Financial Times
Chasing phantoms in the business jet market
Jul 16, 2010
By Rohit Jaggi Reading the runes of a market is nothing if not difficult. Trying to work out the many mysteries of the market for used business jets is even worse.
The statistics say 14.9 per cent of the fleet is up for sale. This is, historically, a very high figure and, industry experts say, it weighs heavily on the prices of both used and new jets, as well as on sales of new jets.
But how many of those aircraft are really in want of a new home?
One jet broker gives me the example of an old Dassault Falcon 900 that has been on the market for some time and is worth maybe $16m (£10m, €12m). But, when you ask, the seller is firm on a price of roughly $24m.
The owner knows the value, and he wants to seem willing to sell. But while no one offers the asking price, he is using the aircraft.
In the post-crunch world of apparent excess being censured by shareholders, “wherever there’s a sense of accountability you’ll find aircraft on the market”, the broker says.
The damage done to the corporate aviation sector in 2008, when the chiefs of the three big Detroit carmakers flew by private jet to Washington to plead for public funds, is hard to overstate. It fed into popular perceptions about wasteful perks and prompted a backlash against executives’ use of private aviation.
Even the broker says: “If you’re a CEO, the private jet is the last frontier in terms of perks.”
The expensive campaign led by Cessna to promote business flying was necessary to give the other side of the argument. But, in the meantime, the pressure has been high on corporate flight departments – in spite of the factors that point to the use of private aviation as a valid business tool.
As one analyst puts it: “When you’re paying a chief executive $5m a year, it doesn’t make any sense to have them sitting for two hours in an airport lounge.”
A rise in some sectors of the charter market adds to the impression that flying executives and key advisers to meetings or site visits is seen as essential – and is becoming more widespread as mergers and acquisitions activity builds up again – but may still be hard to justify when a company-owned aircraft is used.
Mark Wooller, head of corporate aviation and consultancy at the Independent Bureau of Aviation, an advisory group, agrees. “There are definitely companies that have put jets up for sale because of public perceptions,” he says. “They needed to be seen to be selling. When the dust settles, a lot of aircraft will go off the market.”
This is not to underestimate the extent of the slide in values. One market commentator points to an ultra-long-range Bombardier Global Express sold at the top of the market for $60m. Today it is worth $45m. “The owner has to crystallise his loss or use the aircraft for a long time to amortise the loss over a long period,” he says.
According to Richard Aboulafia, vice-president of analysis with Teal Group, a US-based consultancy, “pricing hasn’t recovered at all”. He has been consistent in labelling the current economic situation a three-year downturn, with plenty of pain to come. “We’re only halfway through,” he says.
For now, the difficult part is working out how many phantom planes there are in this section of the market – and what effect they are having.
“The real picture isn’t pretty either,” Mr Aboulafia reckons. He says there is a definite phantom sales component in the total and that one can take a percentage point, maybe more, off the total. But even at 13.5 per cent of the fleet, he points out, the ratio is high.
Mr Wooller says: “We need to get down to single digits to see prices increase. Typically, when you get down to 3-4 per cent, then prices really firm up. But that’s not on the horizon. Not in the short term.”
Some genuine sellers, he adds, are withdrawing their aircraft from the market because they calculate it is more worthwhile to keep using them rather than take a huge loss by accepting the low prices out there. The more that happens, the more prices will rise.
For now, though, the market remains soft. According to Mr Wooller, “it probably needs a good couple of years before it gets back to normal again”.
French passion
In France, again, to fly the new Dassault 900LX – the aircraft is working its way through the certification process, and I was the first outsider to take the controls – I was struck again by the company’s enthusiasm.
Almost everyone I spoke to at Dassault Aviation, it seemed, not just flies but also owns a small aircraft or a share of one. The links between employees – at a personal level – and the birth of the aircraft restoration movement in France, centred on Aérodrome de Cerny-La Ferté-Alais, north-east of Paris, are also extensive.
But the French passion extends beyond flyers. Some time ago, while flight testing the TBM 850, built by Daher-Socata in Tarbes, an air-traffic controller abandoned his laconic and businesslike manner for evident enthusiasm when he passed on a military pilot’s request to use our turboprop aircraft for target practice.
To my relief the Armée de l’Air wanted to intercept us rather than shoot us down. But when the Mirage appeared, its pilot enjoyed a spot of formation flying between rather dissimilar types before giving a Top Gun wave and peeling off to return to base.
Asian growth
On the eve of the Farnborough Air Show in the UK, Boeing’s long-term outlook for airline and freight traffic worldwide sees a growth in passenger volumes of 6 per cent this year, after a fall of 2 per cent last year, in what the US aircraft maker calls an “intensely dynamic”, continually evolving market.
The most dynamic – and fastest growing – is the Asia-Pacific region.
The fortunes of corporate aviation follow a similar trend. While most business aircraft are made by manufacturers based in North America, those aircraft makers have long since taken more than half of their orders from outside their continent, as our interactive graphic shows. And that proportion continues to grow.
We can expect new sales, announced at Farnborough and elsewhere, to join the orders for Airbus corporate jets and other high-value machinery that have already come from the world’s fastest-growing areas, in particular the Asia-Pacific region.
| 
