March 1, 2003

Buying with Bower: Buying in a ‘Buyer’s Market’

by Ron Bower

I’M OFTEN ASKED, "IS THIS A GOOD TIME to buy a used helicopter?" My answer lately has been a resounding, "Yes! We’re in a buyer’s market." A buyer’s market usually is defined as one in which there are more sellers than buyers of a given product.

Some typical characteristics and trends in a buyer’s market are:

  • A slower transaction rate or flow, defined as the number of helicopter purchases made over a given period of time;
  • A rise in the number of helicopters advertised as available for sale; and
  • Declining used helicopter prices.

All of the above factors have been in place since the Nasdaq’s tech-stock started a massive 75% slide in early spring of 2000. Exacerbating this state of affairs were the terrorist attacks in 2001 and a general economic downturn worldwide.

Some factors adversely affect buyers and sellers alike. The deep hits that investors have taken in the stock market surely affected many potential buyers, causing them to defer their planned helicopter purchases. Tanking stocks also hit many sellers, causing them to sell their helicopters for liquidity. Rapidly escalating insurance premiums also have driven up the cost of ownership, prompting some owners to sell.

There is, however, one bright spot: Interest rates are the lowest they’ve been in 20 years. Now is a great time for qualified buyers to finance a helicopter.

Elastic vs. inelastic pricing

It’s important to note that the used helicopter market is elastic; that is, prices fluctuate in direct correlation with demand. Increases in demand over supply usually cause prices to rise, but in the current situation, increases in supply over demand have caused prices to drop. This stretching and contracting of used helicopter prices is characteristic of a free-market response to changing market conditions.

A buyer’s market in used helicopters does not necessarily mean that a buyer’s market simultaneously exists for new helicopters. This is because new helicopter prices are inelastic, and (as I’ve often marveled) manufacturers seem inclined to ignore market conditions.

Whether demand is up or down, you can count on manufacturers to raise prices every year. Ironically, the strategies of providing better service, becoming more price competitive, and developing new and better products are not pursued in hard economic times, due to internal cost cutting.

Some reasons for manufacturers’ price increases are:

  • Corporate pressure to increase profits and protect stockholders’ dividends, even in hard times;
  • Long-term business obligations to components subcontractors;
  • Increases in labor costs (particularly in union shops);
  • Ever-burgeoning overhead; and
  • The need for airframe manufacturers to recover their development and certification costs.

A rare exception to ever-increasing new helicopter prices took place in 1999, when MD Helicopters, Mesa, Arizona, reduced the price of its twin-engine MD Explorer by about 25%. After acquiring the commercial helicopter line from Boeing, MD Helicopters was working from a clean slate. Not burdened with airframe development costs, the new company was "lean and mean." Although MD made some improvements to its helicopters, its sunken development costs allowed the company to turn the slow-selling Explorer into a market-pleasing price performer.

How long will this buyer’s market last? That depends on how long it takes for buyers to outnumber sellers and for the excess supply of available used helicopters to be absorbed. When those two criteria are satisfied, used helicopter prices will rise.

In my opinion, the used helicopter buyer’s market will continue to adversely affect new helicopter sales for a minimum of 12 to 18 months.

The time to buy is during a low market. If you "buy low," you may be able to sell the helicopter later for more than what you paid for it. That possibility doesn’t usually exist with a new helicopter, due to the manufacturer’s inelastic pricing and excess production capacity.

Increases in new helicopter prices tend to buoy used helicopter prices, especially in a seller’s market. Airframe manufacturers love a seller’s market in used helicopters, because it narrows the price gap between new and used aircraft, and prospective buyers are more easily moved to a new helicopter purchase when used helicopter prices are high.

Buying without emotion

First-time helicopter buyers often make emotional purchases based on a relatively narrow span of choices. If you are considering buying a used helicopter, here are a few important tips:

  • Know what you want, and develop a list of desired specifications;
  • Conduct a comprehensive survey of the market;
  • Examine available alternatives in an "apples-to-apples" value comparison;
  • Conduct a technical evaluation that is professional and thorough;
  • Be effective in price negotiations, because the market price is really what a seller and a buyer agree upon; and
  • Use good contractual and financial practices for closing.

This process should reduce the emotion in your decision-making and increase the odds of your being satisfied with the purchase. Also, it puts you in a better investment position when you sell the helicopter.

Bear in mind the old saying, "You make your money when you buy, not when you sell." That’s always sage advice.

Ron Bower has been tracking new and used helicopter transactions for 20 years. Readers may direct questions or comments to him at Ron@bowerhelicopter.com.