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“The Prices Are Insane”: You Know It’s Bad When Used Private Jet Prices Are Crashing

Courtesy of ZeroHedge. View original post here.

America’s wealthiest have never been richer, thanks to 9 years of Federal Reserve "wealth creation" which has favored the top 1%, leading to an imbalance in wealth accumulation that has resulted in a record split between the haves and have nots. In fact, as the Fed admitted two weeks ago, the top 1% of Americans are 70% wealthier than the bottom 90%. But even though the number of millionaires and billionaires living in the US is at an all time high, and is on track to increase by nearly 700,000 a year between now and 2021 – assuming the market does not for the next 4 years – an influx of new potential buyers has done little to alleviate a supply glut that has been weighing on used jet prices for years.

As Bloomberg reports, sales prices for used private jets have fallen as much as 16% over the past year – and more than 35% over the past 3 years - with the average price falling from $13.7 million in April 2014 to $8.9 million as of this summer, according to research by Colibri Aircraft, which specializes in the marketing, resale and purchase of pre-owned private aircraft. And, as a glut of planes came on to the market in the wake of the economic downturn, owners have lost millions on the value of their existing business jets. The resale price of a Bombardier Global XRS, which sold for $50m, has dropped from $31.3m to $20.4m — down just under 35%.

While most major manufacturers, including Gulfstream and Bombardier have modestly pared production in the last couple of years as demand for private jets slumped, it has been nowhere near enough to shrink supply in line with the collapse in demand, and as a result it has not been enough to halt declines in aircraft values, say consultants for the $18 billion industry quoted by Bloomberg.

And with bargains aplenty on machines with few flight hours, including various new timeshare startups which have made it even more economical to rent than to own, manufacturers are slashing prices and cutting deals to entice buyers to purchase new planes. Meanwhile, they keep churning out aircraft and introducing new models.

It is this excess production glut that has sent prices tumbling by double-digits. “It’s a question of who wants to blink first,” Rolland Vincent, a consultant who puts together the JetNet iQ industry forecast, told Bloomberg. “Nobody – because whoever blinks, loses share.”

In the latest, just released long-term outlook on the state of the Business Jet Aviation, Honeywell forecast up to 8,300 new business jet deliveries worth $249 billion from 2017 to 2027, down 2-3%  points from the most recent 10-year forecast released one year ago.

And unfortunately for makers of private jets, a rebound in demand for new company planes, which would help stabilize the market, isn’t in the cards. Corporate plane-buying plans have hit a 17-year low, according to an annual survey by Honeywell International Inc. of more than 1,500 flight departments. Companies expect to replace or add planes equivalent to 19 percent of their fleets on average over the next five years, down from 27 percent in last year’s survey.

"Declining used aircraft prices, continued low commodities prices, and economic and political uncertainties in many business jet markets remain as near-term concerns for new jet purchases, leading to a modest growth in 2018," said Ben Driggs, president, Americas Aftermarket, Honeywell Aerospace. Driggs noted that the declined was most significant in Chinese and Russian purchase plans; Brazil remains a bright spot by recording strongest new aircraft purchase plans in survey from a major aircraft market though overall buying plans also declined year over year.

Meanwhile, all those "aspirational" buyers who hoped to impress someone with their full-priced toy purchase, are seething said Barry Justice, founder and chief executive officer of Corporate Aviation Analysis & Planning Inc.

And so, to stimulate some demand, Gulfstream slashed as much as 35% off the price of its G450, which is being phased out as the new G500 aircraft nears arrival, Vincent said. The G450 had a list price of about $43 million, according to the Business & Commercial Aviation guide.

Others are similarly liquidating: Bombardier has offered discounts of as much as $7 million on the Challenger 350’s list price of about $26 million as it fends off competitors entering the super midsize space, he said. The weakness across the industry in private-jet sales is adding to the pressure on Bombardier, which is also struggling to sell its C Series commercial planes. The U.S. government slapped import duties of about 300% on the single-aisle jetliner in the last two weeks after a complaint by Boeing.

But what is most surprising is that the corporate aircraft segment – the one catering exclusively to the world's richest, i.e. those who have explicitly benefited from central bank policies in the past decade, the global market hasn’t fully recovered from the last U.S. recession, when plunging demand popped a bubble that had flooded the industry with more than 1,000 new jet deliveries in both 2007 and 2008. A nascent recovery in 2013 and 2014 fell apart after the price of oil and other commodities collapsed, drying up sales in emerging markets such as Russia and Brazil.

Deliveries of new private jets are forecast to drop to 630 this year, from 657 last year and 689 in 2015, according to JPMorgan Chase & Co. The number is forecast to rebound slightly to 640 next year.

According to Bloomberg, the more conservative pace has done little to relieve the glut, creating a buyer’s market for used aircraft. A five-year-old jet sold in 2016 was worth only 56% of its original list price, on average. That’s down from 64% in 2012, according to a report by plane broker Jetcraft. The value retention was as high as 91 percent in 2008.

Prices for used aircraft right now are “insane,” said Justice. And yet, prices are only going to get even more insane.

“There’s a vast overproduction of large-cabin airplanes and there are only so many people in the world who are going to step up and pay $60 million-plus,” he said. “What happens is, people are going to that pre-owned market.”

Of couse, none of this should be a surprise, as the collapse of the private-jet bubble isn’t a new phenomenon, though the markdowns that some owners face are probably even larger than what Bloomberg is reporting: Back in 2015, we reported that Delta purchased a used Boeing 777 for just $7.7 million, equivalent to a 97.2% discount off its list price of $277.3 million.

Delta CEO Richard Anderson raised eyebrows, and caused smirks among industry "experts", that October when he said there was a “huge bubble” in used widebody aircraft, pricing a 10-year-old 777-200 at $10 million. Anderson said that the market would be “ripe” for Delta to buy used 777s. To be sure, Boeing CEO Dennis Muilenburg was among those who pushed back against Anderson, saying the Delta CEO was valuing used 777’s much too low. Turns out, Anderson’s estimate was $2.3 million too high.

To be sure, the supply of new jets has fallen sharply in the past decade. In 2008, 1,313 business jets were delivered, compared with 661 in 2016, and less expected this year. But the drop hasn’t been fast enough to balance out oversupply in the used-jet market.

The silver lining is that the chartered private plane industry stands to benefit as more owners give their planes up for charter. The rise in available planes hasn’t had much of an impact on the price of a charter hour, which has changed little in the last decade. “It has been exactly the same price to charter a private jet for the past 10 years,” said Adam Twidell, chief executive of PrivateFly, a global booking service for private aircraft hire.

However, it is just a matter of time before the primary cost deflation spreads to the services segment and who knows: at this rate of plunging prices, it may soon be (much) cheaper to charter a seat in a private jet than to fly commercial first (or even business) class.

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