On one of my classic playlists is Chicago's 1969 hit "Does Anybody Really Know What Time It Is?" I was reminded of that lyric recently when reading a commentary by Steve Forbes, who wrote "Dollar instability wreaks havoc whether it's strengthening or weakening.
A watch that can't keep accurate time is useless, whether it's too fast or too slow
." Actions by Chinese monetary authorities on August 11
have since resulted in RMB depreciation versus the USD by about 4%. Although these actions by the China central bankers prompted a hue and cry from many political corners in the United States, perhaps the real focus of attention ought to be the profound strengthening of the U.S. dollar against most major currencies over the past 12 months, a trend that, by many experts' judgment is far from running its course, and which may continue to pressure prices for dollar-denominated assets (read: oil, gas, and yes…used business jets) worldwide. Here's why…
As with many products trading internationally, business jets are priced in USD. That means currency changes - particularly the surge in the U.S. dollar - matter. Until last month's announcement by the Peoples' Bank of China, the RMB stood as one of few major world currencies to have held value against the USD. Indeed, over the past 12 months (and prior to the central bank's August action), the RMB had actually appreciated slightly versus the U.S. dollar. By contrast, compared to the U.S. dollar, the Euro and Yen are down 11-12% year-over year and Latin American currencies have fared even worse: the Brazilian Real and Mexican Peso have depreciated by 40% and 21% respectively. These currency swings mean that, absent a USD price adjustment, the value of new and used planes worldwide has skyrocketed when denominated from a local currency perspective.
We all know about the geopolitical, economic, and policy headwinds facing our industry. But consider the impact that currency shifts have on the local currency value of aircraft: Over the past 12 months, 2010 G550's have dropped by roughly 10% in value when measured in USD terms. However, when measured in EUR's, that same aircraft's value has actually increased by about 2%. For U.S.-centric buyers and sellers, used aircraft values appear soft - but Euro-centric buyers and sellers see the opposite. And the result is a seemingly contradictory market condition: used jet prices (measured in USD) stumble despite continued (albeit slow) reductions in used inventory.
Perhaps currency shifts are one reason why.
The strength of the USD favors EUR, JPY, BRL, and MXN-dominated jet sellers, who can accept a lower USD-denominated price and still walk away with more money measured in their local currencies. The other side of this trade sees USD-denominated jet buyers finding "deals" as non-USD currency sellers relax their price demands to move a plane.
On balance, these currency dynamics may be creating a material headwind for the USD-measured value of business jets. We may see more USD strengthening to come. In a recent Bloomberg interview, hedge fund investor Stan Druckenmiller of Duquesne Capital stated that currency moves typically play out over several years, and as a result he believes that the current "strong dollar" trend has room to continue. (Note that the USD didn't start appreciating against the EUR until October of 2014.)
If Druckenmiller and others are correct, USD-strength will persist with (all other things equal) negative implications for used jet prices.
Mike Kahmann is Group Head and Managing Director of
CIT Business Aircraft Finance. The Business Aircraft Finance group provides financing and leasing programs for owners of business jet aircraft and turbine helicopters, both in the U.S. and in many international jurisdictions.
To learn more about the correlation between economic growth and demand for business aircraft in Brazil and Mexico, the two Latin American jurisdictions with the largest business aircraft fleets in the region, go to
Business Air LATAM Market Overview, the latest piece of market intelligence from CIT.
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Large markets in Asia, such as China and Indonesia, were big contributors to business aircraft order books. However, with the recent economic slowdown in the Far East, it's likely that this rosy picture will not return for some time.