10 October 2008

The Economic Situation - Is There Any Good News?

The last two weeks have finally seen the global credit crisis started by the US sub-prime mortgage problem expand to affect all the stock-markets worldwide as well as the the global financial industry. Already credit, loans and mortgages are harder to get.

David Smick, a global strategic adviser, noted that the US Government had hoped that "The "shock and awe" of the sheer size of the taxpayer-funded bailout would somehow restore confidence. Instead, stock markets collapsed and credit markets remained frozen."

Cessna's CEO Jack Pelton had some things to say about the availability of credit at NBAA this past week. Essentially he said that in the 2001 recession credit was available, but there were fewer buyers, today there are lots of buyers for business jets, but credit is drying up.

Just about every economist says that we are in for a time of economic slowdown, ranging from a recession to predictions of worse. How bad it will or won't be and how long it will last, all depend on who you listen to.

All of this has implications for anyone trying to sell anything that people normally borrow money for. For instance with mortgages already harder to get, the number of potential home buyers will shrink and house prices will fall.

So what does this mean for small aircraft owners? On the minus side it means that the number of prospective aircraft buyers will decrease and this means that used aircraft prices will fall even lower than where they are now. It may be very hard soon to sell an airplane at any price as no one will be able to get financing to buy them. As people lose their jobs, buying or even keeping an aircraft will not be a priority. Flying activity will probably decrease and this may make it hard for airports to make ends meet. Some aircraft manufacturers, especially small ones, will have trouble staying afloat as orders dry up. Some people trying to sell aircraft will see prices drop so low that they will decide not to sell and, instead, take them off the market instead.

It all sounds pretty bad for aviation. Is there any up side to all this?

There actually is! Most forecasts indicate that oil prices are set to fall as demand drops below current production. Analysts have predicted oil may fall to as low as $50 per barrel in the near future, although that will largely depend on whether OPEC manages to cut production to hold prices at their target of $100 per barrel. All this means that for the next while avgas prices should stabilize and may even go down, especially as demand for oil falls.

The other upside is that for people in the market to buy an aircraft and who can pay cash, there will be some real bargains out there in the next while. The trick will be to wait a while for prices to fall further than they have done already.

If some owners do manage to sell their aircraft this may result in a glut of hangar space freed up. I think hangars are unlikely to fall much in price, but space may be easier to find than it has been in the past.

So we may have cheaper gas, available hangarage and very cheap airplanes available.

Tough economic times always create problems for everyone. There is no doubt that some aircraft owners will have to sell planes due to job losses or other financial pressures. There will be bad news for some owners, but it won't be all bad news for everyone.

Some worthwhile background reading on the general financial situation:



Adam Hunt said...

Some additional thoughts on this subject:

October 10, 2008 - Why Falling Oil Prices Aren't Good News By Paul Bertorelli, AvWeb


October 9, 2008 - It’s a solvency problem, not a liquidity problem By Mark Shuttleworth, CEO Canonical


Adam Hunt said...

Here is an interesting article from AvWeb/Aviation Consumer on this subject:

"Recession? What Recession? Airplane Sales Tell the Tale"


A quote:

"...the used aircraft market strongly favors buyers at the moment. Despite disruption in the mortgage market, credit is available for qualified aircraft buyers, even if terms and interest rates aren't the best. Inventory is high and there are an unusual number of good deals to be found in late-model used airplanes."

"Unfortunately for sellers, this has put downward price pressure on older airplanes—say 20 years and older—so owners have to be realistic about what they can get for those aircraft.They'll sell eventually, but brokers say they have to be priced right. For buyers, there's never been a better time to find a high-value deal on a serious, high-performance airplane with good equipment."

Adam Hunt said...

I have been reading a number of appeals this past week, including this article in AvWeb that indicate that charities and non-profits are already suffering in this economic situation.

While donations have suddenly dried up, there are other factors, too. Last week a number of Canadian universities indicated that, because so much of their income now comes from investments in the stock market, they have had big losses recently. Combined with donations drying up this means that they are short of cash to operate. I am sure that same goes for many aviation charities and non-profits.

So just a reminder, as we head into the holiday season soon that charities and non-profits will need your help more than every this year.

Adam Hunt said...

Here is an interesting perspective on the economy and GA from Aviation Consumer's Paul Bertorelli - Recessionary Paradox: GA Innovates As It Shrinks.

Adam Hunt said...

Here is an analysis dated 25 Nov 08 from Carl Janssens of the Aircraft Bluebook — Price Digest itself, well worth read:


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