Are We Experiencing a New Normal?

Tony Kioussis (00:33):

Welcome to another Asset Insight podcast, covering the aircraft ownership life cycle. I am Tony Kioussis, President of Asset Insight and your host.

Tony Kioussis (00:42):

Aircraft sales have been brisk halfway through the second quarter of this year. So we asked Jay Mesinger, CEO of Mesinger Jet Sales, to join us again for another market update. Welcome back, Jay. And based on the way we measure it, overall demand was just as strong during Q1 as it was during Q4. What did you experience during Q1, and what are you seeing in the current market?

Jay Mesinger (01:06):

Someone asked me today if I thought things were slowing up. And the truth is, yes and no. Activity is not slowing up. People coming to us and asking us to enter into acquisition agreements, very brisk, very robust. But what’s slowing up is the time to find an airplane, which means then that we have fewer transactions going in the first quarter and second quarter than we had in the fourth quarter when there was more inventory. So the sheer lack of inventory is causing the new, most popular vocabulary word that I’m teaching and getting my clients to understand and that’s patience.

Jay Mesinger (01:54):

So it’s brisk, yet the time to get a transaction complete is slower simply because of the length of time it takes to find equipment. It’s not unusual. I might get lucky and find a piece of equipment on day one. In fact, this week we put a Lear 45 on the market and got an acceptable offer on the very first day because there are people waiting. So patience is a key word, but being prepared to move immediately is the other half of that sentence.

Tony Kioussis (02:26):

Based on what we saw in the first quarter, light jets appeared to be selling well, but ask prices were down. In fact, the light jet market… Well, the aircraft that we track in the light jet market posted an all time low figure in April, relative to ask prices. What are you seeing with prices across the spectrum?

Jay Mesinger (02:47):

Well, it’s a funny thing. And I just described the scenario to you with respect to supply that would make you believe that demand against supply is higher. And in a normal economic environment, that would make prices go up. But that’s not the case with equipment like an airplane, where every day, every hour they get older. They get higher time. What I’m seeing is that in some segments, the residual loss rate may be slowing a bit. And that’s a positive thing.

Jay Mesinger (03:16):

Some of the reporting books are saying for the last several quarters in certain categories of airplanes, the prices have been flat. And I wrote an article a few years ago that flat is up in some sense. Yes, I am still seeing prices actually, in most cases, being soft and paying less for the next one than I did for the last one. Now that’s not a bad thing. That’s just the normal course of equipment in a marketplace. But I do see a very positive, healthy balance in our industry right now, and that is that balance between supply and demand. It’s keeping prices from going up and also help stabilizing them from going down at any kind of a fast clip.

Tony Kioussis (04:03):

Buyer preference for a lower time, younger aircraft must be creating issues for prospective clients, just based on the lack of that type of aircraft inventory. Are you seeing previous used aircraft purchasers now moving or shifting their focus toward new aircraft?

Jay Mesinger (04:21):

I just wrote an article last week titled, Basking in the Sun, and it was about that. We get this new crop of acquisition clients in, and they want like new or very new aircraft. And in many categories of airplanes, because the manufacturers had cut back production in the last couple of years… Take your Gulfstream 550 as a perfect example. As Gulfstream was winding to the end of that production cycle, they were actually building fewer 550s over the last three or four years. And of that fewer number of aircraft they were building, a higher percent were going to special purpose mission, be it medical or be it military. So when you get to the high end of the marketplaces in many of them, there’s a lot less to choose from. And that is creating a new and exciting and healthy shift for people being willing to review and consider new against pre-owned.

Jay Mesinger (05:20):

There used to be a much bigger delineation between the prices of new and pre-owned. I think that manufacturers have rightly and smartly understood the need to be competitive in the market with their new aircraft pricing. And believe me, that does not mean they’re dropping prices and making silly deals and hurting people that have bought in near term proceeding them. But it does mean that they’re working hard to not lose transactions over a few dollars. Between that and the smaller amount of units to choose from with like-new, it’s narrowing the gap between the price of new and pre-owned and getting more people to focus on new.

Jay Mesinger (06:00):

Now, having said that, I’ll tell you that the other thing about the manufacturers is they are very smart, and they’ve got great memories. So I don’t think they’re going to take this newfound activity and change their production model and find themselves, if there were an economic hiccup, with aircraft built and not sold. So I think, again, even in that segment, we’re seeing a healthy balance. But yes, I’m seeing people once again say, “Well, let’s compare new to pre-owned,” and that’s healthy. That’s great.

Tony Kioussis (06:30):

Yeah. I can see the rationale behind it for an aircraft buyer, especially an aircraft buyer that has traditionally bought aircraft that are only two, three, four years of age. What are you seeing on the other end of the spectrum with respect to older aircraft? We’ve now got aircraft out there over 35 years of age. They’ve been in the for sale pool for years. Are these assets with their final owner?

Jay Mesinger (06:56):

I keep thinking that’s the case, and they keep gaining more life. I thought with the advent of ADS-B Out a couple of years ago, that was going to take a huge segment of the older aircraft and have them retired as opposed to owners investing in their continued life and use. And there’s a lot of obsolescence in equipment today, and it’s not even with the 35-year-old airplanes, whether it’s the cabin management system or cabin or cockpit displays. And the obsolescence, of course, brings about higher cost to repair. In many cases, you can’t even get things repaired. You literally are forced then to replace.

Jay Mesinger (07:37):

But I am not seeing a huge amount of aircraft yet being retired because of age, at least by my measure of standard and thinking that they certainly should have been. But they’re not. People are enjoying and getting the use of them. They’re being supported for the most part, at least from the airframe and engine side of things, by manufacturers and other third-party vendors. I think that you’re right, many of them are now with their last owners, but I’m not seeing the owners rush to divest themselves.

Tony Kioussis (08:10):

It’s really an interesting phenomenon. And one of the things that we’ve noticed is that some of the engine OEMs are… whether you want to call it adjusting their hourly cost maintenance programs or devising hourly cost maintenance programs to address the older aircraft issue. Because some of these aircraft, when they come up for an overhaul, they’re probably not going to see another overhaul during their lifetime. So it’s really an interesting conundrum for the owner of the aircraft and the OEM who’s trying to get the business.

Jay Mesinger (08:38):

Well, I think when you say that, when people are exploring the opportunity to purchase one of these older airplanes, one of the things that is more critical than even equipment installed are remaining hours to either some engine event, be it a hot section or an overhaul, and they choose the plane that has the greatest number of remaining hours. Because they, like you just said, are not going to invest in them when the time comes if they’re not on some kind of an engine program.

Tony Kioussis (09:10):

Yeah. I agree. Any new hurdles or tailwinds that you see coming in our direction, anything you anticipate?

Jay Mesinger (09:18):

It seems like every day is a hurdle, right? One thing I think that’s going to be a tailwind is going to be the ability to travel again and be able to get out and get places that we haven’t been able to go because of restrictive airspace or restrictive COVID rules and regulations. So I think that’s going to be very nice to get people back out.

Jay Mesinger (09:40):

Hurdles could be future tax issues. Although, I don’t really anticipate that this year. I think that for 2022, you’ll still be able to get your bonus depreciation a hundred percent. I just think there’s so much going on in our economy right now and in our government and in our world that we’re probably not going to address changing those in the near term. So I think that’s good.

Jay Mesinger (10:03):

Back to your original question, the aging aircraft and certainly in the obsolescence around that could create some hurdles and just the sheer lack of inventory or good inventory. Now, one of the things that’s been happening, of course, is that most of the business in the last year and a half or actually several years has been in North America or more specifically, the United States. So it’s always easier to buy a plane that’s here than bring one in and import one. But the last year and a half, it’s been almost impossible to import an airplane. So we’re dwindling that high-quality inventory here in the States to pick from, but it seems to be coming at about the same time that it looks like things will open up and allow for the opportunity to import again.

Jay Mesinger (10:50):

Just the sheer ability to go view an airplane in some part of the world was it was totally impossible in certain parts of the world. So that could be a hurdle, and that’s just simply a good inventory opportunity. And like I said, the word patience is key.

Tony Kioussis (11:05):

Are there any other issues that you think are important that potential buyers and sellers should take account of?

Jay Mesinger (11:12):

Well, patience doesn’t just mean how long it takes to find the airplane. Patience is also a part of how long it takes to find a facility to inspect it. We still have supply chain issues with respect to parts and time to get certain parts. It is a time for patience. It is a time for being tolerant. It is a time when you’re contracting to being more sensible and smarter about drop-dead dates in a contract because of these delays that could occur. I think we’re going to have a great year. I think we’re in the middle of one. I think we’re adjusting to the time it takes to source an airplane. But again, let’s not get to the beginning of the fourth quarter to try to do year-end planning. If you’re a buyer right now, let’s start to think about the strategy and the timing now, so that we don’t have that frenzy at the end, which also can bring about disappointments.

Jay Mesinger (12:11):

But I think that we’ve still got a taste and a desire to get out, get into any airplane, travel around. One of the things that we’ve watched over the last year is people buying second and third homes in the United States because they can’t get out of the States. And buying these planes and using them to get from one of their homes to the other home, I think that’s going to continue. I think people are enjoying that. They’re enjoying a new level of understanding and being around in our own country and not necessarily having to travel out of it. So that’s going to be great. I’m very excited about thinking about going to a NBAA-BACE, getting together with my friends, getting together with my cohorts. So last half of this year is going to be a lot of fun. I think that we’re making great progress on getting some of the past behind us and getting back out.

Tony Kioussis (13:05):

Any changes that you’re planning on over at Mesinger Jet Sales based on what you’re seeing? Or is it business as usual, if you want to call it that?

Jay Mesinger (13:14):

It’s business as usual. We have the same staff today that we had when we started. I’m very proud of that and very proud of them. We have not had people back in our office through this whole time since last March. But we’re talking about changing that, maybe not full-time, maybe two or three days a week, getting everybody back. So those are some very positive and exciting differences that we hope to start to see and embrace during the course of the summer.

Tony Kioussis (13:43):

This has been another Asset Insight podcast covering the aircraft ownership life cycle. Please visit our ever-growing podcast library at assetinsightpodcast.com and select from any number of topics discussed with business aviation industry experts. This is Tony Kioussis. And as always, thank you for listening.