Things are slowing down, from homes to cars. If you read my market newsletter for the 2nd quarter of 2022, this should be no surprise as VREF forecasted a stall out and summer slowdown, but even as the market takes a few weeks off to enjoy the dog days of summer, does that mean values are dropping? Not a chance, and while inventory continues to climb on the pre-owned side of the market, not much else has changed. Business jet fleet sizes are small, and making any correlation to other asset classes is difficult at best. What impacts the desirability of an aircraft, and therefore its value, is not always a byproduct of the economy. The aircraft values that have been hit the hardest over the years were affected by airworthiness directives, fleet-wide groundings, or a rash of accidents or incidents that eventually led to an AD being issued. The good news is once these safety issues are addressed, the market for these models recovers, case in point is the 1980 fleet grounding of the King Air 200 due to wing bolt failures. Today, the 200 Series remains one of the best-selling and best-performing aircraft in terms of residual values in the turboprop market.
The major issues affecting values or the market in the second half of 2022 are isolated to operational problems, expenses, and interest rates as inflation continue to hit all-time highs hovering around 9%. For the most part, the increase in available inventory has not substantially impacted overall values yet. The reason is that availability was so low at the end of 2021 that even tripling the number of aircraft for sale would not move inventory levels into a buyer’s market, or over 5% availability. Keep in mind even though the fleet population of business jets is relatively small, we are still talking about a massive sell-off that would need to happen to push those levels into a bear market. The Challenger 300 is a perfect example of how strong or weak the market is; after all, the CL300 is the most popular super midsize aircraft built, demonstrating a robust following, a population size of 452 aircraft that were delivered over ten years. In the past six months, we have seen an all-time low of 6 aircraft available for sale to a current level of 16. This increase in inventory is still only 3.5% of the total operational fleet, which is very much within the range of a seller’s market. The number of sales is slowing down, which correlates to the summer slowdown. 60 CL300s were sold in the past 12 months; 41 CL300s were sold in the first half, compared to 19 during the second half. Asking prices have also increased but have stabilized over the past 60 days. As we forecasted a couple of months ago, the market should pick up for the 4th quarter as corporate buyers look to take advantage of the last opportunity to file for 100% bonus depreciation.
The post-Covid shutdown number of people wanting to fly private continues to increase, as more and more people are either totally fed up with the airlines and their total lack of customer service or their nonchalant attitude of stranding customers all over the globe. The demand for private travel, however, is starting to plateau either because anyone who has the means has already committed to purchasing an aircraft or the lack of availability and increasing fuel costs have put a stop to the insanity, albeit momentarily. As we all know, if one thing is for sure, what goes up, eventually comes down, and yes, that includes fuel. While the largest operators of business jets continue to struggle with increased operating costs, how long will customers subsidize the increases? So far, the data suggests that those who can afford it might not care enough about inflation to allow the increased operating costs to force the aircraft to be parked. As a good friend of mine says, the person buying a Rolls Royce probably doesn’t ask about fuel mileage or oil change expenses.
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Market Demand & More Affecting Jet Values In 2022
As mentioned above, demand for private jets is up. So, let’s examine why values might be impacted as we get closer to 2023.
Inflation & Fuel Prices
Diesel fuel powers the world, and the price per gallon is up roughly 68% from a year ago, and regular gas is only up approximately 40% from a year ago. From groceries to furniture, everything costs more. Aircraft are no different, and we see little to no change in the year’s balance concerning fuel prices. While fuel prices do not directly impact the value of an aircraft, it does affect the affordability of operating it. Due to increasing operating costs, I am unaware of many aircraft owners parking their planes. Still, depending on the equipment, we expect twin-engine piston aircraft to continue to soften due to these issues.
Whether you are a flight school, FedEx, a major airline, or a corporate operator, the primary factor today is fuel. The impact on aircraft values might not be apparent until the 2nd quarter of 2023, as the current administration is hell-bent on keeping fuel prices high. So far, the impact has been limited to the charter market only as demand has slipped almost 5% since June of 2022, and we expect utilization to stabilize as kids return to school and summer vacations end, forcing everyone else back to the office.
Supply Chain Problems
There are three main issues when it comes to supply chain operations in aviation that can all be addressed in one sentence:
There is a shortage of raw materials, parts, and labor.
Across the globe, manufacturing companies are struggling to produce previously promised products, and aviation is no exception. For most piston operators, the supply chain issues are apparent when it comes time to overhaul your engine, and you would be considered one of the fortunate ones if the job didn’t take three times longer to complete than quoted. Engine overhauls and factory remanufactured engine prices are through the roof, impacting older aircraft and their ability to maintain airworthiness. Almost every shop you talk to is backed up, and they have no more room. One engine shop I spoke to has over 200 engines waiting for an overhaul and no more ramp space for aircraft. Another paint shop I talked to had no availability this year at all. Since another covid spike is expected, and another potential for China and other parts of Asia to be shut down, we expect supply chain issues to remain for at least another 12-18 months.
A list created by Supply Chain Dive highlighting product shortages puts materials like chips and aluminum at the top of the affected parts.
The Feds only have one effective tool to combat inflation: contractionary monetary policy. The goal is to reduce the money supply within the economy by increasing interest rates. It works by making credit more expensive, reducing consumer and business spending, and incentivizing banks to buy Treasuries with a set rate of return instead of riskier equity investments that benefit from low rates. There are indeed other methods, but none have proven very effective. You would have to go back 50 years to the 70s to see price controls in place, which didn’t work to fight inflation.
The bottom line is the United States has few tools in its tool kit to stop inflation. I would like to believe a soft landing is possible. However, it is becoming apparent with all the talk of a possible recession we are already in one. After all, a recession had followed the last five instances when inflation peaked above 5%, those being 1970, 1974, 1980, 1990, and 2008. With a mixed record of soft landings and several issues coming to a head at the end of the year, we expect a correction to aircraft values in 2023.
We will enter our fourth Covid winter, and we can all agree it will be here to stay in one variant. Does the question become, what are the chances of another lockdown? The United States is predicting 100 million cases towards the end of the year, and most Americans have learned to live or at least co-exist with the pandemic. It seems like everyone has had, if not multiple times, vaccinated or not. So, will Covid have any impact on aircraft values? The answer is probably not, as we all witnessed the last lockdown did very little to impact aircraft transactions. Of Course, this is a mixed bag depending on what part of the country you are in, the aircraft type, and whether you have access to parts and pilots to assist in the purchase process. If there is one thing I have learned over the last couple of years is that importing aircraft is only getting harder and taking longer.
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How To Plan Around Top Factors Affecting Jet Values In 2022
Whether you’re looking to buy an aircraft now or in the future, there are three steps you can take to make the buying process smoother:
1. Prepare for a delay
In most cases, there is no amount of money you can throw at supply chain issues to speed up the process. There’s a global shortage of parts and labor, so you should expect holdups beyond your control. The best action you can take is to plan well in advance, practice extreme patience, and not be pressured to forgo a pre-buy or other inspection before buying an aircraft.
2. Address Your Budget Honestly
Increased costs and limited inventory mean you may have to increase your budget or allocate more of it to operations instead of the acquisition. Look at expenses regularly to ensure you can maintain your aircraft and continue to fly; after all, a parked plane and deferred maintenance only lead to more issues. Lastly, there is nothing wrong with changing your mind or switching to a less expensive aircraft; be honest with your finances, and the chances of making a mistake are mitigated.
3. Schedule Maintenance Long Before You Need It
Every aircraft owner needs annual and reoccurring maintenance requirements to ensure their aircraft is airworthy. Simply put, the safety of you and others depends on it. Don’t fall behind or wait until the last minute to try and book a shop a visit. Stay on top of your to-do list and schedule it ahead of time.
VREF Is Your Trusted Aircraft Appraiser
We’re far from completely resolving the challenges ahead, but the industry is prepared and in a much better position than it was during the previous recessions. Aircraft deliveries are back on schedule, and orders are only growing, creating a substantial backlog for all the manufacturers. The aviation industry looks forward to increased production, innovation, and sales. When you need someone you can trust to handle your next aircraft appraisal, contact the seasoned Accredited Senior Appraisers (ASA) of VREF.