- 07 Sep 2020
- Rolland Vincent
- BizAv Market Insight
Entering the final quarter of 2020, understanding who is buying business aircraft, and why, is more important than ever to dealers and brokers planning and preparing for a hoped-for year-end rush. Rollie Vincent elaborates...Back to Articles
Quarter four is upon us in ‘The Year of the Asterisk’, a time that many of us may want to forget – but cannot and will not. These are surely interesting times, given the daily water-cannons of information that we face, leaving us to tend to the never-ending task of sorting the junk from the nice-to-know; the good-to-know; and the mission-critical... Where is Business Aviation at, as October begins...?
For Business and General Aviation (B&GA) aircraft owners and operators, utilization levels have – thankfully – generally rebounded from the depths of the Q2 2020 quagmire, which by most accounts is now one for the history books.
How do we know? Real-time aircraft tracking software and services that provide detailed reports by aircraft size category, airport, airport pair, country and region are helpful guides to gauge the speed, specifics and trajectory of our industry’s rebound (see the WingX Advance report below).
By most accounts, aircraft flight cycles and hours have already returned to 70-80% of 2019 levels on a year-to-date basis, although affixing any one data point to an industry as diverse and globally-oriented as B&GA is invariably fraught with difficulty, and is open to interpretation and, unfortunately, inevitable misinterpretation.
Preparing for a Hoped-For Year-End Rush…
With numerous signs of bright spots and green shoots in aircraft utilization rates, and with surprisingly strong July 2020 pre-owned sales, there are other signals that are more sobering and thought-provoking. What are some of the mission-critical considerations on the minds of aircraft owners, operators and prospective buyers as we enter the home stretch of 2020? And how should aircraft transaction professionals prepare for the hoped-for year-end rush?
Customers – the people who buy and fly in business aircraft – are invariably a subset of the top of society’s pyramid, whether measured by wealth, influence, and/or impact. Good people to know and serve, as a group they epitomize success and tend to be keenly aware of the benefits and true all-in costs of private flying.
They are typically loyal to those who they have come to trust, whether a friend or professional colleague, an aircraft salesperson and their organization, or an aircraft brand.
While aircraft sales and purchase agreements inevitably involve mounds of paperwork, teams of transactional experts, and dollar values with lots of zeroes, the key players in our industry understand that they represent opportunities to prove their worth and earn the right to be considered as trusted advisors for the long term.
While aircraft sales professionals may be staring at their 90-day calendars and wondering how they are going to still get deals done, the fact of the matter is that any such plans should have long-ago been revised to reflect the realities of COVID-19.
The coronavirus pandemic, it’s socio-economic, political, and human health shocks and aftershocks are lingering, encompassing, and dangerous. These factors far outpaced all other strategic challenges facing Business Aviation in the next 5-10 years, as identified by aircraft customers who responded to the recent Q2 2020 JETNET iQ Survey.
While it is easy to dismiss these as uncontrollable issues that simply need to be factored into today’s and tomorrow’s business plans, that seems (to us) a cup-half-empty approach to what is the notorious elephant in the room that is too big to ignore and, for the hungry carnivores amongst us, far too big to eat at one sitting.
The Value of the Time Machine
So, what to do? It may start with the recognition that the highly engineered, brightly painted, and beautifully appointed aircraft is actually not so much a machine as it is a positive enabler of personal autonomy and self-determination.
While the post-WW2 promise of an airplane in every suburban driveway seems laughingly ridiculous in retrospect, the marketing idea and inspirational for it all was spot-on.
With only 37,000 turbine B&GA aircraft in a world of a couple of billion households, we could easily be dismissed as an industry that has little impact on a global scale – but nothing could be further from the truth.
Customers for Business Aviation are amongst the titans of society and industry: They’re savvy, connected and hyper-aware of time; the time they have left, the experiences they cherish or yearn for, the dreams they have unfulfilled, and the legacy and impacts they want to leave for the next generation.
Whether stitching together their companies, properties, trusts and investments, or connecting them with families, friends and trusted advisors, the savviest amongst them know the irreplaceable value of time that a private aircraft delivers.
Keeping Perspective in Q4 2020
While prospective buyers of new and pre-owned business aircraft are fewer in number today than is typical for Q4, it is important to keep things in perspective. Other considerations they have today may seem all-consuming: De-risking and rebuilding their companies and returning them to health; shifting their investment priorities to capture rapidly emerging opportunities; and recommitting to keeping family values at the center of their lives.
All of these are smartly enabled by having ready access to one or more private aircraft.
While they may appear to be fewer in number and less bright on the aircraft sales radar screen, the savvy people who have already invested in B&GA aircraft are reimagining and reinventing the way they go to market, and through life, as always at high speed.
Getting to know them and becoming part of their trusted network of advisors is a good plan to have.
Flight Activity – Europe & North America
According to WingX Advance, European Business Aviation activity for August 2020 finished 3% above traffic levels in August 2019 (the equivalent of 1,845 additional sectors flown). By comparison, North American activity lagged 21%...
The figure for July and the start of August was 18% shy of the activity for the same period in 2019 and, according to WingX, the trend hasn’t been smooth, with some relapse in the second half of July before renewed recovery at the end.
Nevertheless, BizAv still looks to be in better shape than the Scheduled Airlines, which remained down by almost 60%.
Despite the 3% increase in August activity, European flight hours were down, attesting to the shorter sector trend throughout the COVID-19 recovery. The continent saw a dip in activity during mid-month which coincided with a raft of unexpected travel quarantines.
Overall, for the period from April to September European Business Aviation activity was still down by 34% compared with 2019, but that compares favorably against commercial airline traffic which was 77% down over the same period.
The continued recovery in business jet and turboprop activity in Europe is coming from the stalwart markets of Germany, Switzerland and Austria, with France maintaining a YoY improvement throughout August.
Turkey, and especially Russia, saw a big turnaround in flight activity during August, and were well ahead of August 2019 activity. Central European markets like the Czech Republic were well up, and Croatia stood out as the European summer hotspot for August (though flight connections faded fast since quarantines were imposed late in the month).
August was a faltering month for Business Aviation recovery in North America, and ended 21% behind August 2019 activity. However, the US domestic market performed slightly better, and was back up to 81% of normal activity for the full month.
The US trend fell away in the second half of August, and the month ended with a rolling seven-day average of 7,347 flights (5% down on the traffic seen during mid-August). Weekend travel was the strongest, with activity above 90% of normal in August, whereas weekday travel was stalling at 80% of usual.
California and Texas were back to being the busiest US States, flying almost a third of all US sectors in August, but still lagging 16% behind their YoY activity.
Flying over the entirety of August confirmed stagnant trends on the East Coast, and strong growth to getaway locations, from Utah to Wyoming (with Florida treading water 8% below). The stand-out decline for August was Hawaii where traffic levels were down by 65% YoY.
“August saw the overall market edge further towards recovery, with marked variation between Europe and the US,” Richard Koe, managing director, WingX summarized. “Further ahead in the pandemic curve, European countries have substantially opened their economies, and, belatedly, tourism has been rebooted. With June and July flights concentrated into a short August window, YoY activity has consequently been higher.
“The US market is still some way behind, but as the public health crisis recedes, there may now be a quicker upturn.”
The Private Jet Charter Juxtaposition
Over-exuberant talk of growth in the private charter sector could limit future financial support, according to aviation analyst Brian Foley. What’s the true picture, and why is it important to reflect it accurately?
Based on the comments of a few business jet charter providers, one could be led to believe that the private charter industry is on fire as well-heeled travelers avoid the airlines. While there may be some outlier examples, the data generally does not support these claims. In fact, the unsubstantiated exuberance may be setting the industry up for exclusion from any future government aid programs.
Most certainly, Business Aviation traffic has recovered much faster than the airlines. North America business jet trips are now within 20% of this time last summer, and about triple what they were in April of this year. For business jet charter flights specifically, activity remained down 12% in July from the same month last year, according to ARGUS International.
As Summer Moves to Fall…
There is growing concern that summer may have been the high point for the aircraft charter season. Once the frolicking at the beach is over and people return home, the focus normally turns to business trips in the fall.
All one needs to do to predict the strength of the upcoming business travel season is to look at their own trip calendars, which for most road warriors are pretty scant compared to last year.
Trips versus Inquiries
What some charter operators may report as booming business could in fact just be a spike in new inquiries, not trips sold. The number of first-time flyer calls is undeniably higher, but the closing rate into actual trips flown is just a fraction of calls from traditional private flyers.
Newbie interest tends to be short-lived once they get a five- or six-figure quote. Many of their requests are for one-and-done trips, and are shopped for the lowest price, which makes any trips actually flown a low-margin proposition.
Even with a return to 2019 trip activity levels the industry has been oversupplied with charter for quite some time. Despite increased interest in private charters there has been little change in overall industry pricing discipline thus far.
While there are a few pockets of legitimately increased charter activity, depending on region, FAA flight data indicates it’s still off 12% year-over-year. Despite this fact, some charter operators choose to focus public announcements on the positives such as a big increase in their business since April or a new record of inquiries.
The Threat of Backfire
While perhaps beneficial from a marketing perspective, these glowing accounts of the industry could backfire should future government relief programs be considered. A regulator could assume that any further stimulus to the sector is unnecessary given the accounts of business robustness. In short, private aircraft charter has recovered significantly more than the airlines but still isn’t back to normal.
While summer travel may have helped expedite that recovery, the upcoming business travel season could notably affect those gains. Driven by first-time private travelers, charter inquiries are up but are more difficult to consummate.
Efforts to spin disappointing business conditions into a favorable marketing narrative could create optics which limit future financial support.
More Private Charter Flights Contain Families & Pets
Reflecting on the ‘rollercoaster’ period of April-June, charter company PrivateFly published its Q2 trends report revealing a rise in bookings for larger cabin private aircraft in Europe.
More private jet flights are for family travel than ever before, according to a new trends report. “The April to June period really was a rollercoaster ride with activity at a historic low at the start, followed by a surprisingly strong recovery in June - when we were back to over 75% of our expected demand in Europe, and closer to 100% in the US,” said Adam Twidell, CEO of PrivateFly. He added that the trend continued into July.
JETNET Business Aviation Market Review - H1 2020
JETNET released its review of the market for business aircraft in H1 2020 (amidst the global COVID-19 crisis). To add context to these findings, Paul Cardarelli, JETNET Vice President of Sales, made the following notes...
While the market for business aircraft is undoubtedly under stress, and the COVID-19 crisis is not helping, many of the underlying reasons for the stress pre-existed the crisis. “So far this year brokers, dealers and sellers of business aircraft are showing restraint to not over-react to the negative stimuli that now surround the market,” Cardarelli explains.
“They are taking a short-term position on the crisis – a temporary anomaly that can be waited out. As a result of this discipline many key market metrics have yet to turn exceedingly negative.”
There were at the time of writing 2,264 business jets offered for sale (representing 10.07% of the in-service fleet). This is technically a buyer’s market but only just, and the market has held steady between 10.1% and 10.3% since April.
While there has been an increase of aircraft coming on to market in 2020, it has not moved the market into gross oversupply, and the proportion of aircraft for sale is nowhere near the recessionary days of ten years ago when the inventory of business jets swelled to nearly 18%.
Although softer than in 2019, there is no wholesale degradation of prices for aircraft listed for sale on JETNET in 2020.
Pre-owned business jets sold and leased in the first six months January to June, YoY 2019 vs 2020, is down 19% (from 1,169 to 947). This is undoubtedly substantial. But brokers and dealers report that phones have been ringing with calls from buyers.
The reduction in sales would therefore seem less about declining demand and more about sellers not yet capitulating to distressed market offers.
What Has Changed This Year?
What has changed this year is the composition of what’s selling: A bit older, a bit larger, and less expensive than last year. For January to June 2019, the composite of pre-owned business jets sold was a 2004 model priced at $4.4m (USD) with the Light/Super Light jet category leading the market with nearly a 30% share of all pre-owned business jets sold. By comparison, in 2020 the composite is two years older - a 2002 model priced at $3.7m with Mid/Super Mid-size jets as market leader at 27.25% of all jet sales (up 2% YoY).
(The Light/Super Light and Large/Long-Range categories are off in market share this year by 2.7% and 0.5% respectively.)
“Bear in mind that the trajectory of the market today was in place going back to last fall, well before the coronavirus, so 2019 was itself a year in decline,” Cardarelli quantifies. “Compared to 2018, pre-owned sales were off last year by 12%, and inventory trended upward ultimately by 6% YoY. Demand softened because so much post-recession pent-up demand had been satiated in 2017 and 2018.
“We launched into 2020 already facing the headwinds of a market in cool-down,” he concludes. “To that was added two former market depressants becoming relevant again. Brexit was ratified in January, and another contentious US presidential election is set for November. In this sense 2020 looks much like 2016 when inventory for sale and retail sales both trended unfavorably.
Summer Sales Soar for IADA Members
The pace of used aircraft sales picked up sharply in June and July after April/May doldrums brought on by the COVID-19 pandemic and its economic impact, IADA reveals....
Dealers accredited by the International Aircraft Dealers Association (IADA) reported 103 closed sales transactions in July, more than three per day for every day of the month. In June the association members also had a good month, making 74 deals.
Those 177 deals in June and July compare with 100 in April and May, a 77% increase. And fewer deals fell apart in June and July (27 versus 38 in April and May). August began with 87 additional aircraft under sales contracts.
“Our dealers reported exceptionally brisk activity in June and July after a protracted period in March, April and May where the deals were much harder to put together,” summarized IADA Executive Director Wayne Starling. “IADA dealers also experienced a reduced percentage of deals where lowered prices were integral to completing the deal.”
In-Service Aircraft Values & Maintenance Condition
Aircraft transactions continued their recovery and Asset Insight’s August 31, 2020 market analysis of 134 fixed-wing models showed an additional 2.1% inventory fleet decrease during August. Here’s the latest news on the tracked fleet’s values and maintenance condition…
August’s results represented a second consecutive monthly fleet reduction, reducing the year-to-date (YTD) inventory increase to 4.5%. Small Jets led the way with a 4.1% decrease, followed by Medium Jets (3.0%), and Turboprops (1.0%). Large Jets were the only group to post an inventory increase (0.6%).
Average Ask Price for our tracked fleet increased 2.1% in August, lowering this year’s overall value decline to 3.0%. Interestingly, the increase was perpetuated by Medium Jets, the only group to experience a monthly Ask Price increase, and the 2.8% hike lowered the group’s 2020 value loss to only 1.1%.
Inventory Fleet Maintenance Condition
Recovering from July’s decrease, the Quality Rating for Asset Insight’s tracked fleet improved to post another 12-month best (highest) figure, while the ‘for sale’ fleet mix decreased the anticipated cost for upcoming maintenance events. Asset Insight’s tracked inventory recorded the following:
Maintenance Exposure to Ask Price (ETP) Ratio
The ETP Ratio is a useful indicator of an aircraft’s marketability. It is 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 Q2 2020, assets whose ETP Ratio was 40% or more were listed for sale nearly 53% longer (on average) than aircraft whose Ratio was below 40% (251 versus 384 Days on Market).
Asset Insight’s August analytics revealed that over 52% of its tracked models, and more than 55% of the tracked fleet posted an ETP Ratio greater than 40%. August’s fleet ETP Ratio improved (fell) to 70.9% from July’s 71.2%.
With the tracked fleet’s inventory posting its second consecutive monthly reduction, the listed fleet’s figure dropped to 10.5% from July’s 10.7%, continuing to show improvement compared to June’s 10.9% and May’s 11.3%.
The tracked fleet’s Quality Rating improved to 5.741 from July’s 5.712. While below June’s 5.788 record high (best) figure, the figure moved the group further into ‘Outstanding’ territory.
Ask Pricing fell another 0.4% to remain lower than the group’s 12-month average. Inventory increased by three units, with the newest fleet mix improving (lowering) Maintenance Exposure by 0.7%. Older equipment transacted primarily based on price. Newer equipment sellers should be able to command reasonable prices.
It may not look like it, based on the group’s 71.7% ETP Ratio, but Medium Jet figures are quite encouraging for sellers.
The tracked fleet’s inventory decreased 20 units in August and is now down 19 units for the year (the best percentage decrease of the four groups), while the Quality Rating reached 5.323 (a 12-month high/best figure that pushed the group further into the ‘Excellent’ range).
Add to that a Maintenance Exposure decrease of 0.6% to virtually equal the 12-month low/best figure, and you have the making of some value-based transaction opportunities for both buyers, provided they do their homework, as well as many sellers.
With an additional 28 unit decrease to the tracked Small Jet fleet, the group’s inventory is now down 46 units over the past two months. While that still represents an increase of 13 units for the year, it also demonstrates continued improvement.
Curiously, buyers appeared to be more interested in lower quality assets during the month of August, presumably due to price, as both the Quality Rating (which Asset Insight’s grading system rates as ‘Very Good’), and Maintenance exposure figures improved, by 0.12% and 2.6%, respectively.
Unfortunately, Ask Price took a 2.5% tumble, raising the ETP Ratio to a second consecutive 12-month high (worst) figure – something that is unlikely to help many sellers.
The tracked inventory fleet decreased by five units in August. That may not appear significant, considering the 38 unit increase for the year, but it was sufficient to push asset quality further into the ‘Very Good’ range by way of a 1.2% improvement, while Maintenance Exposure posted the group’s lowest (best) 12-month figure by decreasing 0.7%.
When you consider that only 7.4% of the active fleet is listed for sale, and Ask Prices are above average, and have remained stable over the past two months, conditions appear favorable for both buyers and sellers to structure transactions that generate good value for both parties.
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