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Business jets in China are now a buyer’s market with no buyers

China’s business jet buyers are turning into sellers, and there are too many of them

PUBLISHED : Sunday, 17 April, 2016, 5:51pm
UPDATED : Tuesday, 19 April, 2016, 10:47am

Fred Tan has been looking to buy a second-hand private jet for more than a year now but is yet to make a deal.

Not because of a lack of choice. Options are aplenty and the prices keep falling. “I am waiting for prices to drop further,” said the Singaporean businessman with a chuckle. “No rush.”

China’s business jet buyers are turning into sellers, and there are too many of them. So the prices of the jets they are looking to sell are not expected to fly anytime soon.

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“Prices have struggled, certainly,” said David Dixon, Asia president of aircraft broker Jetcraft. “Many factors are at play: oil and gas, natural resources like coal and mine are all down, US dollar is strengthening against other currencies, and politics in Brazil, Russia and China.”

The world’s total inventory of pre-owned business jets for sale have ballooned from US$5.2 billion in March 2014 to US$8.09 billion this February, according to Hong Kong-based consultancy Asian Sky Group. But the manufacturers aren’t selling that many new planes, suggesting the market is shrinking.

“The only thing selling planes now is price,” said Jay Mesinger, a US-based aircraft broker.

Unwanted jets in China – where the government’s austerity measures have been driving officials and businesspeople away from the conspicuous asset – are put in the market through brokers like Dixon and Mesinger and sold wherever the demand is stronger. The US, the world’s biggest business aviation market with a strengthening currency, stands out as the brightest spot.

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“There is a real shift today in the business that’s about China: it is that aircraft are being sold out of the country as opposed to into the country,” Mesinger said, who has done five cross-border deals with Chinese clients in the past year.

At the business aviation trade show in Shanghai last week, where no major jet orders were announced, manufacturers and brokers stressed their confidence in the outlook for the future and blamed global economic uncertainties for the lean phase. But at cocktail parties at night, the truth comes tumbling out in private conversations: it’s the political uncertainty that’s really holding back China’s wannabe business jet owners and crashing prices.

It’s not that the rich Chinese have stopped flying – business aviation traffic in Shanghai’s two airports grew by 20 per cent last year, according to ground handler Shanghai Hawker Pacific, which is building a new hangar for up to 10 more jets. Prospective buyers are just holding back purchase plans, either out of fear of attracting the attention of graft busters or waiting for even better deals, while existing owners helplessly watch their asset value nosedive.

The average asking price of a Global 5000, Bombardier’s popular long-range model, has dropped 10.6 per cent in the past year to US$19.5 million, according to Asian Sky Group’s quarterly market report, while Gulfstream’s newest and largest jet, the G650ER, has in three months gone from US$75 million to US$68.2 million.

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“The premium people used to be willing to pay to get a G650 immediately is gone,” Dixon said. “But the market is still active, there is still business to be done. I think it is just more difficult and there are some shifts in aircraft value,” he said, adding that Jetcraft had its best first-quarter ever.

Pre-owned jets from Asia are increasingly accepted in the US, Dixon said, while Chinese buyers, who used to want only brand-new jets, are also growing accustomed to the idea of used jets that could come for half the price.

But Chinese aircraft owners who had to pay a 22.8 per cent tax and duty when importing aircraft are at a disadvantage in the market. There’s also a mismatch of preferences that inhibits deals. In Asia, and China in particular, large-cabin, long-range jets are the favourites. In the US and mature markets in general, lighter, cheaper aircraft prevail.

That makes it extra hard for Chinese sellers, while upcoming new models from the manufacturers put further pressure on the prices of old models.

“Aircraft are staying longer in the market. Sellers need to be realistic,” said Jolie Howard, vice-president of sales at CIT Business Aircraft Finance.

“That just means it is a buyer’s market,” said Andy Gill, a senior director at Honeywell Aerospace, who added that he expects Asia-Pacific’s preference for large-cabin jets to mirror the rest of the world in time.

But Gulfstream, maker of the most popular big jets in China, disagrees. “I think the China market is going to stay primarily a large-cabin, long-range market because of the distances Chinese companies need to travel,” said Scott Neal, senior vice-president of sales of Gulfstream. “But I will say that as the Chinese market matures, we are seeing more interest in our smaller products, such as the G280, for use in local missions,” he said.

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“We have seen some of the frenetic pace of activities over the past few years slow a bit in mainland China, but we are still seeing very good activities,” Neal said, adding that the firm had a busy week full of appointments at the show in Shanghai.

Analysts said weak new orders from China, after peaking in 2009, are hitting the manufacturers with a lag, as the old orders have yet to be delivered. While Gulftream’s Neal insisted the order pipeline for China is “strong”, without disclosing the numbers, his company has forecast it would deliver fewer jets this year than last year. Bombardier, which has the second largest market share in China after Gulfstream, predicts a 25 per cent fall in business jet shipments globally this year.