2017 Preowned Sales Signal Signs for Optimism

As 2018 gets going, there is cautious optimism in the business-aircraft transaction world. Full-year 2017 deliveries, up just more than 1 percent at the three-quarter pole, according to GAMA's official numbers, are expected to be flat to up slightly when the final figures are tallied. The optimism stretches to the used market, where pockets of positive news and some encouraging data points have many looking to brighter days ahead
 
Last year "was a success for the pre-owned business jet industry," declared Hagerty Jet Group in its 2017 fourth-quarter market update. "There was an uptick in transactions, inventory declined and prices in many of the Gulfstream markets are stabilizing."
 
Figures shared by Hagerty underscore its view. Hagerty tracks several key metrics, including the highest and lowest numbers of aircraft on the market during a given quarter within the last 24 months. Among the eight Gulfstream models tracked in its update, five—including all three in-production models, the G650, G550 and G280—had their most recent quarterly lows sometime during 2017. Two, the GV and G150 (which saw its production come to an end with S/N 326, delivered in June), were at 24-month highs as 2017 came to an end, while the high-water marks for the other six models took place during 2017's first quarter.
 
Another positive: the low number of in-production Gulfstreams on the market—inventory levels for the the G650, G550 and G280 were at 4 percent or less as of late December. "The lack of late-model aircraft for sale should help Gulfstream sell new positions," Hagerty suggested.
 
That's one possibility. Another is that the firming of the used market, particularly in-production aircraft, could attract more sellers—a pattern that could extend as market fundamentals continue to strengthen.
"We believe that as soon as we get any uptick in demand, there are additional used aircraft, often younger aircraft, that hit the market," wrote Canaccord Genuity analyst Ken Herbert. "We believe the strength in traffic should continue, and the fundamentals will eventually drive significant increases in this market, but we are still cautious heading into 2018 and see the potential for a greater pick-up in 2019.
 
Preowned-aircraft market gurus compile a lot of data, but none of it directly measures intent to sell. The closet indicators are arguably the figures that track the total number of aircraft on the market, how long they're there, and how many of them are removed from the preowned inventory before being sold.
 
AircraftPost, which compiles transaction data of about 55 business-jet models that make up the market's core—think Embraer Phenom 300s through Gulfstream G650s—tracks these numbers. Recent macro figures that focus on in-production aircraft, which typically move faster than their out-of-production counterparts, suggest that Canaccord's view is spot-on.
 
In each of the last three calendar years, the percentage of current-generation aircraft on the market that were removed from the preowned inventory has risen, AircraftPost figures show. The figure, just 5.7 percent in 2014, approached 15 percent in 2017, AircraftPost's preliminary full-year figures showed. Not surprisingly, the average number of days on the market rose along a similar trajectory, from 158 days in 2015 to 304 days last year.
 
Among in-production models with in-service fleets of at least 100 aircraft, making them most likely to have active preowned feedstock, the only models that saw days-on-market declines were the Dassault Falcon 7X and 900EX/LX. The G450 and G550 were flat.
 
A deeper look into the numbers unveils signs of a slow turnaround. The percentage of current-production aircraft on the market that sold rose to 47 percent in 2017, climbing more than 13 points over year-earlier numbers and recording the first year-over-year increase since 2014. In addition, the percentage of the total in-production fleet that changed hands edged above 6 percent last year, up from 4.2 percent in 2016. 
 
The percentage of in-production aircraft on the market reached 13 percent in 2017. Among the 22 models AircraftPost tracks that were in production in 2017, six showed year-over-year inventory declines.
 
While many of these data points suggest the preowned market is firming, the great unknown is whether this will pull more inventory out of the shadows. In 2016, 41 of the 469 aircraft offered for sale and tracked by AircraftPost were removed—just under 9 percent. The jump to nearly 15 percent last year was the largest-year-over-year jump in at least five years, suggesting that there are many owners of current-generation aircraft eager to sell.

Business aviation flight activity last month in the U.S. fell short of forecast (5.6 percent growth), but still managed to post a 2 percent year-over-year increase, according to TraqPak data released today by Argus International. Analysts at the business aviation services company are calling for a 3.3 percent gain in flying this month.

By operational category, Part 135 flying came out on top, rising 4.6 percent from a year ago, while fractional activity wasn’t far behind, with a 4 percent increase. But Part 91 flying once again slipped into negative territory, falling 0.5 percent year-over-year, with gains in midsize and large-cabin jets more than offset by losses in turboprops and light jets.

Despite an 8.3 percent resurgence in fractional turboprop flying last month, the turboprop aircraft category remained flat year-over-year. Light jet activity was equally anemic, logging a 0.1 percent decrease. However, midsize and large-cabin flying saw solid gains last month, ascending 4.2 percent and 5.5 percent, respectively, from a year ago.

In individual categories, only Part 135 large-cabin jets experienced double-digit gains, climbing 11.2 percent year-over-year. Large-cabin fractional activity recorded a 5.8 percent loss over the same period.

Argus’s TraqPak data provides “flight-number-specific aircraft arrival and departure information on all IFR flights in the U.S., Canada, and the Caribbean.”

A 100 percent expensing option will be available to owners of aircraft purchased after Sept. 27, 2017, under the comprehensive tax overhaul package that passed the House and Senate this week. The package, which awaits President Donald Trump’s signature, has been widely praised by both NBAA and NATA for the accelerated depreciation (100 percent expensing) measure and clarification on aircraft management fee taxation, among other provisions.

NBAA president and CEO Ed Bolen said the measures will lead to growth for the general aviation industry. “Provisions in the bill, such as immediate expensing, are key economic drivers for the general aviation industry, which supports 1.1 million jobs.”

NATA president Martin Hiller expressed appreciation that lawmakers recognized “the importance to aviation businesses nationwide of pro-investment tax policies, including full and immediate expensing and provisions that provide certainty as to the tax status of aircraft management services.”

Calling the tax changes “big news for the private aviation industry,” aircraft broker jetAVIVA outlined the prospective effect of the expensing provision in a Q&A session with its strategic tax-planning partner Daniel Cheung. “With marginal tax rate at about 40 percent, a taxpayer can realize $800,000 in income tax savings by purchasing a $2 million aircraft,” Cheung said in the Q&A.

Cheung reiterated that the measure applies to both new and used aircraft and noted, “By closing [a deal] and placing a business aircraft in service before the end of 2017, a taxpayer could immediately depreciate 100 percent of the cost of the aircraft on his or her 2017 income tax return.”

The full expensing option will be available through 2022. After that, the tax bill phases out the accelerated depreciation in increments of 20 percent each year until 2027.

NBAA further underscored the importance of the clarification that aircraft management fees are not subject to the 7.5 percent airline ticket tax. “For many years aircraft management companies were on the brink of closing their doors because of the improper and retroactive application of commercial airline ticket taxes,” said Scott O’Brien, NBAA's senior director of government affairs. “With tax reform, these small businesses now have certainty as to their obligations.”

While supportive of the bill, NBAA points out that not all provisions were positive, citing as a drawback the repeal of like-kind exchanges for business property. Under like-kind exchanges, businesses have had the option to defer taxes on sales of equipment if they were purchasing new equipment. The association said it plans to work with a broad coalition to seek reinstatement of this tax measure