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Aviation History
2002
2002 - 2658.PDF
models as trade-ins, which they are forced to sell at a loss - or not sell at all. One man ufacturer says: "Two years ago we were happy to take aircraft as trade-in on a new one as we could sell it within weeks. Now we are saddled with around nine aircraft in our inventory worth several million (dol lars] and we cannot afford to wait until the market picks up." JP Morgan says that the weak used-air craft market will continue to force manu facturers to sacrifice margins in exchange for volume. If aircraft prices continue to drop, the cost of new aircraft could become "uneconomic relative to used aircraft", the analyst adds. For manufacturers, a revival in used air craft sales will be the catalyst for a new air craft market upturn. "An increase in after- market activity due to rising demand will result in a drop in the number of aircraft for sale. This will allow aftermarket pricing to firm up and improve so that new aircraft become more attractive on a relative basis and manufacturers no longer face substan tial margin pressure," says JP Morgan. Charter hope General Aviation Services' Dickensen says aircraft popular with charter operators will lead the recovery: "The charter market is thriving and, as consumer confidence returns, operators will begin to invest in more aircraft. Types within the S3-6 mil lion range such as the Cessna CJ2 and Citation V and Raytheon Hawker 700 will drive the demand." Meanwhile, some traders are casting nervous glances at the growing fractional ownership fleets, which they fear could eventually be sold on to the fragile used aircraft market when customer contracts expire within the next few years. Although fractional companies have not disclosed their plans, UK consultancy Airclaims says a large number of pre-owned fractional air craft will enter the market; this could have a detrimental effect on the resale value of existing types. "Fractional aircraft will be high-time machines [flying on average around l,000h a year), but with their good maintenance history, they should still be desirable," Airclaims adds. Engles believes the large companies, such as Netjets, will create a dedicated, pre- owned fractional programme in an attempt to lower the cost of entry, and bring newcomers into the market. At Netjets, owners reaching the end of their five-year agreements are offered the option of buying a new aircraft share or staying with the existing aircraft and paying a higher hourly fee because the warranty has expired. This avoids depressing prices by dumping aircraft on to the used market at the five-year mark. Fractionals have already contributed to the large used aircraft inventories, as increasing numbers of owners have dis posed of their aircraft and acquired shares instead. Other obstacles hindering used market growth are the host of regulatory requirements being mandated for aircraft to ease congestion and increase capacity throughout European and US airspace. Business aircraft operators will have to undertake costly avionics upgrades if they want continued access to fuel-efficient flight levels and the major airports. Add to this the increasing local opposi tion to the continued operation of older, noisier business jets, and some models, such as the Gulfstream II and Rockwell Sabreliner 60, may be forced out of the market. Engles says the most likely home for these "inefficient and noisy types" will As noise concerns grow, the Gulfstream II may become much harder to sell "While there is political and economic unrest, companies will put off making long- term business decisions'' RICK ENGLES, AIRCRAFT BROKER be countries not subject to strict regulatory regimes, such as some in Africa. Traders' individual interpretations of what will constitute a recovery appear mixed. Dickensen is convinced the market cannot drop much further and should soon begin to bottom out. "Most sellers are becoming more realistic about what their aircraft are worth today, and buyer interest, notably in low-time aircraft, is starting to return. These are always the first aircraft to sell, but the prices will remain low for some time," he says. Stable market In a recent survey of business aircraft deal ers and brokers, sales agent Aircraft Shopper Online (ASO) found the resale market remained relatively stable through out the second quarter, although there was a noticeable downward trend. ASO says that 39% of respondents "reported a decline in serious inquiries and 38% reported a decrease in aircraft sales". For the third quarter, ASO found 41% of respondents expected an increase in sales, 42% no change, while only 17% predicted a decrease. On the positive side, for those looking for a bargain, the current market is ripe with opportunity. "If a customer wanted to trade up a year ago, it might have meant selling their existing aircraft and coming up with several million (dollars] more," says Engles. "Now it might cost their air craft and a significantly smaller instalment to get a larger model with more range and cabin comforts." Engles believes the market has not yet reached its lowest point. "While there is political and economic unrest combined with a mistrust of corporate USA, compa nies and individuals will continue to put off making long-term business decisions," he says. Like the "canary in the mine", the used aircraft market is a gauge for the business aviation environment, "but we don't expect it to start singing again for some time". • 58 3-9 SEPTEMBER 2002 FLIGHT INTERNATIONAL www.flightinternational.com
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