Used Aircraft Maintenance Analysis (March)

The inventory fleet keeps shrinking, but average Ask Prices keep decreasing. Why is this, and which used jet and turboprop aircraft were the most improved and most deteriorated models in terms of their marketability in March? Asset Insight’s Tony Kioussis explores…

The total number of used aircraft listed ‘For Sale’ declined for all four groups during March. Large jets led the way with a 4.1% decrease (15 units), Medium and Small jets followed with 1.3% and 1.2% decreases (seven and six units respectively), while Turboprop inventory decreased by two units (0.7%).

Buyer focus on low-time, high quality aircraft cannot be overstated. Data collected during Asset Insight’s March 29, 2018 market analysis covering 92 fixed-wing aircraft models and 1,657 units listed ‘For Sale’ revealed that many sellers of older and/or lesser Quality assets are finding it necessary to reduce price in an effort to entice buyers.

This is somewhat counterintuitive, as reduced supply has historically led to firmer (if not higher) pricing. However, that does not yet appear to be the case with respect to older models.

The average Quality Rating for Large and Medium jets improved during March, while Small jets and Turboprops posted a Quality Rating decrease. Maintenance Exposure decreased for all three jet groups, while increasing for Turboprops.

In the case of Small jets, the Exposure decrease means that while the number of maintenance events due on inventory aircraft has increased, these are (on average) less costly to complete.

The average Ask Price for tracked models decreased 0.7% to register a second consecutive monthly record low figure, although group performance varied:

• Large jet prices improved 1.8%;
• Medium jet pricing was virtually unchanged;
• Small jets fell 0.9% to a new record low figure;
• Turboprops posted a 12-month low with a -0.2% average price decrease.

All of these changes resulted in a 5.8% Maintenance Exposure to Price (ETP) Ratio improvement, but the figure was still too high to positively impact older inventory aircraft marketability, especially as 61.5% of all inventory aircraft registered an ETP Ratio in excess of 40%.

ETP Explained

For those new to these analytics, let’s review the ETP Ratio and its relevance. The ETP Ratio calculates an aircraft's Maintenance Exposure as it relates to the Ask Price. This is achieved by dividing an aircraft's Maintenance Exposure (the financial liability accrued with respect to future scheduled maintenance events) by the aircraft's Ask Price.

The ETP Ratio is a useful indicator of an aircraft’s marketability.

‘Days on Market’ analysis has shown that when the ETP Ratio is greater than 40%, a listed aircraft’s Days on Market increase (in many cases by more than 30%).

So, for example, aircraft whose ETP Ratio exceeded 40% during Q1 2018 were listed ‘For Sale’ an average 61% longer than aircraft whose Ratio was below 40% (189 days versus 303 days on the market, respectively).

Accordingly, as the ETP Ratio decreases, the asset's value increases (in relation to the aircraft's price). Our tracked fleet ETP Ratio improved since February’s 66.9% to 63.0%. By aircraft group:

• Although it was the group’s worst 12-month figure, Turboprops continued to post the lowest (best) ETP Ratio at 52.2%;
• Large jets followed at 56.3%, an improvement;
• Medium jets also improved with a Ratio of 63.3%;
• Small jets improved to 73.8%.

Excluding models who’s ETP Ratio has remained over 200% during the previous two months (such aircraft are considered outliers), following is a breakdown of which individual models fared the best, and which fared the worst in March 2018.

Most Improved Models

All six ‘Most Improved Models’ shown in Table A experienced a Maintenance Exposure reduction (improvement). The Gulfstream GV and the Cessna Citation II registered price decreases of $424,653 and $14,337, respectively, while the remaining four models posted the following price increases:

• Learjet 35A:  +$6,300
• Gulfstream GIV: +$197,302
• Citation ISP:  +$22,045
• Learjet 60:  +$70,022

Learjet 35A:This model topped the Most Improved list for March without registering a single sales transaction or addition to inventory. The available fleet’s Maintenance Exposure decreased by $278,340, due to maintenance event completions.

The small increase in Average Ask Price resulted from a price reduction for one aircraft, while a second aircraft moved from a posted Ask Price to ‘Make Offer’.

Gulfstream GIV: Two sales were registered in March, and the inventory fleet decreased to 13 units since there were no new listings. Maintenance Exposure decreased by nearly $537k, as the two traded units were below average asset quality. Along with the model’s price increase, the GIV was able to earn the second highest spot on our list.

Gulfstream GV:The GV aircraft listed ‘For Sale’ decreased by one unit over the past month due to three retail transactions (one involving an aircraft that was never listed), while one new asset entered the available inventory.

While the model incurred an average Ask Price decrease approaching $425k, the changes to inventory decreased Maintenance Exposure by over $2.4m, earning a spot on the ‘Most Improved’ list.

Citation ISP:This model posted three retail sales, one lease and three new additions to the ‘For Sale’ fleet. The overall impact was to decrease total inventory by one unit, while decreasing Maintenance Exposure by over $66k and increasing average Ask Price by $22k.

The ISP’s ETP Ratio reduction of 18.3% signals that traded aircraft were replaced by higher asset quality units, and sellers can only hope that the Ask Price increase, while nominal, might lead to further improvement.

Learjet 60:One Learjet 60 retail transaction occurred last month after we closed out February’s figures, and there was one additional sale posted during the month of March. With three additions to inventory during March the ‘For Sale’ fleet increased by one unit resulting in a Maintenance Exposure decrease exceeding $172k.

It is worth noting that Ask Price increased by over $70k, but involved a $200k decrease for one unit while a second unit posted an Ask Price in March (as opposed to its ‘Inquire’ listing in February). Lastly, one newly listed aircraft has a posted price more than 70% above the model’s average March ‘Ask Price’.

Were that figure to be excluded as an Outlier, the Lear 60’s average ‘Ask Price’ would actually decrease by over $3,900, increasing the model’s ETP Ratio and likely drop it from the ‘Most Improved’ list.

As we have repeatedly counseled buyers and sellers, the importance of collecting and understanding the details behind apparent market pricing shifts should not be underestimated.

Citation II:There was a great deal of Citation II activity in March (unsurprising, given the month ended with 90 listed ‘For Sale’). One transaction was posted after we ran February’s figures, four aircraft traded in March, five were withdrawn from the market, and there were eight new listings.

All of this jockeying led to an ETP Ratio improvement of 13.1%, led by a Maintenance Exposure decrease of nearly $102k that was more than able to counter a $14k Ask Price reduction.

Most Deteriorated Models

All aircraft in the ‘Most Deteriorated’ category experienced a Maintenance Exposure increase in March. The Challenger 601-1A and the Falcon 2000 registered Ask Price increases while the other four models incurred Ask Price decreases, including:

• Learjet 31   -$275,000
• King Air 300   -$43,000
• Citation X (MSG3)  -$480,000
• King Air B200 (Pre-2001) -$10,032

Learjet 31: In a single month, this model moved from the best spot on the Most Improved category to occupy the worst spot on the ‘Most Deteriorated’ list. It all happened with the Lear 31 registering no transactions, but one aircraft was withdrawn from the ‘For Sale’ fleet.

While Maintenance Exposure saw a relatively minor increase, the withdrawn aircraft left only one unit displaying an Ask Price amongst the six listed units, and its posted price was far lower than the withdrawn aircraft’s Ask Price.

While perhaps an Outlier, the model was included to point out just how challenging pricing figures can be for the untrained eye to decipher, and hence the reason we recommend engaging the services of a Certified broker when seeking to sell an aircraft.

King Air 300: Two aircraft traded in March and one was added to the ‘For Sale’ list. As both trades involved higher quality assets, Maintenance Exposure increased for the remaining inventory by over $132k, while Ask Price fell by $43k. The net effect to the model’s ETP Ratio was an increase of 12.2%.

While not catastrophic, the model is now well into an ETP Ratio range that we consider to be excessive.

Challenger 601-1A:No aircraft trades were posted for this model by our March closing date, but normal aircraft utilization increased Maintenance Exposure by over $192k and overwhelmed a $30k Ask Price increase, raising the ETP Ratio by 8.6% and earning the model a place on this list.

Citation X (MSG3):The model ended the month with an ETP Ratio of 37.7% that, although higher than February’s 29.9%, was below (better than) the margin we consider to be unacceptable.

One aircraft transacted in March, while two joined the ‘For Sale’ list, raising total inventory to six units. The change in fleet mix increased Maintenance Exposure by $124k while lowering average Ask Price by $480k due partly to a $500k price reduction for one of the listed units.

Falcon 2000:Inventory sales decreased the ‘For Sale’ fleet by four units, two taking place in March and two in February (trades posted after we closed out the month), and it clearly involved higher quality aircraft as average Maintenance Exposure climbed nearly $363k.

Ask Price increased by more than $170k, and that included the effect of two aircraft entering the inventory. At we closed out March, the available fleet stood at 14 aircraft.

King Air B200 (Pre-2001):The ‘For Sale’ fleet increased by one unit at the end of March, with five units transacting (one as a lease) and six units entering inventory.

While the model’s ETP Ratio was only marginally above the 40% threshold, the inventory fleet’s Maintenance Exposure increased by nearly $56k, and the average Ask Price fell by over $10k to earn it a spot on the ‘Most Deteriorated’ list. With 48 candidates to choose from, sellers are bound to be challenged by buyers seeking to extract good values from higher quality assets.

In Summary…

Higher quality aircraft continue to sell well. Statistically, average Ask Prices are falling. However, transaction values for assets of higher maintenance quality are solidifying.

For sellers that do not know the position of their aircraft relative to assets of the same model ‘For Sale’ or a competitive model, the cost is likely to manifest as more Days on Market along with an additional pricing penalty as maintenance comes due. Knowing such facts is the only way one can justify an Ask Price and know if an offer received is the best likely to be achieved in any sales environment.

It’s 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 far before work must be completed.

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.

It is not until an aircraft undergoes some major maintenance that a seller is sufficiently motivated to accept a lower figure, or a buyer is willing to pay a higher price and the aircraft transacts, ultimately.

A wise seller needs to consider the potential marketability impact early maintenance might have on their aircraft, as well as enrollment on an Hourly Cost Maintenance Program where more than half of their model’s in-service fleet is enrolled on HCMP.

Sellers also need to carefully weigh any offer from a prospective buyer against the loss in value of their aircraft ‘For Sale’ as the asset spends more days on the market awaiting a better offer while simultaneously accruing a higher maintenance figure.

More information from www.assetinsight.com

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