Depreciation – the only cost that matters.
Business jets are far from the most sensible financial investment, at least as far as the investment might appear on the corporate balance sheet. As an asset, in general terms jets depreciate quickly, especially since the global financial crisis triggered in 2008. The days where you could make money buying and then selling a jet nine years down the line are long gone. The value, of course, lies beyond the balance sheet.
Whilst the market is recovering, jet prices are still depreciating. When looking at general depreciation of a Bombardier Challenger, residual prices have fallen from 88% after nine years in 2006 to 26% from 2008-2017.
The story is the same for the Cessna XLS, the sale price of a nine-year-old aircraft had risen to 103% of the original purchase price in 2006. If you were to sell last year, you would be looking at closer to 30%.
The question posed by Stefan Duller, managing director at AvionMar is whether higher depreciation means that this is a buyer’s market? He does not think so. Ever since 2008, deliveries have fallen, despite lower prices. We are now back to the level of deliveries we saw in the mid-2000s but aircraft prices are still falling.
Will we ever see the old depreciation curve return? Will we be back to an era when selling a jet can make money after nine years? Duller thinks no. Low retirement rates of aged aircraft, huge discounts before models are phased out of production, and trickle-down effects from larger jets are all affecting the residual values of used aircraft.
So, what can be done to create change? Cutting production rates, reducing discounts for models at the end of their production lives and, as a consequence, an overall change in the market mindset could mitigate the price depreciation rates we have seen since the financial crisis.