As published in BusinessAir Magazine issue 12.
The aircraft market is more than likely the closest market to the theoretical Adam Smith “Invisible Hand” theory and basis for free market thought.
For those who have forgotten Economics 101, a quick refresher is in order. Basically, the concept is that in a free market, that supply and demand will dictate prices. In theory, there are not outside forces that influence the outcome of the market. (The Invisible hand.) As in all theories, the perfect world does not exist. Governments influence commodity prices, regulation of utilities skew the true market price, monopolies and oligopolies, think the OPEC oil cartel of the 80’s and 90’s and many other artificial outside forces can produce results that are not reflective of the free market.
Some think in the aviation market place that the OEM has a much greater power to influence the markets than I feel they really do. In fact, I believe that the results of OEM actions on discounting are more a result of the free market forces and supply and demand. New models help OEMs’ because often they represent innovation that allows the OEM to have stable prices due to the high demand for these new products. This is good for the OEM but can have a negative effect on the used models they replace.
There are two forces at work when OEM’s raise prices. One is, higher demand allows them to raise prices without inventory build up, and two, the inflation factor. Both of these can be a reason for used prices to rise.
On the downside, if demand softens, the OEM cannot raise prices, or if they do, they will increase inventories and therefore place price pressure to get the extra capacity sold. Add to this a lower inflation rate than has been recent history and used prices decline.
The question becomes a chicken and the egg dilemma. Are the OEMs’ discounting the reason used prices fall, or is the real cause because demand is low? The end result is the same.
Mike McCracken is a 30+ year aviation industry veteran and owner of Hawkeye Aircraft Acquisitions.