I am currently working with several clients on acquisitions. I have found myself making offers on several aircraft over the last few weeks and have been encountering a problem I haven’t run into in a while. Perhaps it is just a coincidence, but it seems that many of the sellers I have been negotiating with are unwilling to do much bargaining these days.
In three separate instances over the past two weeks, I have made reasonable offers (in my opinion) on aircraft on behalf of different clients only to receive a counter offer at the asking price. My definition of a reasonable offer is somewhere between 5-8% below asking price. The problem seems to be that many sellers feel that they have already discounted the price of their aircraft so steeply over the past 18 months that they do not want to negotiate any further. Unfortunately (for the sellers that is) buyers still have a lot of options out there.
We are finally to a point in the marketplace where retail transactions are taking place and we can see a trend of sales prices that help to establish retail values. Brokers are reporting those sales to their clients and those clients then add the 10% or so to that price in order to establish their asking price. However, when reasonable offers finally come in, many seem to forget what it’s like to be a buyer in this market. Inventory levels remain at historically high percentages and paying a premium over what the last buyer paid does not sit well with anyone just yet.
In all fairness, many buyers are still making unreasonably low offers in hopes of setting a new market low. For offers like those, a counter offer of the asking price is probably a pretty good tactic for saying no thank you without being unnessarily rude. But in negotiations, it is important to distinguish between those fishing expeditions and a real buyer attempting to begin negotiations in good faith.
Good faith negotiations can take on many forms. But there is a general structure they all seem to follow. Most look something like this:
- Buyer submits an initial offer ~ 5-10% below asking price
- Seller makes a counter somewhere below the asking price (how far below depends on where the initial offer started)
- Buyer increases his offer
- Seller decreases his counter by a similar percentage
- Both parties should have an end price in mind, based on recent comparable sales and current competition and counter-offers should give hints as to what that number is
- As long as each party seems to be negotiating in good faith and making reasonable moves, progress is made. As soon as one party fails to make a concession in line with what the other party has made, progress comes to a grinding halt
- At that point, both parties must assess their position and decide what the aircraft is worth to them
As I’ve heard before, if you are the owner of an aircraft currently for sale, it means that at this moment, by default, you are the highest bidder for that asset. There are either no buyers currently interested in that product or the price you have established is higher than those buyers are willing to pay. In a declining market it behooves the seller to get out ahead of the market and sell quickly. In an increasing market, time is on the seller’s side.
In today’s market, there are several aircraft models still headed down. However, the newer model aircraft have for the most part bottomed out and begun to stabilize. There’s only one or two models of aircraft that have demonstrated any price increases and those are current production ultra-long range model aircraft built in the last 5 years.
I feel like I’m starting to ramble a bit, so I guess I’ll cut to the chase. Following are some recommendations I would make to buyers and sellers of newer aircraft who truly want to complete a transaction in this environment.
BUYERS
- Make your first offer high enough that you don’t insult the seller
- Make an effort to see the aircraft at its home base to establish credibility
- Keep your letter of intent very simple, save the complicated issues for the purchase agreement
- Have financing pre-arranged if necessary
- Hire a good agent that is responsive and that you communicate well with
SELLERS
- Establish a reasonable asking price based on the most recent sales and availability
- Negotiate in good faith based on the concessions the buyer demonstrates on his offers
- Be willing to come off your asking price by at least 3% or more
- Do not let pride get in the way of your negotiations
- Hire a good agent that is responsive and that you communicate well with
Remember, selling an aircraft is not like selling real estate. In real estate, no two pieces of property are truly alike. If a buyer really wants to own a particular piece of property, he doesn’t have much choice. With aircraft, depending on the make and model, the OEM probably produced around 200-300 units or more.
A search on the Jetnet Mulit-listing service shows that almost 3,000 jet aircraft are currently listed for sale. In June of 2007, that number was almost 50% lower. We have seen some fairly steady sales figures over the first 5 months of the year, averaging around 200 sales per month. At the current burn rate, I’m afraid we are doomed to have a large supply of aircraft on the market for quite some time.
My advice to sellers, if you want to move that aircraft in this environment, you’d better play nice.
Toby J. Smith
Vice President
JBA JETS, Inc.
918-834-9100
toby.smith@jba.aero