By Anthony Kioussis
President, Asset Insight
Business aviation operates within a data-rich environment. The challenge has always been collecting useful data in a timely fashion, and then deciphering it to create actionable information. As we do every year, Asset Insight collected a significant amount of data during 2019, and many industry professionals accessed the information we derived to their benefit.
With that in mind, we decided to look back at 2019 by way of determining useful market indicators, such as relevant correlations for buyers and sellers to take into account as they make decisions throughout the coming year.
First, let’s have a look at the used aircraft inventory. In doing so, we should point out that Asset Insight tracked 96 actively traded models during 2019, comprising 33 large jets, 30 medium jets, 22 small jets, and 11 turboprops.
As Table A illustrates, used aircraft inventory contracted in May and again in December, but it grew in total over the calendar year. While December’s contraction was probably caused by the year-end transaction frenzy, it is difficult to guess what made total inventory contract in May.
Perhaps sellers were motivated to close before the slow summer season. Maybe buyers wanted to close on their aircraft for use during their summer travel. Perhaps both. The key takeaway here is that our tracked fleet’s inventory increased nearly 10%.
That trend could lead one to infer that downward pricing pressure is likely during Q1, especially since all 4 groups contributed to the increase. Small jets led the way with a double-digit increase of 15.4%, medium jets were next at 9.8%, large jets followed at 8.7%, while turboprops posted a relatively minor 2.1% increase.
Let’s test out our potential 2020 pricing theory by examining Ask Price changes since December 2018 (Table B). While inventory increased the most for the small jet group, pricing for this group decreased 5.7% during 2019, while pricing for medium jets, a group that incurred the 2nd highest inventory increase, experienced a healthy 11% year-over-year price increase.
Specific model pricing may be negatively affected when large numbers of assets are listed for sale. However, assuming a correlation between model size availability and pricing is not justified statistically.
In fact, without detailed analytics at the comparable aircraft level, such an assumption could lead a seller to reduce the Ask Price too quickly, or induce a buyer to offer less than the market value for a highly-desirable unit, and potentially miss out on their aircraft of choice to a better-informed purchaser.
In an attempt to see if a correlation exists between Ask Prices and aircraft Actual Transaction Values, Table C plots the differential between these 2 data points for each aircraft group. While some correlation may appear to be present within the large jets group, this is probably coincidental, as the other 3 groups posed no statistical correlation for the past year.
What is useful for sellers to note is that the Ask to Actual Value spread for medium and small jets closed out 2019 by registering the smallest differential for the past 3 years. This may signify that Ask Price for these aircraft more closely matched what the market is willing to pay.
Next, let’s examine the maintenance quality rating (a measure of the proximity to maintenance events embedded in an aircraft) of listed assets by group (Table D). We utilized Asset Insight’s standardized scale ranging from –2.500 to 10.000.
For more information, refer to “Understanding how Asset Quality affects value of an aircraft offered for sale” (Pro Pilot, Jan 2018, page 12). Asset Quality decreased 1.8% in 2019, with some groups faring better than others.
Turboprops, for example, never managed to rise above a “Good” quality rating after January. While some would view this as a black mark for the group, the reality is that higher-quality assets are the ones preferred by buyers, with lower-quality assets remaining on the market for extended time periods.
On the other end of the scale, large jets posted an “Outstanding” rating for January and maintained that rating from May through December. As opposed to those purchasing turboprops, buyers of large jets opted for lower-quality assets, possibly due to comparing price against the maintenance that sellers were willing to conduct in order to close transactions.
There is one other behavior differentiator between large jet and turboprop buyers. A very significant percentage of large jets are enrolled on engine Hourly Cost Maintenance Programs (HCMP). As such, embedded/accrued engine maintenance expense does not pose the same risk and related cost hurdle that it poses for turboprop sellers.
Relatively few turboprop owners enroll their aircraft engines on HCMP, and thus engine utilization and maintenance costs become a greater factor in aircraft pricing. This often leads to lower-quality aircraft owners viewing offers they receive as unacceptable, even though it is logical for buyers to address accrued maintenance expense in their purchase offer price.
Table E displays the Maintenance Exposure figures, a financial accounting of an aircraft’s accumulated/embedded maintenance expense compared to its condition on the day it came off the production line, posted by each group during 2019.
While our tracked fleet’s average figure remained in a fairly narrow band throughout the year, large jets posted their lowest Maintenance Exposure figure during the month of December. Not surprisingly, December was also a month where large jets posted one of the group’s highest Maintenance Ratings.
A strong (but not absolute) inverse correlation exists between an asset’s Quality Rating and its Maintenance Exposure. In most cases, when the Quality Rating is rising, Maintenance Exposure is falling. When the Quality Rating is falling, Maintenance Exposure is usually climbing.
Maintenance Exposure also plays a key role in measuring an aircraft’s marketability through its Exposure to Ask Price Ratio. The ETP Ratio calculates an aircraft’s Maintenance Exposure as it relates to its Ask Price, and it is calculated by dividing an aircraft’s Maintenance Exposure (the financial liability accrued with respect to future scheduled maintenance events) by the aircraft’s Ask Price.
Days on Market (DoM) analysis has shown that when the ETP Ratio is greater than 40%, the time it takes to remarket the asset increases, in many cases by more than 30% (Table F). For example, in December, aircraft whose ETP Ratio was 40% or greater were listed for sale nearly 84% longer than assets with an ETP Ratio below 40% (395 versus 215 DoM).
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 much before work must be completed, thus lowering Maintenance Exposure.
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.
While the correlation between the ETP Ratio and Days on Market is not absolute, it is sufficiently high, and accurate, that sellers need to understand how this market dynamic is likely to impact their aircraft’s selling period (Table G).
Lastly, when a seller’s aircraft is enrolled on an HCMP, the asset’s HCMP-adjusted ETP Ratio decreases as Maintenance Exposure is reduced by the value of HCMP coverage. While buyers may be preferentially fond of aircraft enrolled on these programs, the ETP Ratio quantitatively demonstrates how HCMP reduces an aircraft’s Days on Market at resale.
With increasing computing speed allowing for more data to be converted into timely, actionable information, buyers and sellers lacking detailed analytics will find it difficult to optimize the value of their aircraft in an industry that is quickly shifting from a data to an information-driven environment.
Anthony Kioussis is President of Asset Insight, which offers aircraft valuation and aviation consulting services. His 40+ years of experience in aviation includes GE Capital Corporate Aircraft Finance, Jet Aviation, and JSSI.