The private aircraft market has experienced an unprecedented recovery over the past six to twelve months, resulting in historically low pre-owned aircraft inventories and significant levels of interest from first-time buyers.
To help you navigate the current market conditions, Citi Private Bank convened an expert panel – comprising of Paul Barrett, North America Head of the Global Family Office Group, Ford von Weise, Head of Aircraft Finance and Advisory, Citi Private Bank, and John Beveridge, President, Boston JetSearch – to discuss a range of subjects including valuations of pre-owned and new aircraft, management and staffing.
We invite you to view this engaging session and observe its key takeaways.
We believe the private aircraft market has experienced an unprecedented recovery over the past six to twelve months, and the trend is likely to continue.
As COVID hit early in 2020, private aircraft transactions fell off. But by July 2020, the market began to pick up again and has been climbing ever since. At present, activity is at its highest in 40 years. That has a lot to do with positive wealth creation, the low interest rate environment, and a desire of the ultrawealthy to avoid commercial airlines in favor of private flying, if they can.
A key feature of the current market is the clear lack of availability of used private aircraft.
This is reflected in used aircraft prices. High demand coupled with low inventory have triggered a rise in asking rates of close to 10% per month over the past four to six months. Waiting times for good inventory have also become painfully high and are now comparable to waiting for new aircraft. If people are willing to wait, the real value now is in new aircraft straight. Lower used aircraft inventories combined with their rising prices have closed the value gap between new and used aircraft, resulting in record new aircraft orders.
Despite unprecedented backlogs and record demand, manufacturers have been hesitant to raise aircraft production rates.
This is due to supply chain constraints, along with concerns over the macroeconomic climate. Additionally, as meaningful production increases normally take a few years to realize, manufacturers are reluctant to invest substantial capital in the face of uncertainty and concerns relative to potential unsold inventory or white tails.
The entry of many first-time aircraft buyers has increased inventory pressures on the market.
As first-time buyers are not existing owners, they're not selling an aircraft into the market while buying one out of it. Consequently, many first-time buyers, who have been willing to pay premium prices, have hoovered up the inventory over the last 12 months.
First-time buyers have also increased the demand for private aircraft management companies.
A private aircraft management company is literally hired to handle every facet of the operation. It comes in, takes over from the owners and operates their jet on contract. The package often includes handling regulatory compliance and safety systems, along with hiring and monitoring of the crew. For first-time buyers, the entire startup can be outsourced to a private aircraft management company. Additionally, in the age of high aviation fuel prices, the fuel for flights is bought at the management companies’ competitive bulk rate as they have 200 to 300 aircraft flying around the world at any given time.
Owning your own aircraft does not make much financial sense unless usage is at least 200 hours or more per year.
If you have zero to 100 hours of usage per year, chartering an aircraft is always going to be more financially efficient. You don't own or control the asset, but it's less expensive and generally works. Of course, we do have plenty of clients who have only 100 hours a year of usage and are comfortable in the knowledge that there are cheaper ways to do what they're doing without owning a private aircraft. A key motivating factor for many such clients is the fact that commercial airlines aren't flying to a lot of secondary and tertiary cities which they flew to before COVID hit. Travel connectivity on your terms anytime / anywhere is a powerful motivator that has brought many to the private aircraft market, especially those located away from big metropolitan areas.
We believe that business aviation will once again be more correlated to the broad market indices now that manufacturing rates are constrained and more in line with demand than in the immediate post global financial crisis era.
The overall economic environment and correlated risks indicate that business aviation is more likely to experience what we believe is a soft landing in the event of a downturn. However, we do believe that upon a soft landing, there will be a bifurcation on business aviation with respect to aircraft age, or what aircraft land the softest and what aircraft land harder. More generally, we feel that newer aircraft up to 12 to 15 years old will fare much better.
We've gone from what's called a very soft market where insurance is cheap, to a very hard market of late.
Aviation risk is typically one big segment including general, business and commercial aviation. When the airlines have a big claim, premiums go up across the board. We are in this hard insurance market because of the Russia-Ukraine conflict, as all the stranded aircraft assets are there right now. It’s going to be a difficult insurance market going forward that is going to get even worse. However, if you look at the overall cost of operations on a relative basis, insurance is still cheap and we're coming off a pretty low floor after many years.
Takeaway 9 Aircraft finance
We are in a golden era of business aviation and competitive aircraft purchase financing reflects that.
Relatively low interest rates have attracted a lot of lenders into the market and it's extraordinarily competitive. We're seeing loan-to-values customarily of 90% LTV. Terms of the loan and covenants are more attractive today than they were even a few months to a few years ago. Yet, the credit standards are much tighter than they were pre-global financial crisis and financing is readily available. If you want to buy an aircraft, now may be the time to finance one.