We continue to hear criticism that certain manufacturers are depressing resale markets with aggressive price discounts on new aircraft. After all, we know that pre-owned values are headed south; we know that manufacturers are “open for business”; and we know that the pre-owned market is de facto governed by new aircraft pricing and lead times …
Or do we?
At the risk of dispelling a convenient truth, the data we are looking at tells a different story. The reality is that OEM’s probably have almost no impact on their own resale markets today. How can this be? Because pre-owned prices have fallen to levels that the OEM’s can’t touch, and have become detached from new aircraft pricing. The OEM’s aren’t pushing prices down- they are just trying to play catch up with markets that are running away from them.
The chart below is based on real data for a current production large cabin aircraft. The type really doesn’t matter, it’s the same chart for basically all of them. The blue lines show current Aircraft Bluebook and Vref prices, by model year. We can see those lines go loopy as they approach the new end of the chart- where the purple dot represents the best-negotiated price for a new plane.
However, when we do some basic math on real data in the pre-owned market today, we get a different line, represented in red. This line shows the equivalent 2016 pre-owned value for this particular model is really about 10% below the brand-new “pre-used” delivery price. In the car business, it’s called driving off the lot.
The premise is that the pre-owned market will only pay a certain amount for each year of “newness.” Rational shoppers (which most are) for example won’t pay a radical premium for a 1-year old vs. 2-year old airplane; a 2-year old vs. 3-year old; and so on down the line. This rationale extends, with some small allowances, through new aircraft.
Markets always adjust to keep year-over-year prices in some organized line. When a 10-year old aircraft drops in value it will ultimately pull all the newer ones down with it. In fact, there is a lot of jostling as aircraft of various ages go on and off the market, cut prices, etc. But when depreciation is high enough, the used market will start to tear away from new pricing.
OEM’s have tried to adjust, in an attempt to keep pace with drastically falling resale values. But unlike a pre-owned seller, who will be forced to take what the market will bear, the OEM’s have a floor. There is some number below which they cannot sustainably sell aircraft. Beyond that, they have a long-term interest in protecting their prices- it’s very difficult to raise them to absent a substantial increase in backlog.
When the pre-owned price/age curve lines up with factory pricing, there can be both an emotional and financial argument for buying new. The incremental cost is marginal and can be more easily justified with the added benefits of warranties, tax depreciation, customization, the latest options, etc.
However, when you combine the current high-depreciation environment with an “off the lot” haircut, the financial argument for new vs. pre-owned becomes much more difficult to justify. We believe this has bifurcated the market between financially minded “value shoppers” and the smaller subset of buyers who have an emotional or philosophical attachment to that new car smell. Unfortunately, that subset is probably not sufficient to sustain current production levels- at least in many cases.
This is the vexing issue that is keeping senior leadership at all the OEM’s up at night.
None of this is to invalidate the benefits of new, of which there are many. However, before signing on the dotted line, we would recommend any buyer do a pre-used analysis on the real post-delivery value of their aircraft. That’s the starting point for projecting your resale value going forward and it will have a big impact on the bottom line.
Please check the next edition of theJetWatch for more on this subject as well as a Falcon 50EX market focus.