It has come to my attention in talking to a colleague and good friend over dinner – who is attempting to sell his relatively low time in real good shape older Fan Jet aircraft, that he said was impossible – that things are a lot worse than readily meets the eye. My friend was further distressed about the loss of equity in the aviation markets and the still unknown hit he would have to take, if a buyer eventually stepped up.

He asked me what I thought and I felt terrible replying, "perhaps there are no buyers at any price." This was not a flip comment but rather an observation made after conversations PrivateSky has had with brokers who tell us that written offers received are not closeable. The sellers simply will not accept the haircut they need to take on the price or terms to move the aircraft. So, the question begs; what is something worth if there are in fact no buyers?

In analysing this aspect, a conclusion reachable is that there are in fact few buyers out there for pre-owned aircraft at current seller acceptable prices. The market may in fact now be at a crossroads in terms of 20+ years and 20- years where previously it was not.

Are there for example too many 20+ aircraft for the market to ever absorb at seller-acceptable prices? It is speculative but perhaps the answer is yes, maybe there are now too many used aircraft. Could it be that some persons will no longer travel for any reason even though they have the money to afford this luxury purchase? Who knows, but I can tell you the concern is valid that a lot of aircraft may just hit the scrap yard as the useful economic life may have ended.

The sales equation relies on a willing seller and buyer concluding a meeting of the minds. Sophisticated buyers realise they must buy substantially below wholesale to insure against further residual value drops but sellers have not reached a willingness point to accept substantial equity loss.

This is a seller’s nightmare, however further hesitation in not selling now might compound the loss when the fractional fleet coming up on the five-year sale period kicks in. This would then mean an even bigger loss for the sellers holding on too long. Brokers in most cases fear telling the sellers – for fear of losing a client – the words: “I can not do the impossible and if you want to sell, we must lower the price substantially or we can do nothing.”

To further complicate this, several aviation lenders this week changed their policies in regards to lending against an aviation asset. I was told they are specifically worried that planes older than 20 years might never have real buyers out there. Some of these lenders have had to take back planes with no one to sell them to and are now parting them out. Their credit departments responding have clamped down on them, regarding the value of the collateral more specifically in terms of its age. Personally I think this is wrong to do this as certain 20+ airplanes have the ability to withstand this upside down market for the long haul but the lenders themselves now make it artificially worse by how they conduct themselves during this down period. In other words, by taking this step they perpetuate their own demise and by saying it enough times, it now becomes true to the sheep herd.

My opinion is that the mid and large iron can sustain value through this market if given a chance but at reduced price levels from the previous highs attained over the last few years. If a buyer bought at the high side of this market he will be forced to accept a haircut for sure but that is caused by the excess of product that will not go away. There are just too many new airplanes that came off the line in the last five years and every one sold creates another pre-owned one on the market. The days of runaway appreciation are over.

The new rules for asset based aviation lenders that are reasonably big players in the market:

A- Plane must be no older than 20 years

B- Loan on the plane must be at least 3 million dollars minimum in size.

That means model year 81 or newer and in reality probably 86 or newer as some will adopt the position that aircraft should be less than 20 years old at the initial 5 year term-out date.

This will change the supply/demand equation, as those older planes will be removed from the asset based financing equation so in reality the supply/demand curve will get re-adjusted. Yes, there are still local bank lenders out there that will lend against older than 20 but not against the collateral only as had been the case. A large down payment, or a balance sheet behind the deal will still get the financing.

Alternatively, this financing change could further depress the 20+ year market even further.

Partially good news though if you want to pay cash for an older plane and hold it till you part it out as the bargains should get much bigger out there now. Those with cash for a big down-payment who can live with this part of the equation will get some real buys on a lot of very good iron that can run for years and years to come. Those 20+ year planes will need lots of maintenance, which is good news for maintenance facilities and parts vendors.

In conclusion, things have really changed in the last 60 days in aviation. If you are a seller it is not a good time but if you are a buyer and have cash at hand huge bargains will be there on many very fine 20+ year aircraft that can run forever if properly maintained and serviced.

Vincent M. Wolanin, is chairman/ceo of PrivateSky Aviation Services, Inc Fort Myers Florida, a maintenance service center and Avitat FBO specialising in scheduled and unscheduled maintenance on the Gulfstream II, III, IV and V. E mail: Vincent.Wolanin@privatesky.net