With second quarter statistics compiled, we asked Jay Mesinger, CEO of Mesinger Jet Sales, to join us for another discussion on the market. Topics covered include:
Jay Mesinger is the CEO and Founder of Mesinger Jet Sales, an international aircraft brokerage firm, with over 47 years of experience in the aviation industry. Mesinger Jet Sales has modernized the formula for buying and selling aircraft providing their clients with the best market intelligence for aircraft sales pricing and correct acquisition expectations leading to successful transactions.
Jay is an industry leader and figurehead. He was a Member of the Board of the National Business Aviation Association (NBAA), and the Chairman of the Associate Member Advisory Council (AMAC). He was the first aircraft broker to serve on the NBAA board and served on the AMAC committee for 10 years ending in October, 2013. Jay has also been on the Customer Advisory Boards of Jet Aviation, Airbus North America and Duncan Aviation. Jay is and has been a member of Gulfstream’s “Key Player” team and Bombardier’s “Influencer” group since their respective inceptions. Jay is also a member of the European Business Aviation Association (EBAA) and the Colorado Aviation Business Association (CABA). And, Jay serves on the Board of Directors of The Morris Animal Foundation.
In addition, Jay regularly speaks at industry gatherings, writes the monthly Mesinger Pulse newsletter, and started the very first aviation brokerage website over 25 years ago.
Mesinger Jet Sales has modernized the formula for buying and selling aircraft providing our clients with the best market intelligence for aircraft sales pricing and correct acquisition expectations leading to successful transactions. Transparency, a hands-on process, forward-thinking intelligence and analysis, technical support throughout the transaction and an unwavering commitment to protecting our clients’ best interests are just some of the things that set us apart and all part of what leads to our success for our clients.
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. With second-quarter statistics firmly ensconced in the record books, we asked Jay Mesinger, CEO of Mesinger Jet Sales to join us for another discussion on the current market. Always a pleasure to learn your thoughts on the state of the business of aircraft sales today. How you doing?
Jay Mesinger (01:01):
I’m great. And you know, Tony, this gives me some discipline to have to stop and think and organize my thoughts. So thank you, as well.
Tony Kioussis (01:10):
I was thinking about this the other day. I think if I was asked to identify the greatest hurdle facing business aircraft sales today, it would have to be lack of inventory, specifically when it comes to low-time younger aircraft. Would you agree?
Jay Mesinger (01:24):
I would absolutely agree. In fact, I think the only thing that’s going to make our year, 2021, less vibrant and less transactional is going to be the lack of inventory, not the lack of demand.
Tony Kioussis (01:38):
We just pulled up preliminary numbers for July, and there was about a 5% decrease in availability for the stable of aircraft we track. It’s the 13th month in a row, that inventory has gone down.
Jay Mesinger (01:52):
I wish I had a crystal ball because our industry is not static, it’s very dynamic and it’s a pendulum. And so if we had a crystal ball to understand the speed and the direction of the pendulum, we’d have a better sense of how long things last. And I’ll tell you something, a year ago, no, a little bit longer than a year ago, starting in March, April, May, of 2020, our focus was less about available inventory and more about what the impact of the pandemic would have on prices decreasing?
Jay Mesinger (02:27):
We saw our stock market going down and we saw many economic indicators around the uncertainty of the pandemic, what effect would it have? As we began to quantify the effect, we said that the pandemic probably would have a 5% to 20% effect on pricing, basing the difference between 5% and 20% on pedigree of the airplane, the age of the airplane, mechanical integrity of the airplane, we were trying to quantify the loss in value. We weren’t trying to decide whether not there was going to be a problem with dramatically increased activity that would deplete inventory. So we were completely facing the wrong direction, trying to decide what the heck the pandemic would mean to us?
Jay Mesinger (03:10):
Today, the pandemic means very different things to us. And just this morning, we were playing around and looking at the CJ3 market. And in May of 2020, Tony, there were 47 CJ3s for sale. Today, there are 7 for sale, and of the 7 for sale, 4 are deal pending and the remaining 3 have been on the market since May of 2020, so they’re not even really for sale. So you could say there are zero, real CJ3s for sale today. Now, where does that take us, in terms of pricing and that lack of inventory? If you remember, and you talk about younger aircraft, another interesting statistic, if somebody calls me and they say, “We want to buy a Gulfstream 450 in between 2015 and 2018, when they stopped the line.” They only built 25, 450s.
Jay Mesinger (04:03):
So just the sheer lack of building of certain airplanes and then you put any kind of stress on the fleet, very little elasticity and you have very few airplanes to choose from. But what does that do to pricing? That’s the elephant in the room right now. And I don’t know what you’re seeing, but I’m seeing people willing to pay more than they were willing to pay, but I’m not seeing them pay huge, ridiculous premiums.
Jay Mesinger (04:33):
I’m seeing them buy airplanes, if they’re not paying as much attention to I think, in terms of their mechanical integrity and be willing to buy airplanes without the depth of pre-buy because the seller’s not allowing it and I think that’s going to come back to haunt some people. But I’m not seeing prices really go up above what might be the top of where that market is anyway. Then when that bubble goes away and it will, as soon as inventory starts to balance out, will prices go back down or will that be the new price they start from? What do you think, Tony?
Tony Kioussis (05:09):
We are not seeing dramatically increased pricing for people going after aircraft they desire. We’re seeing pricing in the vicinity of where the ask price is. Some of the ask prices may be a little inflated, so you could argue that some people are paying a little bit more than they would have if we didn’t have the lack of availability. But I keep hearing about people paying 15%, 20% more than the market number. I haven’t seen any of that. I agree with your comment. I really don’t think that pricing is dramatically increased. It’s at the upper end of where you would expect it to be, however.
Jay Mesinger (05:47):
Well, and you know what we don’t want to create, is a reason for buyers to sit on the fence, thinking it’s the wrong time to enter the market. It certainly takes a lot more patients right now to enter the market. You’ve got to be willing to know that it could take 60, 90 days to find an airplane, but you better be ready in case your trusted broker finds it on day two. Because you won’t be the only person looking, so you won’t get a second bite at that apple. But patience is really what it’s all about today, I believe.
Tony Kioussis (06:16):
The one thing that we’re advising all clients is, get started now if you want to close on an airplane before the end of the year. To your point, you could find one right away, but that would be the exception rather than the rule. I should think that you’d probably be telling people, get on your horse and start mowing down the road if you’re looking to buy an airplane this year. But also I think, and this is something you’ve preached in the past and correctly so, observe some patients until you find exactly what you’re looking for.
Jay Mesinger (06:45):
Well, and I think there’s patients in the time it takes to find it and patients in finding the right airplane. Do not just buy the next one that comes along because you’re afraid you won’t find another one. And if that were the last plane built, we’d all be out of business. And don’t cut corners on how you’d be willing to inspect it, in times or greater supply. And don’t cut corners in the kinds of things you would choose with respect, to not doing a thorough pre-purchase or having what would be a commercially reasonable, good contract.
Jay Mesinger (07:16):
But as I sit back and say, what caused this in the middle of a pandemic? I go back to a story I probably told on a prior podcast with you. And that is, starting in March of 2020, I got calls from people that said, “I’m never going to get on a commercial flight again.” And that to me was the idle talk at the time and a couple of months later, it turned into reality and people were really buying planes, but it was all first-time buyers. And it’s like going to a party and not bringing any hors d’oeuvres or some wine or some beer, you just go and eat the host’s food and drink their liquor and you bring nothing to the party. So first-time buyers and lots of them, coming into a market space, just deplete the inventory. They don’t add to the churn because they don’t bring anything to trade-in.
Jay Mesinger (08:00):
You take out the fact that the commercial, the corporate side of our world completely retreated, either because of a combination of optics. You’re furloughing people, so it’s not a good time to buy an airplane, or you literally can’t go anywhere that you need the plane for. So your fleet sits idle and you don’t come into the marketplace and create trades. The only corporate trading I saw was that, where people had gone to the factory a year before, and ordered a plane that was coming in. But those weren’t big numbers like we usually enjoy with people who put a plane in for sale and take one out as they buy it.
Jay Mesinger (08:34):
The next thing that’s happening, that’s contributing to this, is the idea that I don’t want to own two planes, but I sure don’t want to be without one. That’s a nice magic trick, but the problem is, people have such a lack of confidence right now, that they’re going to replace what they sell, that they’re more willing to own two now, than they are to own none. So they’re not going to relinquish their trade-in plane until they have absolute certainty, maybe even ownership of the replacement plane. So those things, and with the last piece being, it’s been almost impossible to import an airplane today because of COVID restrictions and traveling around the world and being able to look at planes, that we have had to deal with just the universe of US airplanes, to fulfill the demand of US buyers. And there’s been no replenishing of that.
Jay Mesinger (09:27):
So when will that happen? When will the corporate world come in and start relinquishing a plane as they acquire? And when will first-time buyers slow down a bit, so they don’t come to the party with nothing to give back? As the Delta variant has come about, just when we thought people would be a little bit more comfortable getting back on a commercial flight, they’re less comfortable now. And so we’re right back to the number of phone calls we were getting from people saying, “I’m not going to get on a commercial flight. I’m going to buy an airplane.” And they don’t come to the party with anything to contribute.
Tony Kioussis (10:03):
You’re absolutely on target on that. And I think the impetus to buy an airplane if you can afford it, to your point, is going to increase with this additional wave of COVID. Who wants to get into a crowded airplane when they can afford to be safely ensconced by themselves?
Jay Mesinger (10:20):
I had a representative from one of the big fractional companies come visit me last week. And he said, “We’re trying to buy every single airplane we can find.” And of course, their sourcing of aircraft or the OEMs, the manufacturers, and they don’t have anything. We’re trying to hire every pilot we can find. All of this new utilization, from new subsets of users, are really taxing our industry right now. And when we started this conversation a few minutes ago, when we were talking about that pendulum, that pendulum is going to swing back. It’s going to swing back slowly and that’s okay, fast swings on the pendulum in our industry are never very healthy.
Jay Mesinger (10:57):
And inventory will start to replenish and utilization will start to settle down and get back to a more normal basis. The other piece of this, of course, is the supply chain issue and it’s still real. I tell clients, starting now, if they call me and they say, “We are buying a plane and it must be in service by December 31st.” There’s no way I can paper that contingency into a purchase agreement and expect any seller to allow me today to tie up their airplane, take it apart on a shop floor and have some supply chain issue that it can’t be closed by December 31st, so we can, as buyers get out, and leave them sitting there. That’s just not going to happen. And so I’m cautious now, as I communicate with potential buyers, that’s a nice thing and if they get the depreciation, great, but that shouldn’t be why they’re buying the airplane. You know, Tony, most people say, “Thanks for that, Jay. We understand, we would not expect that contingency to be in a contract.” But it’s good to advise them of that.
Tony Kioussis (11:58):
We listen to clients, tell us that they’re looking for an aircraft to be appraised with some new modifications on it. And the first thing that runs through my mind, is where are you going to get the modifications done? All of the shops are going flat out right now. We counsel people that take delivery of the aircraft and work on the modifications down the road, rather than trying to do it now, if they’re interested in being in that airplane in a reasonable amount of time. When you look at the data on some of these older aircraft, you’ve got aircraft trading for a few hundred thousand dollars that have embedded maintenance of a million or a million and a half or even more. How does that transaction make sense?
Tony Kioussis (12:37):
I mean, if the airplane is worth, say 300,000, how do you buy an airplane that then adds another million and a half to the cost of owning that airplane? It’s such a tough scenario that I’m finally, really believing that we’re going to see retirements out of this. I think a lot of airplanes are with their final owner. And I know I’ve said this before and so have you, but I really think that a lot of aircraft are with their final owner. I mean, we’ve got light jets that are over 40 years old. We’ve got turboprops that are over 70 years old. At some point, these assets need to move on.
Jay Mesinger (13:11):
Tony, I’ve seen milestone-like events, ADS Out is a perfect one. I thought they’re not going to invest $75,000 or $100,000 in that old airplane. And I see people look at these older airplanes now, with their only focus on the remaining hours to overhaul or next engine event, since that’s the next biggest expenditure. And they buy the one that has the most remaining hours and pay the least for it, rather than buy the one that has other high mechanical integrity benchmarks. But you’re right, I can’t imagine that you’re going to go spend equal dollars to the value of the airplane on any kind of modification.
Jay Mesinger (13:53):
So I think we may really be at that stage. The only thing that may keep these airplanes going one more short round, is those people literally right now, who are saying, “I want an airplane. I can’t find anything else. Okay. I’ll be its last owner and albeit, that ownership period will be fairly short, but I want a plane and I’ll use this as my interim lift until I find the right plane.” But that’s not going to extend the life long.
Tony Kioussis (14:20):
I think that a number of aircraft are at that crucial point, where the owner cannot sell the aircraft, but they’re running out of time on the engines. And the thought process that we see prevailing, is that you end up with the owner going out and buying two used engines, putting them on the aircraft. That’s assuming that they can find a shop to do it in and putting them on the aircraft so that they can continue to fly. But as far as overhauling older engines and selling an aircraft with seriously used up engines, I just don’t see how that’s possible. I mean, the numbers to me just don’t make any sense. That’s what it really comes down to.
Jay Mesinger (14:58):
Right, right. So that will just mean we finally have the smaller fleet than we have had and that we’ve been talking about, but it’s really time.
Tony Kioussis (15:09):
We’ve got operational characteristics of aircraft that have reached the end of their road, but the financial obsolescence is there, there’s just no way you can get around that for some airplanes. But time will tell, who knows? It’s an interesting scenario. What do you see as issues that we’re likely to face during the second half of the year?
Jay Mesinger (15:29):
Well, I think more of the same. I hope there’s no new issues, but the old issues are pretty powerful. That being the fact that our inventory levels are down dramatically, the length of time we have to find an airplane, get it through a pre-buy, are elongated. I think that the idea that we’re not out of the woods yet, is just going to make what we’ve had to get used to in the last year, go longer than we hoped it would. And they are all real issues that impact our marketplace. And I do not see people in the manufacturing segment who are very smart, with great memories, having a blind eye towards the idea that the pendulum can swing and increasing production and finding themselves in an unenviable position of having more airplanes and they can sell.
Jay Mesinger (16:16):
So I think it’s a fairly status quota, within a couple of units for each manufacturer, of what they’re going to produce. I think that we’re going to have to get some confidence in our industry, that people will be able to replace what they relinquish and more people coming into the marketplace, relinquishing, not just depleting for all that to change. And that’s why I said, I wish I had a crystal ball and I could tell you when. But I can tell you for sure, that it will happen because it’s just a dynamic market.
Tony Kioussis (16:46):
Yeah. I mean, the pendulum will swing the other way. And as corporate flight departments take delivery of new aircraft, there will be some good airplanes that will be hitting the used aircraft market for sure. But to your point, the number of first-time buyers is so high that I think it’s going to continue to put pressure on inventory. I just don’t know when that’s going to change and I don’t expect to change anytime soon. I can’t imagine that the OEMs are going to go dramatically, increase production, they’ve learned their lesson, God bless them, from what’s happened in the past. So it’s interesting. How do you see financing today? Are you seeing any trends, any issues?
Jay Mesinger (17:27):
I think that their industry is impacted, as well. If they can’t get airplanes bought, they can’t get them financed. So they’re probably struggling a bit, as well, with when this market segment will change. And I think that they’d be there and willing, money’s cheap, they’d love to lend it. I don’t think that they’re going to retreat from that stance. I think that they want to be sure that they understand the residual value of these airplanes, so that they have the right loan to value coefficient. But I don’t see much changing there.
Tony Kioussis (18:03):
Yeah, and I can’t say that I’ve really seen much either. I’ve spoken to a few of the lenders. The number of aircraft being financed is very high, but a lot of that has been because of lower rates and people refinancing their own aircraft. So it’s a different equation altogether. Do you see any consolidation in the marketplace in any of the various arenas, be it OEM, be it aircraft management companies, et cetera?
Jay Mesinger (18:31):
Consolidation is an interesting phenomenon and the answer to that is probably, yes. From an economic standpoint, I think that it provides some people standing back, a chance to see how to make more money with aviation, by putting like-aviation companies together and creating some operational efficiencies. I think that by and large FPOS, fuelers, will enjoy that, management companies seem to have been hanging tight and getting involved with consolidation.
Jay Mesinger (19:04):
The aircraft brokerage business is an interesting piece. We don’t do that many transactions. Believe it or not, we don’t make as much money as people think we do and so I don’t know that by and large, putting us together is going to make a lot of sense. I’ve seen a little bit of it. We’ll see how successful that is. But I think consolidation is something that goes on in any industry. I think it’s going to go on because of an enjoying view of increased profitability from the groups that you put together more than, because I’ve seen groups going out of business and thinking that coming together might be a lifeline. I don’t think anybody’s really looking for lifelines today.
Tony Kioussis (19:45):
That’s probably true. Everybody’s probably looking for additional staffing today. Thanks, Jay, for taking the time and I’ll definitely be talking to you on Thursday.
Jay Mesinger (19:55):
Great. Thanks, Tony. You do such great things to support our industry and you mentioned us having the ability to talk next Thursday. I’ve asked you to be on a panel for an NBA News Hour that Mesinger Jet Sales is sponsoring, on August 11th, where the title is, The Elephant in the Room. And we actually touched upon a bit of it today, lack of inventory, how that affects pricing. I’ve got some great guests. I’ve got you. I’ve got Todd Duncan, who’s going to talk a bit about the supply chain side of things and the delay in getting airplanes through previse. And I’ve got Joe Moeggenberg with ARGUS coming on to talk about what he’s seen in the industry with respect to use and travel. And I hope everybody will join.
Tony Kioussis (20:39):
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.
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