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Aircraft prices – where are they going?

By Adam Hunt

 

For Canadian aircraft buyers the short answer, for both new and used aircraft, is "down." This is good news if you are in the market for an aircraft, but bad news if you are selling one. What is going on here? The answer is, aircraft are priced in U.S. dollars and the Canadian dollar has made strong gains over the U.S. dollar in recent weeks - gaining five per cent in the last two weeks of May alone.

As of June 1, the Canadian dollar was trading at U.S. $1.0614, a rate not seen since the summer of 1977. This is a large change from the Canadian dollar’s low point in early 2002, when it took $1.6183 to buy a U.S. dollar. This represents a 35 per cent drop in value for the U.S. dollar and aircraft prices.

Most of the world’s aircraft are made in the U.S. Aircraft parts and raw materials are also made in the U.S. Free-trade and easy import procedures mean there is one unified market in new and used aircraft in North America and the larger volumes of the U.S. market set the prices. The closing gap between the currencies has recently been driven by the strengthening Canadian dollar, bolstered by strong commodity and energy markets, as Canada sells more oil and gas to the U.S.

Canadian mergers and acquisitions have also strengthened the economy and with falling unemployment and a strong housing market there are many signs the Canadian economy is getting stronger and the Canadian dollar will make even further gains against the U.S. currency.

CIBC World Markets chief economist Jeff Rubin and National Bank Financial chief economist Clement Gignac both publicly predicted in late May we will have a par dollar in the near future, perhaps as early as the first quarter of 2008.

The risk of federal government intervention to hold the dollar down to preserve manufacturing jobs seems unlikely. On May 31, 2007 Prime Minister Harper, an economist himself, indicated the government would let the dollar find its own level. Holding it down, even to preserve export manufacturing jobs would be a "huge mistake," Prime Minister Harper said.

The Bank of Canada has signalled it will raise interest rates to control the core inflation numbers which have been running consistently above the central bank’s targets. Higher interest rates will likely result in a higher dollar as investment increases as a result.

There have been some changes in aircraft values outside the exchange rate issue. There are now many new models of glass-cockpit equipped four-seat aircraft on the market. U.S. market demand for older, used, four seat light aircraft that do not have glass cockpits has fallen as a result and prices for these have cooled.

For example, a four-seat 1960 Cessna 172 with good paint and interior and a mid-time engine has a Bluebook value of Cdn$25,900 today.

A similar effect is being seen in older two-seaters that are over 1,320 pounds gross weight and thus do not qualify to be flown with a Sport Pilot Certificate in the U.S. Demand for Sport Pilot qualified aircraft remains strong, however, holding values on older Cubs and similar aircraft up.

A typical two-seater too heavy for U.S. Sport Pilots, the 1978 Piper PA-38-112 Tomahawk with good paint and interior and a mid-time engine comes out at Cdn$12,700. These values are down dramatically over the 2002 peak.

So what does this all mean for the Canadian aircraft buyer? It adds up to a good time to buy a new or used aircraft. The aircraft itself will cost less than even a few weeks ago. The airframe and engine parts, likely ordered from the USA, will also cost less, when you need them.

Only European aircraft and parts are steady in value, as the Euro has remained strong against the Canadian dollar.

As a bonus, falling aircraft values means hull insurance will also cost less, since you won’t need to buy as much of it for a lower value aircraft.

One of the effects of the recently falling U.S. dollar is many Canadian aircraft sellers have not kept up with economic developments and lowered their prices accordingly in recent weeks. As a result many Canadian asking prices are too high. This is why record numbers of aircraft are being imported from the U.S., driving up the Canadian Civil Aircraft Register.

If you find domestic offerings overpriced then a look at the U.S. market may be in order. All in all if you have been waiting to buy a new or used aircraft then 2007 will be a great year to do so. Values are at record lows and there are bargains out there in both the U.S. and here in Canada.

The U.S. market in particular is a good place to find aircraft to buy as the selling prices haven’t changed much.

If you are selling an aircraft you will have to look hard at the value you can get for it. Given the loss of 35 per cent of its price in the last couple of years and future projections from the bank economists, it may make more sense to hang onto it and fly it. If you do decide to sell it, make sure that your asking price is realistic or else you may spend a lot of money on advertising with little result.