It is our opinion that aircraft values are in a new paradigm. We feel historical references to past downturns should only be viewed with a minimal historical framework.
This aviation downturn is quite different than past downturns on several fronts. First, we entered this downturn in a period of tepid demand and not bubble prices. Bubble pricing exacerbated the previous downturns. This downturn came on the heals of 2019 that saw aviation transactions down from previous years. We were experiencing some pricing stability, but more in line with normal depreciation rates for year over year aging and pricing.
Second, most companies came into this downturn with a good supply of cash and liquidity. We did not see as many cash strapped and highly leveraged businesses. We also had not experienced loans and leases based on highly optimistic residual values, since 2008/2009 financial institutions were forced to be more conservative in their loan terms.
Thirdly, OEM’s have maintained more measured output to the market demand. They have not been over producing trying to keep up with a bubble in demand.
Going forward we think that we will see an uptick in demand for private aviation flying. People are still going to need to travel, but they will be more likely to turn to an alternate means to public transportation. I have talked to CEO’s and flight departments and most have reported that they desire to not put key executives on the airlines. They are viewing this as a safety issue. We feel this will offset and more than likely be a net gain over the unfortunate few businesses that can no longer afford their own plane.
As to market values. We would caution that the previous indictors of market strength are not going to be accurate for several months post coming out of this shutdown. Aircraft being on the market during the shutdown and a slow recovery will skew days on market.
Likewise, absorption rates, which are a great indicator of the market in terms of price to available aircraft, will also be skewed by less demand during the last few months with few buyers willing to step up and buy. The combination of the whole buying process being more complicated will see absorption rates move to more months to absorb the inventory.
Probably the best measure will be to add the 60-90 days to the previous years average time on market. As to absorption rates, we think adding 4-6 months months to the previous numbers going into late 2020 will make more sense. We look at absorption rates differently than days on market as less desirable aircraft have a tendency to inflate the average days on market. Absorption rates in our opinion reflect good quality aircraft exchanging hands at market prices more accurately.
A significant increase in the percentage of the fleet for sale will be an important number to watch and definitely we will watch the trend. However, we have seen certain models have brisk absorption rates while seeing a high percentage of that market for sale. If demand for some models does increase, the percentage of the fleet for sale might be offset by lower absorption rates.
By the time this is published we will have started to see what the market looks like and how it is trending. We are highly optimistic about the aviation market and do not see the doom and gloom that 2008/2009 produced.
