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2011 - On track to frustrate...
Mixed messages make used market hesitant.


Would it be tax uncertainty- or unrelenting spending-shyness? Perhaps it’s the poor business climate- or maybe it’s been mugged by businesses engaged in their own bet-hedging? Alternatively- it could be a reaction to Europe’s financial struggles- or a realization that the existing aircraft still works fine? If you are looking for an excuse to do nothing- the word “uncertainty” is getting most of the action these days – despite numerous and monumental certainties that should normally dwarf the doubts.

There is one certainty though: despite all the hand-wringing- there’s some slow growth in the action out there that looks as if it will even last beyond the year’s end. The growth is showing in business flying- in aircraft use- in sales of pre-owned business-turbine aircraft and through growth in their asking prices.

Not yet growing are new airplane sales- charter flight numbers or the inventory of pre-owned business turbine aircraft in the ‘For Sale’ fleet. Anyone expecting everything to get rosy all at once in any particular area will be disappointed- however. You may dimly remember the market of 2007: lots of buyers with lots of credit- a bit of cash- a surplus of ambition and a sand foundation that messily crumbled three years ago last month.

Following the crash of 2008- observers see glimmers and stirs - small movements that in combination lend some credence to a consensus: that Business Aviation finally- for certain- has found the bottom - beyond which even a shallow incline could lead the community slowly away from the depths of three extremely tough years and into the peaks of a new boom.

Right now- though- any and all signs of even the most-moderate gain generates warm glows of tempered optimism…

A Surprising Turn

As the third quarter neared its September 30 end- end-of-August flight-activity reports started pointing toward an ever-so-slight margin of growth year-over-year. For one- Argus’ TraqPak reports noted August 2011 brought a spare 0.2 percent gain in flying year-over-year from August 2010. That’s not a lot- but better than another slide down the charts.

The surprising number for many observers- however- was another gain in private (FAR Part 91) operator flying. The 4.9 percent gain recorded wasn’t 2011’s first gain in FAR 91 flight hours- but it was among the more robust. In a repeat of a pattern- the mid-size jet segment led the gains- up 3.4 percent. Respectively- light and large-cabin jets gained 2.4 percent and 3.0 percent - with propjet operations dragging down the whole FAR 91 segment with a drop of 11.7 percent- the report outlined.

In contrast to the picture painted by FAR 91 operations- charter flying under FAR 135 dropped 6.9 percent since the prior August- the report revealed. That’s tough- but still not as steep a drop as the fractional light jets – off from August 2010 a significant 16.9 percent.

A chief pilot for a Midwest charter provider commented- “We flew more last year than we have so far this year. It’s not a fatal drop - yet - but if bookings don’t come back with the upcoming holidays… we may need to make a change to our staff levels.” So in balance- TraqPak’s serial-number-specific data paints a picture of individual and corporate owners flying their own machines for more hours- while fewer hours are being logged by charter providers.

Up- as one broker observed- is up: “I’ll take anything positive that I can get.” Thankfully- hours flown isn’t the only positive indication of the past few months.

Inventories Shrinking - Prices Firming 

The cycle precipitated by the global plunge into recession wreaked havoc on several markets for large durable goods. While real estate has yet to move completely past its previous excesses Business and Personal Aviation are as well mired in the ripples of the economic malaise that occurs when supply exceeds demand and sales suffer from the resulting values collapse.

We may- however- be riding the slight slope to above water in sales of pre-owned business-turbine aircraft – but not equally well in all segments. Much of the continuing hesitation remains mired more in concerns about the future value of aircraft as opposed to the value of using them today.

“The benefits of the company airplane continue to be more and more pronounced among people who must travel frequently – for business or pleasure-” noted a manufacturer’s business analyst recently. “But so many of those who could most benefit continue to sit on airliners from fear that they are about to buy at the wrong time.

“Now we’re telling people that the waiting period is ending – prices are starting to firm-up- in some segments even trend up.”

Tomorrow- the consultant explained- will only shorter the odds of prices rising. JETNET issued a recent report affirming much of the consultant’s position. According to the consultant- the average asking prices for business turbine aircraft grew 3.5 percent through to the end of August as sales increased 11.4 percent. Not all segments experienced the same gains in prices but all segments saw welcome drops in the inventory for sale.

As a percentage of the in-service fleet- business jets experienced an inventory drop to 13.8 percent- down more than a point from the 14.9 percent for sale at the same stage in 2010. Propjets for sale dropped a more-modest 0.5 percent to 10.2 percent. Yet even with these improvements the products remain stubbornly difficult to move- with the average time-on-the-market for jets still above 12 months (385 days)- while turboprops need only slightly less time on average (325 days)- up from last year.

Dealers- brokers and analysts- all offered varying observations about the uninspired- sluggish pace of new turbine-aircraft sales this year – conditions widely expected to continue into and through 2012 before starting to recover and grow solidly in the latter half of the decade. Supporting these predictions come recent positive signs that read like the precursors long held as being indicative of recovery.

Mixed Messages Recapped

(1) The market sold enough business-turbine aircraft to (2) register a small decline in For Sale pre-owned business-turbine aircraft. (3) Asking prices paused from their downward trend and turned slightly upward. (4) Private operators are flying more hours while- (5) charter use continues to trend downward. (6) Planemakers continue to develop new models- even amid these challenging times – time in which (7) new-airplane sales remain depressed and continue to (8) struggle to show any signs of solid recovery.

The conflicts among these factors and observations serve largely to underscore the very real lack of certainty about the underlying causes of this market malaise. Profitable even now- many corporations simply see no need to spend on expanding for a market unable- or unwilling to embrace their expansion – while- in the meantime- profits continue to grow in most industries.

A couple of brokers and dealers surveyed for this article parroted a common political argument as the main culprit: “Uncertainty about business; uncertainty about the future of tax policies; uncertainty about the political environment.”

Finance executives pointed out a conflicting element- though: those very many businesses scoring record profits that left both those companies and numerous high net-worth individuals sitting on lots of cash. “There is absolutely no uncertainty where that’s concerned-” noted one OEM sales executive. “We’ve got a nice fat list of highly- qualified prospects who simply aren’t motivated to buy – and part of it’s a hold-out cop-out.”

Berkshire Hathaway alone has scores of billions of cash to hand – and plans to keep its cash coffers full. The owner of NetJets and FlightSafety International respects- and watches the Business Aviation market as much as any company- and more than most other investors.

What works now for business is profiting from the status quo- risking little on expansion that isn’t an all-new idea or product. “Financial advisors cite ‘uncertainty’ about tax policies but they’re absolutely certain they’ll be able to get every penny of depreciation they deserve before it’s all said and done-” said a Midwest broker. “Right now many of them can’t use 100 percent depreciation this year unless they pay cash-” the broker noted. “Many of the people we talk to could deduct 100 percent of an upgrade…and they’re still not buying. What does that tell you?”

It says- according to one aircraft-savvy accountant- that tax policy helps only up to a point. “We’re hearing arguments selling the idea that somehow 20 percent per year is great- but 14 percent and change is disastrous… when it still adds up to 100 percent - no more- no less.

“If a 100 percent write-down in a year isn’t doing it- maybe it’s not all that much about tax policy after all. Maybe it’s driven by looking at a consumer market with less potential to drive growth. Perhaps reduced potential is the constraint.

“When you’re sitting on dozens- scores- even hundreds of millions; the plane still works; and you can retrofit almost any missing bells or whistles- fuel efficiency might drive some high-use operators – if there are any left these days.”

Consumer Drive Driven Off…

Our aircraft-and-tax-savvy accountant added an aside about the difficulties of a business expanding: “Few companies want to expand when there are so few customers to support it. There has to be growth in demand to support business growth. Simply being ‘new’ may help you steal customers from a competitor- but it won’t automatically expand the total demand – and that’s what’s lacking.”

He cited airplanes repossessed because the owners’ business plans faltered and they couldn’t carry their notes to term. “Sadly”- he said- “many were fledgling aviation businesses – small charter and sole-proprietor flight-schools – unable to attract customers away from more-established competitors.

“You can see from the relatively flat growth in business flying that the balance is tipping toward the owner/operator and away from the for-hire operator-” he concluded. “Owners who couldn’t sell or wouldn’t sell at the depressed prices are reversing course…if they’re stuck with it- they might as well use it to the point that it makes sense.”

Still- those positive indicators give some observers the signs they want to see indicating that a turnaround could start to stir - perhaps in another year- most believe- but not without some financial-market stability- they add.

Summer's Setbacks as Next Year's Prospects

The volatility of financial markets spurred more than one wave of deep stock-market cycles- which set the stage for conversations with a number of brokers and dealers. Most reported continued slippage in sales of both new- and pre-owned business turbine airplanes. They also took to heart that planemakers seem to be continuing R&D on new models – new models not due for another 18 months and longer - corresponding with most expectations for the market’s return.

“The financial market volatility that began earlier this summer and continues has put the market in suspended animation-” said analyst and consultant Brian Foley- of Brian Foley &Associates. “That pushed recovery out an equal number of months into next year at the soonest.

“This is especially devastating to the small and mid-size jet market- a market which has never really shown meaningful signs of recovery since declining in 2008.” Like all cycles- however- this one should fade into something better- Foley (and others) predicted. “This period is temporary and sales will continue their climb once there’s some semblance of stability in the economy.”

The problem is time and predicting the spot when things should start to improve – and fewer seem willing to offer a forecast right now. “When that happens is anyone’s guess at this point-” Foley said. “We’re not following a traditional recovery out of a recession here.”

“Too often today I’m calling past leads who told me to call in six months – six months ago – and they’re still interested and still conflicted about whether to spend-” our Midwest broker outlined. “Now they ask me what I see that’s good on the market? When I tell them- they wince before asking me to call back in a year.”

 

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