No Mystery to Market Forces

No Mystery to Market Forces

Steve Varsano

Steve Varsano, founder of corporate aircraft sales specialists The Jet Business, shares his views on the global market, and the many factors affecting supply, demand and prices

When it comes to buying a multi-million-dollar business aircraft, it would be foolish to think that cost was not the number-one factor in decision making. While supply and demand directly affect prices, there are numerous influences that can skew these market forces.

Exchange rates, for instance, are super relevant right now. People don’t really pay this point enough attention, but currency markets move so rapidly, so radically, that they can change the pricing drastically – depending on where you are based and what currency you deal in.

Just three years ago, one US dollar would get you 0.72 Euros. Now you can get 0.90 Euros.

Since airplanes are priced in dollars around the world, in Europe it becomes very expensive to buy an airplane. If you want to buy something in Euros or British Pounds, it is much more expensive. Suddenly a US$10 million airplane is going to cost you US$12.5 million.

On the flipside, people with an aircraft to sell in Europe will be able to sell it cheaper, effectively giving their US$10 million jet a US$7.5 million price tag, while still retaining their own currency value. Of course, European-based sellers are on top of this market difference and use more of this difference to make up for market depreciation – but can sometimes be convinced of accepting a lower price for the inconvenience of moving an aircraft from EASA to N registration.

It may be tempting to wait for more favourable exchange rates before making a purchase but the fact of the matter is, if you need an aircraft then you need to buy. It’s like buying an iPhone – do you buy the latest version or wait 6 months for the new one to come out. If you do, there will be another new version 12 months later. And so it goes.

If there is a need in the business you obviously want to make the best deal that you can at that moment in time, but you can’t forecast the market in six months and base your acquisition strategy on that.

If you have a certain budget then you may need to step down a model or buy something a little older, but prices have come down significantly in the last few years. So much so that you can buy a lot of airplanes for much lower prices. But prices have stabilised now.

Often first-time buyers come to The Jet Business for advice, and invariably they want to know which aircraft is the best value for money. That’s a tough question, as it depends on your mission. If doesn’t matter if the best buy in terms of price is a Falcon 2000 if your mission requires a Falcon 7X. You have to look at your mission, your number of passengers, and then work out which aircraft is best for you. Then there are probably five choices you can pick from in different models.

There are some aircraft that have historically held their value better than others and when these others decrease to a certain point, it becomes too compelling not to buy that brand.

As an example, take a Bombardier Global XRS and a Gulfstream G550. Those are two comparable aircraft as far as mission profile. Before 2008, an XRS was priced a million or two more than a similar G550 (in terms of age, hours, equipment). Today, for a number of reasons, that XRS is valued approximately 20% less than the G550. There comes a certain point where if somebody wants to buy a Gulfstream but sees that the competitor is, say, 20% less, they are going to have to seriously consider the alternative.

That point of cross over is different for every buyer and some are just not financially swayed.

Gulfstream G450
Gulfstream G450

Market forces are very fluid and they are what control residual value of aircraft, not the manufacturers. An aircraft is only worth what someone is prepared to pay.

In the last 6 months, a couple of models actually saw their prices rise, as demand outstripped supply. The G450 was one of those aircraft that saw an increase. One of these reasons was because Gulfstream announced it was halting production of this model back in 2016, and prices dropped. Then all it takes is for a few interested buyers to reach that point where they feel prices are too good to miss, and the price could rise again with this renewed demand and finite supply.

It only takes a few buyers to move the market. People are like penguins – once one jumps in, others will follow.

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