The Business Aircraft Market, As Fourth Quarter Approaches

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 (00:43):

Business aviation closed out the year’s first quarter with demand at an all-time high inventory at an all-time low. And some aircraft transaction values that, on the surface at least, appeared to have little in common with the time space continuum. To help us make sense of all this, we asked Jay Mesinger, CEO of Mesinger Jet Sales and a frequent contributor to our podcast, to join us once again. Always great speaking with you, Jay. Where are we in this marketplace?

Jay Mesinger (01:13):

It’s a time where frustration runs high. People are feeling bad about the process. Buyers are feeling as if there’s no reason to be in it, to go sit on the fence. I’m working hard to shoo them back into the center and have confidence in a process. Sellers continually have an idea that they run the show. It’s a complete seller’s market. And I appreciate that. I also appreciate when it’s a buyer’s market. I most appreciate when it’s a balanced market and that’s not where we are right now. But you know, we could be headed back to that and I’ve got some clear signals and I’m just hopeful that the pendulum, as it starts to swing, doesn’t crash through the balance sector and go right across to the other side. And that, of course, is what I’ve been talking about, whether it’s a hard landing or a soft landing.

Tony Kioussis (02:02):

What are some of the shifts you’re seeing changes that are starting to form relative to the current market conditions?

Jay Mesinger (02:09):

Well, the conversation and the conversation precedes the actions and the conversation among buyers that say, “Wait a minute. We did what the seller asked. We communicated with them eloquently with high transparency. They gave us a sense of what their process was going to be proving. We were good listeners with exactly what they said they wanted. And then they said, ‘Oh gosh, this was just day one. We’re going to keep it on for a while.'” So what do you do as a buyer? Do you go out there day one and give them what they want and help them get over the finish line, and you get over the finish line? Or do you wait and maybe potentially lose the opportunity? Or do you sit on the side and nothing happens?

Jay Mesinger (02:49):

So what am I seeing? First, I’m seeing the conversation, but I’m seeing some other really interesting conversations, Tony. Just yesterday, I saw a, I love this, price adjustment for a broker’s 900 XP. Price adjustment is a nice word. You seldom see price adjustment used when you’re going to increase the price as opposed to price lowered. Then last night, I got an e-blast: “Good evening. Effective immediately, the asking price of our aircraft has been reduced. Please give me a call to discuss.” Price reduced. Price adjustment. They’re starting to dust off whole phrases and inject them back in the advertising.

Jay Mesinger (03:30):

And that’s occurring because sellers are not finding that on day one, moment one, they’re getting 10 full-price offers. Airplanes are starting to stack up in certain categories. I don’t think this is going to be a bottom drops out of the market eventuality, but it is going to give choice to buyers, and choice is going to slow down process for the sellers. And part of the choice is going to be for a buyer to be more demanding of process.

Jay Mesinger (03:58):

I woke up this morning with this email from a client of mine who hired me to buy: “Stock market crashing. Tech stocks in the dumpster. Hedge funds shutting down. Russian oligarchs being sanctioned. Seems like at some point, this should create some inventory. Hopefully,. That happens before my own fortunes also end up in a dumpster fire because of this terrible market.” Smiley face. So buyers, and I think smart sellers, are starting to say there’s enough data out there, whether it’s because of inflation, whether it’s because of interest rate, whether it’s because of fuel prices, whether it’s because of geopolitical events, there’s enough out there that wouldn’t you think there are going to be some market changes?

Tony Kioussis (04:38):

The marketplace is in a state that I don’t know any of us have seen before. Everybody’s trying to predict the future with a crystal ball that broke a few months ago. If not a few years ago. I’ve been wondering if, because of the limited inventory, if transactions this year were going to be impacted, number of transactions compared to last year. But it was interesting. Last month we actually saw inventory climb, admittedly not a huge jump, but it was the first monthly increase since June fully increase since June 2020. To your earlier point, I hope the pendulum doesn’t swing all the way the other way. Your comments are really interesting because I’m wondering if the pendulum is going to swing the other way faster than most people think.

Jay Mesinger (05:21):

Well, nobody will be able to take the blame more than the greed in the seller community. So I think that they don’t need to stop and wonder, “Oh my gosh, what happened?” They should just say, “Oh, it finally happened. We finally pushed everybody too far, too fast.” I try to regularly call my friends at the escrow agencies and say, “What are you doing?” And they’re just as busy as they’ve ever been, closing more airplanes than they’ve ever closed. And you know, I don’t know where they’re coming from. They’re certainly not Russian oligarch airplanes, although I hear some brokers trying to say they want to get a piece of that, and if they could just get those airplanes to a neutral registry, that they’d be able to sell them. I completely disagree and I’d stay way away from those airplanes. I know that they’re not necessarily coming out of China, although I’ve seen several, because it’s still just as problematic than an airplane out of China, if not more than ever.

Jay Mesinger (06:15):

I think that there’s some quote-unquote off-market opportunities, so airplanes that you’ve never seen come to market get sold because somebody makes a call to an owner and they choose to sell because they’re compelled by the pricing. So there’s some of that. We are down with respect to transactions. I’m not really very worried. In fact, I’m suggesting to my buyers, and I’m not down in number of buyers that have hired us to pay these retainers, I’m down in completed transactions because it’s so hard to get involved, or I won’t even let one of my clients get involved based on a process that doesn’t include a full pre-buy. But I’m not worried about it. I’m suggesting to my clients that are buyers, “Let’s wait, time’s going to be on your side.”

Jay Mesinger (06:55):

So I think that we’ll have a very busy last end of the year, because I think that the change will begin to occur and we’ll be able to find some transactions and we’ll be first and foremost to make them. And I might add, Tony, I’m so proud of how we run our business. We are going to come out the other side of this with every bit of the integrity we had going into it, and transparency. We have not changed a bit. If anything, we are more resolved than ever to how good business should be done for both sides of the transaction.

Tony Kioussis (07:25):

I know that’s true by your business, Jay, and I’m pleased to hear you say that. It’s something that is not shared by some of the community, and that’s a shame. I know that you and your business run in the best possible way. How do you see bonus depreciation affecting aircraft sales this year?

Jay Mesinger (07:42):

Well, I have a few people starting to rumble. I think it’s going to be there. I don’t think that the current administration has the time to deal with that at all, so I think people can count on it for 2022. And I hope that those people that it is a mandate for call me sooner than later, because if you remember, we talked about this last year, you start to call me around September and say you want a plane closed by December, I won’t take that project on because with supply chain issues and with delays and getting in pre-purchase facilities, you just can’t guarantee that a plane’s going to be closed, and no seller is going to have a contingency in their contract that the airplane has to be closed and delivered and in service by December 31st.

Jay Mesinger (08:23):

But I do think it’s going to entice some people. I think that bonus depreciation and the value of that is certainly a function of all the rest of the economy. And I think that there’s still a lot of people making a lot of money doing whatever it is that they do. And so that they’ll want to take advantage of that. How that shifts the numbers, it’s going to just completely depend on supply.

Tony Kioussis (08:43):

Do you see traditional corporate buyers getting back into the market anytime soon? I mean, considering the lack of new aircraft availability, which a lot of corporate buyers tend to go for, a new aircraft that is, do you see them getting back into the market anytime soon?

Jay Mesinger (08:59):

I see them flying again, and that’s a precursor to getting back into the market. I think that’s a good, healthy thing. And the more they start to fly and the more they start getting back to business, the more they’re going to start talking about modernization and matriculation and fleet change and look. So I think that’s next to happen. I think there’s a lot of interesting things going on in the marketplace right now that are clearly impacting operators and particularly corporate operators.

Jay Mesinger (09:25):

Just the issue with the 500 and 600 right now, and those airplanes being greatly impacted by restrictions on landing due to winds. I know Gulf Stream is working really hard, because that’s who they are, and because they know that they need to be there for their clients to get a solution to that problem and get it into the market as quickly as possible. But I see some corporations that have those planes looking for some kind of alternate lift, which certainly is going to put more stress on the providers like NetJets and Jet Links and Flexjet and those kind of people that provide either card or lease opportunities to cover that need, that supplemental lift need. That’s going to put some more stress and strain on the corporations, hopefully not to not fly, but to work hard to find some alternate lift right now.

Tony Kioussis (10:14):

What do you think’s likely to happen to prices for the remainder of this year? I mean, I know that’s a loaded question, but I just wanted to get your view on it.

Jay Mesinger (10:24):

Well, as I said, I am really hopeful that the pendulum doesn’t crash through the center line, because that could affect pricing very negatively. My hope is that pricing will just ease that pressure on the short supply, will ease because of some added supply, and pricing will just start to level out and this will be the new baseline. That’s a much better predictor than the hope that pricing drops 40 or 50%, which is what it has risen in the last year.

Jay Mesinger (10:55):

So I’m not discouraging my clients from paying today’s prices. I’m discouraging them in some cases from paying 10 or 20% over what the last one sold for. I’m discouraging them from not getting involved. Imagine you pay these high prices for a plane and the seller doesn’t allow you to do a pre if you’re a seller and you’re getting these kind of prices, the least you should do is to give the opportunity to do a traditional transaction, which includes a full pre-buy. We won’t bring a seller on. It won’t allow for a full pre-buy. As sellers right now, we’re involved in some pretty extensive invasive pre-buys on behalf of the process, and that’s thankfully due to the caliber of the clientele I have. And I’m not suggesting that my seller doesn’t take advantage of today’s pricing, but take advantage of it and embrace the idea of a traditional transaction.

Tony Kioussis (11:47):

I think the whole idea of acquiring an aircraft without a pre-buy or even a limited pre-buy is recipe for disaster. And I applaud you for not taking clients who won’t allow it as a seller.

Jay Mesinger (11:59):

If you’re the buyer, I would run from a transaction like that as quickly as possible.

Tony Kioussis (12:04):

What effect, if any, do you think the Russian sanctions will have on the business aviation market, specifically aircraft sales? I mean, I know we touched on it a little while ago, but I just want to go back to that for a second.

Jay Mesinger (12:17):

Let’s start with the OEMs. Some percentage of each of the manufacturers’ book of business probably included sanctioned Russian buyers whose transactions cannot be completed. So that’ll give five, 10%, 20% of the book of business, put that back in the marketplace. That’s still not a whole lot. I honestly don’t believe that I would get involved right now with any transaction where the owner was on any kind of a sanction list and you were going to try to work your way around that through some form of swapped ownership or some form of change in ownership. I think it’s a recipe for getting yourself caught up in the middle of a mess.

Tony Kioussis (12:56):

We’ve had two calls from first-time buyers chasing Russian aircraft, and they don’t seem to understand what the ramifications are. And, curiously, neither one of them is using an experienced aircraft acquisition firm. They’re both trying to do it on their own. I mean, you talk about a recipe for disaster. It’s amazing to me that with everything that’s going on, that someone can think that they can do this on their own, but there’s still some of that mindset out there, which is pretty scary.

Jay Mesinger (13:26):

And leave it to a first-time buyer, who’s twice as dangerous when accompanied into the market by somebody who’s working for themselves and not the first-time buyer.

Tony Kioussis (13:35):

Yeah, exactly. What’s Mesinger Jet Sales been up to since our last conversation in February?

Jay Mesinger (13:42):

Working hard and working hard to understand the marketplace and to help our clients navigate the marketplace. We have spent as much time trying to get our clients to be patient and to accept the fact that change is in the wind and to sit back for a moment to take advantage of more choice, better choice, and choice that is a more traditional transaction, and just continue to expand our business on the basis of doing business the right way. That’s Mesinger Jet Sales.

Tony Kioussis (14:10):

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.