- 04 Nov 2020
- Brian Foley
- BizAv Market Insight
Entering the final month of an unpredicted — and unpredictable — year, what’s the status of aircraft sales? Brian Foley, Editor, Market Indicators weighs the evidence, assessing the contributing factors…
It’s not often that pre-owned business aircraft sales activity outshines new transactions. Usually, the tide raises (or lowers) new and used equally, based on such factors as the economy, or one’s balance sheet, personal portfolio performance, and confidence in the future. Not this time...
Strong used sales activity is often used as a predictor of new aircraft sales under the presumption that a lack of quality, low-time pre-owned inventory with rising prices will drive hapless buyers into the new airplane showroom.
That hasn’t happened in 2020, with pre-owned transactions on track to outpace last year, while overall new aircraft deliveries will be down an estimated 25-30% by year-end.
Exceptions to the Generalization
In the past, there had been two distinct categories of buyers – new and used. The used buyer was typically value-driven, seeking the most bang for the buck, whereas the new buyer favored things like a warranty, personal customization and disliked the thought of having someone else’s discarded airplane.
More recently though there have been exceptions to that generalization, with the price divide between used and new becoming so great that justification to pay an out-sized premium for that new leather smell has become a much weaker argument.
Given that used airplane sales activity is decisively outperforming new, one would assume that there must be some obvious explanation. While the answers to this anomaly may not be immediately clear, one solution to find an answer would be to ‘follow the money’, which often unlocks many of the world’s mysteries.
First, new business jets depreciate a lot faster, and more precipitously than they used to. At one time a new buyer could reasonably expect their airplane to retain perhaps 70-80% of its value after five years and, in some cases, particularly for newly-announced models, even appreciate. (This may have been the expectation back when demand outstripped supply of business jets.)
Today, though, supply roughly equals demand, meaning corporate jets now depreciate like a capital good is expected to (i.e., a car, airliner or even a refrigerator). As such it depreciates more quickly with time, with a more conservative estimate now being to assume that it’s worth roughly half its value in five years.
As an example, just a few years ago a $30m new jet buyer could anticipate losing around $6m in value over the first five years. Today that number is closer to $15m, providing yet another incentive to purchase a well-depreciated pre-owned aircraft instead.
Covid-19 may also be driving some new entrants into Business Aviation. In general, this category of aircraft buyer lacks the financial depth of traditional owners, and is more likely to be sticker-shocked at the costs to buy, staff, operate and maintain a jet, which persuades them to first try a pre-owned aircraft which offers a better value.
Tax Law Still has Legs?
The last supposition of used sales activity outpacing new would be that the US tax law allowing an accelerated tax write-off on an airplane purchase, even a used one still has legs. While early in the year it seemed that those who could benefit from the deduction had already taken it, Covid-19 may have brought in new entrants who are equally motivated by the perk.
Pre-owned sales activity this year is expected to be on par with, or maybe a little better, than last year’s level. Ultimately, this is a remarkable achievement given the Covid-19 environment.
It is anticipated 2021 will be another decent year for pre-owned as new deliveries try to claw back their 2020 delivery losses.
Flight Activity Slides as Quarantines Renewed
From the start of October into the first week of November, global Business Aviation sectors declined by 14.7% compared to the same period in 2019, says WingX Advance. BizAv activity represented just over 20% of global fixed-wing activity for the period, up from 12% in 2019.
Year-on-year (YoY), Business Aviation trends picked up in October compared to September and hit a post-March high point in mid-October. Since then, rolling seven-day activity slid back 10%, declining each day through November 3rd. North America saw 78% of the global Business Aviation sectors in October/start of November, yet activity there was down 16% YoY for the period.
(That represented a slight improvement on the 18% YoY decline in September). The weakest North American markets were Canada, Mexico, Bahamas, Sint Maarten, and Bermuda.
Overall, the United States saw sectors fall 14% compared to the same five weeks in 2019, though notably sectors between two and three hours increased YoY. In fact, the second half of October was the busiest period for Business Aviation in the US since February, but recovery has since lapsed again.
The flight activity trends across the US since September maintained a familiar narrative:
Business aviation trends in Europe held up over October and the start of November, down 12% on same period in 2019. However, the resurgence of the virus and the associated lockdown renewals saw a steady deterioration, with a 22% drop in the rolling average activity since the start of October.
The UK continued to be the hardest hit, with outbound flights falling 32% since September. Spain, France, Switzerland and Belgium all saw 20% declines. Other countries, including Germany, Italy and Austria, maintained 90%-plus of normal activity.
Flight activity in Sweden was only 2% off, and Business Aviation flights in Portugal were up 10%, while in Greece and Turkey flights soared more than 40% above usual for the time of year. Worldwide
The charter market continued to be the resilient sector, down only 6% YoY. Fractional operators also made a big comeback, with October activity trailing by 8%. Sadly, private flight departments were operating at least 20% below par.
“With the resurgence of the virus in Europe inevitably heading towards the United States, the industry faces a turbulent few months, and that is already reflected in the relapsing recovery in flights coming into November,” suggested Richard Koe, Managing Director, WingX Advance.
“The business traveller isn’t going to come back in large numbers this winter, so much depends on the sustainability of leisure demand - especially for charter flights.”
Pent-up Demand Boosts BizAv’s Winter Resilience
Business Aviation flight hours rose 87.5% between Q2 and Q3 as flying resumed following the dramatic declines related to COVID-19, says Jet Support Services, Inc. (JSSI) in its quarterly Business Aviation Index…
The Index reports on the global flight activity and utilization for more than 2,000 business aircraft enrolled on JSSI hourly cost maintenance programs, including jets, turboprops and helicopters. Since average flight hours reached all-time lows in April due to the COVID-19 pandemic, BizAv activity has recovered to 78.4% of 2019 levels.
As some of the pent-up travel demand was released, month-over-month flight activity between August and September 2020 climbed 7.1%, the first monthly increase in flying hours since Q3 2019.
JSSI’s data reveals that several industries initially hit hardest by the coronavirus pandemic – such as business services and financial services – demonstrated the most significant recoveries in Q3, recording 84.3% and 111.4% increases in flying hours respectively, quarter-over-quarter.
Large aircraft have taken the biggest plunge globally, says JSSI, with YoY flight hours down 30.7%. By comparison, ‘small-cabin aircraft’ saw the least pronounced decrease in activity, down just 2.1% YoY, reflecting their value during the pandemic.
Looking ahead, Neil Book, President and CEO, JSSI, predicts “elevated leisure travel during the winter months as tighter travel restrictions, coupled with the virus resurgence will continue to inhibit business-related flight hours.”
YTD Avionics Sales Down 27%
The Aircraft Electronics Association released its Q3 2020 Avionics Market Report, and total worldwide Business & General Aviation avionics sales amounted to $1.67bn, YTD, down 27% compared to 2019.
During Q3 2020 (July-September), sales decreased 33.4% compared to Q3 2019. However, sales in Q3 2020 were up 5.9% compared to Q2 2020, with retrofit sales up 10.8% over Q2.
Of the >$1.6bn in sales YTD in 2020, 54.5% came from the retrofit market (avionics equipment installed after original production), while forward-fit sales (avionics equipment installed by airframe manufacturers during original production) amounted to 45.5%.
According to the companies that separated their total sales figures between North America (US and Canada) and other international markets, 73.7% of the YTD sales volume occurred in North America, while 26.3% took place in other international markets.
“The significant contraction of industry sales during the last six months has been driven by the international health crisis,” said AEA President and CEO Mike Adamson. “However, we are encouraged with the direction of activity in the retrofit market, which is up nearly 11% over Q2 total sales.
“In addition, the overwhelming majority of AEA member shops and manufacturers are continuing their essential operations, and many are reporting customer backlogs that extend several weeks and into next year.”
In-Service Aircraft Values & Maintenance Condition
As the number of monthly transactions continued increasing, Asset Insight’s October 31, 2020 market analysis covering 134 fixed-wing models, and 2,174 aircraft listed for sale, posted the largest monthly inventory decrease (3.2%).
The YTD inventory fleet is now 0.4% below the number of assets listed in December 2019, with availability decreasing for all four groups.
Asset Insight’s tracked fleet’s average Ask Price increased for the third consecutive month to post a 12-month high figure. October’s 3.3% increase equated to a 1.7% increase YTD, although not all groups saw the rise.
Inventory Fleet Maintenance Condition
The rise in aircraft transactions, and surprising buyer interest in lower quality assets during the month, created an inventory fleet mix improvement with respect to both Asset Quality and Maintenance Exposure.
Maintenance Exposure to Ask Price (ETP) Ratio
The ETP Ratio is a useful indicator of an aircraft’s marketability. It’s computed by dividing the asset's Maintenance Exposure (the financial liability accrued with respect to future scheduled maintenance events) by its Ask Price. ‘Days on Market’ analysis has shown that when the ETP Ratio is greater than 40%, a listed aircraft’s time on the market increases, usually by more than 30%.
During Q3 2020, assets whose ETP Ratio was 40% or more were listed for sale 50% longer (on average) than aircraft whose Ratio was below 40% (269 vs 404 Days on Market). Asset Insight’s October analytics revealed that over 51% of our tracked models – and nearly 56% of our tracked fleet – posted an ETP Ratio greater than 40%.
The month’s fleet ETP Ratio improved to 69.8% from September’s 73.7%, reflecting a figure slightly worse than the 12-month average.
With the tracked inventory decreasing, 10.1% of the active fleet was listed for sale in October, continuing the steady monthly decrease dating back to May’s 11.3%. Turboprops once again led the way, this time at 8.0%, Large Jets further improved to 8.4%, Small Jets decreased to 10.4%, and Medium Jets improved to 12.1%.
The Quality Rating improved 1.1% for Large Jets, boosting the group up to 5.640 and deeper into ‘Outstanding’ territory, while Maintenance Exposure improved 3.1% to better the 12-month average.
The tracked inventory decreased by 16 units, meaning availability is now 14.4% higher YTD. October’s Ask Prices reflected the group’s 12-month average figure. With both Quality Rating and Maintenance Exposure improving due to lower quality assets leaving the available fleet, Q4 is likely to post strong sales figures.
Higher quality assets were the ones primarily trading in October, worsening the available fleet’s Quality Rating by a nominal 0.3% but, at 5.297, maintaining a better-than-average figure while keeping the group within the ‘Excellent’ range.
A decrease of 23 assets in the inventory worsened Maintenance Exposure slightly by 0.2%, but this figure was also better that the group’s 12-month average.
As we have previously stated, statistics generated by Mid-Size Jets continue to defy logic, since an Ask Price decrease of 0.6%, together with the Maintenance Exposure increase should have increased the group’s ETP Ratio. But, at 68.9%, the average ETP Ratio actually improved from September’s 70.9%, to reflect a 12-month low.
Inventory decreased by an additional 20 units during October, creating a 4.7% YTD reduction in availability – and the latest fleet mix improved the group’s Quality Rating 1.9%. At 5.236 the figure is better than the 12-month average, but not enough to rise above the ‘Very Good’ range. Although Ask Prices lost some ground during October, they are still up 7.8% YTD.
Maintenance Exposure improved 2.0% and, while the figure is still worse than the 12-month average, it did manage to improve the ETP Ratio to 98.8% from September’s 12-month worst 100.3%. (In other words, the average Light Jet has embedded maintenance virtually equal to its Ask Price, ergo a low price may not equate to a good value.)
With a 14-unit reduction to inventory, the tracked Turboprop fleet is now only 2.4% above its 2019 year-end figure, and is also sporting a 2.0% improvement to its Quality Rating and a 2.4% improvement to Maintenance Exposure (both reflecting 12-month best figures).
With Ask Price posting an increase that’s flipped the YTD figure into positive territory, and a 12- month best ETP Ratio that’s only 0.7% worse than the 40% Asset Insight considers to be ‘excessive’, Turboprops offer some great opportunities for buyers and sellers during the last two months of 2020!
Will the Covid-19 Impact be Short Term on New Jet Sales?
The COVID-19 pandemic is not expected to have a long-term impact on business jet sales. At least that’s the prediction of Honeywell in the company’s latest annual 10-year forecast of the business jet market. Mike Potts analyses…
Honeywell expects the business jet market to total 7,300 aircraft worth $235bn over the period from 2021 to 2030, representing a 4% reduction from the 7,600 jets worth $248bn they predicted for the comparable period a year ago.
By comparison, JETNET iQ, the other major player in business jet market forecasting, is less optimistic, with the expectation of 6,584 jets worth $217.5bn over the 10-year period between 2020 and 2029 (that’s a 6.6% reduction in units and a 9.75% drop in billings from what JETNET forecast a year ago).
Purchase Plans Unaffected
According to Honeywell, 80% of jet operators surveyed say their purchase plans have not been affected by the Covid-19 crisis, and, as a result, Honeywell reports five-year purchase plans are about what they were last year, which was rather optimistic…
The Covid-19 crisis has clearly had an impact on deliveries so far in 2020, and in the most recent General Aviation Manufacturers Association Shipment Report (Q2), jet sales were off 26.7% from the 333 aircraft that were shipped in H1 2019 to just 244. Billings, meanwhile, were down 20.2%.
Honeywell does not expect this downturn to last, and says that business jet utilization is expected to be at 80-86% of 2019 levels by the end of 2020, and to fully recover by mid- 2021. With that recovery the purchase market should rebound too, it believes.
As a result Honeywell expects the net loss of aircraft sales over the coming decade to only be about 300 units. Based on historical delivery patterns, that could be about the reduction we are likely to see in the course of this year.
Honeywell’s projected delivery chart shows a steady upward trend over the coming decade with this year’s market projected around 500 units, rising to around 800 by the end of the period.
Market Confidence to Improve?
JETNET polls its respondents about their confidence in the current market. A total of 37.2% of respondents believe the market is turning upward, while 29.8% believe we are at the low point. That leaves 33.0% (one-third) who believe we are still trending downward.
Where’s the Market Focus Going to Be?
Looking at the overall market, Honeywell says operators continue to focus on larger, longer-range aircraft, with Large and ‘Mid-cabin’ models expected to account for 65% of purchases in the next five years.
JETNET agrees that the market favors larger aircraft, noting that 79.5% of sales in the next 12 months are expected to be Medium or Large Jets.
Projected Demand by Region
As a part of its forecast, Honeywell breaks the market down by region. Honeywell still expects North America to account for 64% of the jet market over the next five years, up from 60% last year.
That doesn’t so much represent a gain as it does a reduction among other parts of the world. Some 32 percent of North American jet operators expect to buy new airplanes in the next two years, down from 36% a year ago.
On balance, Honeywell characterizes the new airplane acquisition plans in North America as ‘flat’.
Europe will represent 18% of the global jet market in the next five years, down 1% from last year. Fully 24% of operators planning to buy in the next five years expect to make their purchases during the next 24 months.
The Latin American market will account for around 3% of business jet purchases in the next five years, down from 7% in Honeywell’s forecast a year ago. Only about 19% of those operators expect to buy in the next two years, compared with a worldwide average of 30%. Honeywell ascribes the reduction in the Latin American market to “economic pessimism”.
Purchase plans in Asia and the Pacific Rim are stable and unchanged from a year ago, according to Honeywell, when they were expected to account for 10% of the jet market over the next five years. About 30% of purchases are expected in the next two years, consistent with the world average, but down by about 10% from a year ago.
In the Middle East and Africa purchase plans increased from a five year low in 2019’s forecast, and are expected to account for about 4% of the worldwide market. One-third more customers responding the Honeywell’s survey (about 16%) said they expect to replace their aircraft or add to their fleet in the next two years, up from 12% a year ago.
Airline Declines Not Feeding BizJet Demand…
Interestingly, Honeywell said its survey does not support the hypothesis that a decline in airline travel has resulted in an increase in business jet acquisitions. It adds that more than 95% of operators said they expect no change in their fleets due to commercial travel reductions.
MI www.honeywell.com or www.jetnet.com