I believe that Covid-19 along with other market factors have made now, a great time to purchase or lend against pre-owned large cabin business jets. The Covid-19 pandemic has obviously negatively affected business jets values across the board in the short term, however looking from a big picture perspective, this pandemic has caused many that can afford to fly private, but have not done so in the past, to now do so. When this pandemic is behind us, I envision many of these new entrants into private aviation will continue to fly privately.
These new entrants are not necessarily rushing to purchase pre-owned large cabin aircraft; however they are utilizing the services of charter operators and program sales providers like XO Jet, Vista Jet and Wheels UP who all seem to be looking to add to their fleets due in large part to the increase in demand for the product or service as a result of the Covid-19 pandemic.
Although Covid-19 is a contributing factor to why pre-owned large cabin business jet values have declined 10-15% in recent months, there are other factors contributing to these depressed values. I believe large cabin business jets are well below what I would call their Base-Line annual depreciation rates between 10%-12% and will for the next few years hold their value or depreciate at a slower rate than their Base-Line depreciation curve.
The business jet space has slowly been maturing for the past 30 years and I believe has adopted and exhibited characteristics of a mature market for the past several years. New, especially large cabin, business jet aircraft are exhibiting higher annual depreciation rates, in the 15-20% range, in their first few years. This is followed by a leveling off to get more in line with the anticipated Base-Line depreciation of 10%-12%. This 10%-12% annual depreciation is what I believe is a realistic, post 2008 crisis, long-term Base-Line depreciation rate for business jets. This is a far greater annual depreciation rate than the 3%-5%, that was commonly accepted in the industry pre-2008 crisis.
Because there are economic and market factors affecting business jet values it is not likely that any business jet will exactly follow along its 10%-12% annual Base-Line depreciation curve however its value will typically trend towards it’s during the operational life of the aircraft.
Below is a graph of a 2003 Bombardier Global Express and it’s depreciation over the past 17 years – It spent most of its life well above its annual Base-Line Deprecation curve but over the past few years has gravitated back to it.
Other Factors Contributing to Current Below Base-Line Values
OEM Year over Year (YOY) Pricing for New Business Jet Aircraft
Historically OEM price increases of new aircraft grew at roughly the same rate as inflation, which is what would be expected. Leading up to the 2008 crash, the YOY pricing from Business Jet OEMs was as high as 15% for some large cabin models. Due to the maturing market and more discipline amongst OEMs with production rates and keeping speculators out of their order books, we have seen YOY pricing for new aircraft remain relatively flat for the past few years. This indicates values are not overinflated and I believe it is important to note that these YOY prices do not account for discounts that OEMs may be providing which only help keep business jet values from being over inflated and are significant contributing factor to the below Base-Line values we are currently seeing.
Delivery Rates of Business Jets
Delivery Rates of new business jets have been at a reasonable rate of growth over the last several years. Total deliveries for 2017, 2018 and 2019 were 677, 703 and 809 units respectively. These numbers are well below the 2007 and 2008 numbers of 1,137 and 1317 units respectively. Additionally, due to Covid-19 and OEM factories being shut down and or working at limited production capacity temporarily, 2020 deliveries are anticipated to be below those of 2019.
Current Examples of 2015 Vintage Large Cabin Business Jets
Below are graphs of a 2015 Bombardier Global 6000 and a 2015 Gulfstream G550. The graphs show how these aircraft have depreciated faster than the anticipated annual Base-Line Deprecation rate of 10% to 12%.
COVID-19 Helping Business Jet Values
As mentioned above, I believe COVID-19 has helped increase the demand for private jet travel. More specifically charter operators and program sales companies like Vista Jet, XO Jet and Wheels Up are already seeing increased demand for their services as compared to the same time in 2019.
Although this pandemic has increased the demand for private jet travel I do not anticipate pre-owned business jets to increase in value, however I do believe pre-owned large cabin aircraft which are currently below their Base-Line values will experience annual depreciation rates in the 5% to 7% range for the next 12 to 24 months as their values trend back to their Base-Line values thus making now a great time to purchase or lend against this asset class.