer, as we began to emerge from the 2008-2009 global downturn. However, in that period our entire fleet was 5 years younger, there was less concern about next gen upgrades and there was not a global recovery.
This is not going to be a dusted-up article! In order to claim that we are in a balanced market today I looked at several resources, including the two reporting books, Aircraft Bluebook and VREF, as well as questioning many aircraft brokers, lenders and attorneys. They all seemed to say the same thing. Balanced. It is too early in this balancing act to declare too much of an off-center market phenomenon. Meaning, it would not be fair to call it a sellers’ market and it is not too early to stop calling it a buyers’ market.
Let’s look at the difference between the balance 5 years ago and today. In just looking at a few categories of aircraft that are 10 years or newer now, the market experienced a calming of residual loss rates from about the 3rd quarter of 2013 to about the 1st quarter of 2015. That was when I wrote an article titled “Careful What You Wish For” which outlined the three big wishes everyone in North America had, a lower cost of oil, more energy independence, and a stronger dollar. I went on to say that we actually got all the wishes we asked for granted almost on the same day. The only problem was those wishes caused havoc in our markets again. Oil dropped over one hundred dollars a barrel, concurrently US oil reserves surged and our dollar strengthened overnight. The capital expenditure of companies and countries subsequently dried up overnight. So began another significant drop in aircraft values which is only beginning to level out as of the 3rd quarter of 2017. Back to balance.
As I mentioned 5 years ago as we looked at our fleet at large we had a 5-year younger fleet even for the oldest planes. The idea of eminent investment in even the oldest planes that wanted to fly only domestically was still out so far by most standards that it was not on the radar screens of most owners or buyers and sellers. Today, as we have an older fleet with the near-term investment being required for next gen, we began to not only face the reality of further investment in our fleet for compliancy, but also the contemplation of certain age aircraft just truly being on their last leg. Some people will not want to make that avionic investment in an aircraft that may only be worth $500,000. Therefore, we may be saying goodbye to a segment of our fleet that has been delivering safe flying to its owners for 25 to 30 years. That loss of fleet count will add to the equation of overall supply.
The biggest news today is global economic health. This is the first time in a long time that the world economy is growing. This will be the single most contributing factor to the balanced market. I am asked all the time about the effect the new tax cuts will have on aircraft transactions. My answer today, which of course may shift over time, is it is too early to tell. Will the 100% depreciation in the first year for pre-owned aircraft stimulate sales? Not sure yet if as a stand alone benefit that will bring a large increase to sales. After all, not everyone has the ability or capacity to use that new benefit. Many high net worth individuals who no longer have business interests can’t use the depreciation and the personal use factor has to also weigh in for those who could. I think the overall business confidence level is up in North America and in many other parts of the world, and that as much as anything, is good for business. As a counter balance to this, one must consider the risk of inflation and the toll a few hundred basis points could take on borrowing. So, in one hand we have benefits of tax incentives and in the other hand we have risks associated with growth. My advice is like it is with any market condition, approach the market with good counsel and common sense. Align with those professionals who have your best interest in mind. Ask good questions and expect solid answers. As always, demand a transparent transaction.
WHY NOT BEFORE?
Before I launch into this article’s topic, I wanted to take a moment and comment on this year’s NBAA BACE in Las Vegas. Aside from Vegas being a great city for this event, including weather, restaurants, static display venue and hotel accommodations, we must remember it is no better than the people. Mix in great industry participants with an amazing convention development strategy and execution made in great part through the leadership of NBAA and you have another very successful event. Congratulations to all who lead this event and participated at every level. Bravo!!
I had a chance to talk to many industry leaders during the event. In many cases, and often unsolicited, a common theme kept coming up, the ethics of our industry. Of course, every conversation included the “how’s business” question and often that ended up in the same place. Never worked so hard, earned less per deal. But the deals were happening and the majority of people I spoke to endorsed the North American activity and were excited to see a steady growth in transactions. The conversations however, kept coming back to ethics.
So, why now? Maybe it goes back to the other side of the conversation, never worked so hard and earned less per deal. Maybe there is a glass ceiling or tipping point that we as an industry are coming up to. Maybe there is an underlying feeling that it may be time to create an industry theme and work in sync to instill some barriers to entry as well as methods to identify and police violations to usual and customary best practices. The vast majority of our industry participants use best practices without mandates or written Codes of Ethics. It is just the way most people conduct their life as well as their business. After all, written Codes of Ethics are meaningless, unless actually followed and adhered to. You might say without adherence they are not worth the paper they are written on!
What are areas of concern that most people who were having these discussions focused on? Pretty much universally it was transparency. How does a lack of transparency affect a transaction? Financial parts of the transactions can be masked thereby creating opportunities that are not disclosed to benefit someone in the transaction. One can see this in back-to-back transactions and accepting or paying finders fees or referral fees that are not disclosed. These can be small remunerations or large out of balance payments.
The discussions during my visit to BACE leaned towards trying to develop sweeping industry best practices. By the way, this is not just about the brokerage or consulting side of the aircraft transaction. These discussions also included every other facet of the industry including maintenance, management, fueling and equipment sales that were experiencing violations of best practices.
As I said, maybe like never before are the players in our industry tired of feeling as if they have never worked harder for less. They feel as if the reason for the less is due to the feeling that buyers and sellers of all the areas of our industry are feeling they are getting less value from the service providers and so they want to pay less for the service. They may feel that due to hidden fees and remunerations they are not comfortable paying higher or more reasonable fees. They cannot put their finger on exactly why, but it may be a general feeling of distrust due to hearing stories of improprieties as well as possibly having actually experienced them.
Why not before? Simple. Often it takes that boiling point or tipping point to collectively reach an end of wit’s feeling. I found it so interesting that as an industry we may have hit that wall together. Best practices are a wonderful thing. In fact, one does not have to shout it and say, “look over here we adhere to best practices!” Reputations always proceed the act. Typically, people who do it right don’t do it by accident, they do it because it is their way of life. People that do not adhere to best practices or lack of transparency also do not act that way by accident. It almost seems as if they don’t know how to do it right and would mess up time after time as if it is their way of life.
This will be very interesting to see if this discussion dies on the vine or really gets traction. It would be a welcome change for everyone that wants to play on a level field.
CIRCLING THE WAGONS
There are multiple private and public industry events taking place this month and next. Many of the airframe manufacturers and fractional companies are gathering small select industry participants to discuss our current market as it pertains to their specific positioning as well as broader discussions about trends and projections. We are always honored to be invited to these group discussions and always leave with a greater sense of worth and understanding about our great industry. On the more public side of events, National Business Aviation Association (NBAA), recently hosted their Regional Forum in Morristown, NJ, and NBAA-BACE takes place in Las Vegas next month.
All of these events allow for a gathering of large and small operations to collaborate, consolidate and deliberate the markets and influencing events. No doubt the continuing topics will touch on market strengths, pre-owned pricing and availability of aircraft, new versus pre-owned sales statistics, as well as new product roll outs and introductions. Some of the discussions fall on historical knowledge, some rely on predicting trends and some just fall into the gut check area.
As I am writing this article a quick glance at the Dow Jones for today show the markets up 260 points due to a collective sigh of relief for the minimal apparent loss of life from Irma. I only bring this up to demonstrate the fragility of the financial markets domestically and internationally. Just last week the markets were struggling for days over the provocative statements being hurled around by the US and N. Korea. As I read the different blogs that appear daily regarding financial markets as well as specific trend prognostications about our industry I see a theme occurring regarding what is looking in some circles as a lessening of the residual loss rates of aircraft in some categories. Also, along with that sentiment is the discussion of the differentiation between the cost of the new offerings from manufacturers and the opportunities afforded in the like-new aircraft. The theme is twofold. First, is it sustainable and second, is it real? Funny how time changes things. Go back down memory lane with me to 2007, and remember that not only did the value of young aircraft not go down against the price of a new ones, in many cases they actually could have been the same price.
And what about the discussion of supply and demand? It is said that there may be a percent of available aircraft by category that equals as much as 10-15%, but then the conversation goes on to say that once you parse the list of available aircraft down to the select few that are registered in the United States, have great pedigree, no damage history and the most popular configuration, you may only be left with a very few aircraft rather than 10-15% of the fleet in that segment. This may be true, however the distraction that can be made by the noise that we hear and see daily with eblasts like “Huge Price Reduction” or “Next to Sell” or “Owner Wants It to Be Sold Today” can be very seductive for what the untrained eye may make one feel about a deal as they approach a market segment. This distraction can cause you to miss the real deal by taking precious time away from the right opportunity.
If there is one take away from all this it is the reality of the tenuous nature of the market we are all in. Deals are taking longer to close. Still not totally sure there is any one reason for this phenomenon but it adds to the stress of each transaction. The saying “time kills deals” has never been as true as it is today. Given the volatility of our world and the added time of the transaction the collective sigh of relief that is heard when a deal closes is remarkable. Hurricanes, debt ceilings, dictators and unstable geopolitical environments are all contributing to a shaky recovery that could take two steps back rather than one step forward at every sunrise.
So why say circle the wagons? It seems like in old westerns the circling of the wagons provided a barrier from the enemy. I’m not always sure who the enemy is in our case, but providing a barrier never hurts. It also gives us a chance to talk amongst ourselves to discuss the ideas and share the thoughts that can help build a strong front for our future. I look forward to seeing you all next month in Las Vegas. It is always joyous to gather and enjoy each other’s company. This year is shaping up to be a record year for attendance and an amazing opportunity for understanding shared product introductions and new service offerings. If you have not already made plans to attend NBAA-BACE it is not too late. Go online to NBAA.org today and register. I have seen the list of educational and informational programing and it is exceptional.
Also, please make plans to attend the Corporate Angel Network event on Wednesday night. This event is perhaps the best networking event at the convention. Wednesday, October 11, 2017, 6:00 p.m. – 8:00 p.m., Wynn Hotel Las Vegas – Lafite Ballroom. See you there!
THUNDER ONLY HAPPENS WHEN IT’S RAINING
Every once in a while, a song title or lyrics can be used to perfectly describe totally unrelated current events. Now, if you can break away from humming this Fleetwood Mac song, let’s move on to the topic. Is the market changing? Is it raining now and creating this discussion “thunder” or is change not really happening?
There are a few categories of planes, that upon closer inspection and culling of the available aircraft, are much less supply rich than they appear to be at first glance. So, take any list of the total aircraft and pare it down based on the criteria that either your client has for you or just general usual and customary criteria such as pedigree, equipment, total time, damage history, configuration and registration history. Now once you have created your internal checklist of items required to meet your client’s mandate is there an aircraft that actually checks all of the boxes? Is there an aircraft that checks most of the boxes? Are the unchecked boxes criteria that can be checked with additional investment or are some unchecked boxes those that cannot ever be checked due to the specific criteria? For instance, you cannot buy your way out of damage history or history of corrosion and repairs. You will never be able to turn the hands of time back to make an otherwise great plane with just too much time fit your mandate. But what do you do with an aircraft that does check all the boxes? Is that a plane that perhaps you might be willing to pay slightly more for based on the aggregate of the offering?
My short answer to buyers is, yes, if you can get the mandate boxes checked with twenty-five or fifty cent dollars rather than having to buy the plane that has most boxes checked, but then spend one hundred cent dollars, do it. Why pay more for less when you can get what is no doubt a better buy with smart calculations made on a willingness to pay slightly more for the better plane? I do not think that residual loss, even quarter over quarter, is over. I am just saying that approaching markets with an attitude that there is so much inventory that every plane is a steal may be misleading. I always tell my clients that our goal is not to buy a cheap plane cheap, but rather to find and buy a great plane at the best price. This “Best Price” discussion means some consideration for benefits and value.
Back to the original question. Is the market changing? Again, the short answer is, yes. Is it shifting dramatically? The even shorter answer is, no! Prices are still trending down in almost every category. In a few, the residual loss rate may be slowing, but prices are not going up. In fact, let’s not forget that these pieces of equipment are just that, they are not investments like real estate or stock shares. These pieces of equipment get older, they suffer with time and they are impacted by use. What may be changing is the perception of the market. The perception cannot continue to be that markets are supply rich. The perception needs to shift to be that markets are still around 10% of fleet supply, however as I mentioned above, they are not all good and qualified to meet your clients’ mandates.
The transactions that are taking place are still predominantly in North America which means that much of the available inventory that is not US based is harder to contract and costlier to purchase. This continues to shift the focus on the available aircraft based here in North America. Don’t get me wrong, there are not inherent problems with aircraft based out of the US, however there are regions of the world who’s regulatory recording bodies do not track liens or identify owners and just focus on operators. These nuances create a more problematic and even risky situation to know with certainty that there are no liens lurking in the shadows.
Another significant development that is taking place now with respect to process and timing of a sale is that the service centers are slammed. It now may take as long as 30 days to get a slot for a pre-buy. Once in a facility, since there seems to be a lot of over promising with respect to labor availability, the inspection is also taking longer. One thing we all know is time kills deals! This is also holding true with modification timelines. What took three weeks can now take five weeks. Therefore, good planning and setting the right client expectations, are critical.
So, is that a sonic boom or is that thunder and is it really raining?