LDN - Business

U.S. private jet buyers seek distressed planes in early sign of turbulence

[January 24, 2023] By Allison Lampert

(Reuters) - Some U.S. business jet buyers are looking for new aircraft whose current owners are having trouble making payments ahead of delivery, in a possible sign of early cracks in what has been a soaring market up to now.

From preowned planes selling more gradually to flattening business jet traffic, demand is beginning to moderate, aviation lawyers, brokers and analysts said. While defaults remain rare, those signs of uneven demand are drawing attention.

One business jet executive said he has seen a few distressed planes and customers who are late on payments due to financial hardships, some of whom are from parts of Eastern Europe or Latin America where economic growth is expected to slow.

"We're watching to see if it will level off as a soft landing versus something else," said the executive, who asked not to be identified.

Investors will be watching for clues when Gulfstream-maker General Dynamics Corp and Cessna business jet maker Textron Inc report earnings on Wednesday. Private jet makers have assured investors their billion-dollar backlogs and ongoing demand would cushion any blow from a possible recession.

Planemakers rarely disclose cases of distressed planes, but argue they can easily resell unwanted models.

"If, for any reason, the final sale of an aircraft does not occur, the sales team works to match the aircraft with a similar customer's mission, location and timeline," said Lannie O'Bannion, a senior vice president at Textron's aviation unit.

HUNT FOR PLANES

During the COVID-19 pandemic, surging wealth, access to cheap cash, and demand from elite travelers fueled a sellers' market for business jets that left planemakers with swollen backlogs and long waits for certain models.

But rising interest rates that have hiked borrowing costs and growing signs of a looming recession have led some buyers to delay purchases.

With demand still strong for the moment, some eager buyers are hunting for distressed assets as a way to short-circuit the still-long wait for new planes, industry officials said. Some buyers also scrambled late last year to find distressed planes to qualify for favorable taxation rules.

Brian Proctor, chief executive of aviation advisory and brokerage firm Mente Group, said he has two buyers that would look at a distressed new plane "even if it wasn't 100% perfect."

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A General Dynamics sign is shown at the International Association of Chiefs of Police conference in San Diego, California, U.S. October 17, 2016. REUTERS/Mike Blake

Meanwhile, aviation attorney Stewart Lapayowker said he knew of a few buyers "waiting on the sidelines ready to jump into a delivery that's in default" given that some vulnerable customers were rethinking earlier orders.

At the same time, the speed of sales has slowed, with preowned aircraft now taking weeks to sell instead of hours or days during late 2021, Proctor said.

In another sign the market may be calming, inventory levels of listed preowned planes for sale grew more than 40% during the back half of 2022, said aviation analyst Brian Foley, citing data from industry specialist AMSTAT.

Research consultancy WINGX said branded charter activity in North America fell 2% last year. WINGX sees 2023 flight activity falling from pandemic levels, but still ahead of 2019.

EMISSIONS BACKLASH

Another factor giving buyers pause is the growing backlash over emissions, with countries like Belgium planning to taxcorporate aircraft and the labeling of some U.S. celebrities who own jets as "climate criminals."

Zipporah Marmor, vice president at business aviation services company ACASS, recalled one deal for a preowned business jet that fell apart following proposals in Europe to ban, tax or regulate private aircraft. The European company's board discouraged the deal.

Montreal business jet maker Bombardier, which reports earnings on Feb. 9, has said it was able to resell four or five airplanes originally destined for buyers in Russia before the war in Ukraine to other customers.

Aerospace analyst Richard Aboulafia said the key is avoiding a crash in demand as in 2008.

"My issue is if things get 2008-bad, then the backlog is a false sense of security," he said, adding such a crash is unlikely.

For now, one company's collapsed deal is another buyer's good fortune. Marmor turned the failed deal with the European company into a sale to a U.S. buyer two weeks later at a higher price.

"Buyers are willing to be more flexible to get an airplane," she said.

(Reporting by Allison Lampert in Montreal, Editing by Ben Klayman and Matthew Lewis)

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