- 06 Jul 2022
- Brian Foley
- Market Insight
For those concerned about the impact of economic uncertainty on the aviation industry, Brian Foley offers words of encouragement: Business Aviation can weather a mild recession (and may even benefit). Here’s why...Back to Articles
There has been a lot of discussion of if and when the current economic slowdown could manifest itself into a full-blown recession. Defined as two consecutive quarters of negative GDP growth, there are those who believe it could happen later this year or next. Still more think it will never happen. And there are others who think we’re already in a recession.
In the US, the world’s largest Business Aviation market, GDP growth was already minus 1.6% for the first quarter of this year. By the time you read this article the second quarter advance estimate will have been released and we’ll all know whether we’re in a recession already. But it won’t really matter...
A Different Kind of Slowdown
This would arguably be a different kind of slowdown than we’ve typically seen in the past. Strangely, the job market remains robust despite a slowing economy. Consumer spending drives the economy, and having a job should keep the spigots flowing albeit at a reduced rate in this inflationary environment.
Business Aviation is arguably better prepared to weather the storm than other industries. It already has a lot of built-in reserves should the sledding get tough.
Take, for example, the pre-owned aircraft inventory for sale which currently stands at 4% of the business jet fleet, according to AMSTAT. This is well below the historical average of 10-12%, which allows for a lot of wiggle room should the economy take a header.
Similarly, business jet utilization, which is a monthly measure of the number of take-offs and landings, has been at all-time highs. Taking a little ‘haircut’ wouldn’t necessarily be unwelcome, given that providers such as charter, fractional and MRO centers have been stretched to offer an acceptable level of availability and service to their clients.
Slowing down just a bit would allow these providers to catch their breath during a period of high demand, while getting adequately staffed in this tight job market.
Even the new business jet manufacturers have some winter fat reserves to endure a slowdown. Delivery lead times are being pushed out to two or more years, while backlogs have consistently grown.
Some OEMs are challenged by supply chain issues and the need for more skilled workers, and currently risk losing loyal customers prepared to switch brands to one that can deliver a little bit sooner.
Other Fringe Benefits of a Slowdown
There are other fringe benefits of a slowdown as well. During an economic downturn the price of oil often declines due to a drop in demand from industry. With Jet A fuel currently hovering near US$9 per gallon at Teterboro Airport, any kind of respite would be welcomed by aircraft operators.
A rising interest rate environment could even help aircraft lessors who were being outgunned by finance companies who were practically lending free money in the recent past. And airlines cutting back schedules could even provide some benefit to help our industry’s flight crew staffing struggles.
The next economic slowdown would be unlikely to resemble anything like the catastrophic 2009 financial crisis, and indeed may even be a benefit.
We’re in a new paradigm of increased industry demand by those who have either discovered private aviation, or have become more committed to it. This elevated level of activity will help the industry better endure the next downturn.
Flight Activity – Global
For the first six months (H1) of 2022 there were 2.7 million Business Aviation flights, according to WingX Advance. Business jets and turboprops flew 22% more sectors than in H1 2021, and 15% more than in H1 2019.
While the turboprop rebound was weaker, business jet activity was up 27% compared to H1 2021, and 21% ahead of H1 2019. By comparison, scheduled airline sectors ended the period almost 30% behind H1 2019 activity.
The pace of the rebound in business jet demand slowed somewhat, most evidently in the key North American market. Year to Date (YTD), business jet flights were up 20% compared to a year ago, whereas June 2022 saw a 7% increase compared with June 2021.
The gains over 2019 have been sustained, with a 20% increase YTD, and a 21% increase in June 2022 over June 2019. On a week-to-week basis, however, June began to show some signs of slowing. During the Fourth of July weekend, business jet activity fell 5% short of 2021’s record spike, although it was still 32% ahead of 2019.
Almost 300,000 business jet sectors were flown in Europe in H1 2022, 38% more than in H1 2021, and 17% more than H1 2019.
Inevitably the rebound on 2021 has slowed as the year has elapsed, with June’s data showing a 21% increase on June 2021. Nevertheless, the increase on June 2019 has grown with 19% more bizjet activity in June 2022.
Rest of the World
Outside Europe and North America, the rebound in bizjet activity H1 2022 grew 22% compared to H1 2021, and 17% in June 2022 versus June 2021.
“The first half of the year set a new record for global business jet demand, and although the rebound is slowing, the gains on 2019 have held steady at around 20%,” Richard Koe, Managing Director, WingX summarized.
“The Fourth of July holiday period confirmed that airlines are coming back, especially in the US, and there is arguably a correlation with bizjet demand tapering, down 5% on last year during that weekend. Meanwhile, the European summer demand has hit new heights as the summer holidays start in earnest.”
Are we all Seeing the Same Thing?
There are some mixed messages for those closely monitoring pre-owned business jet sales activity at the moment. James Hagerty, President and CEO of Hagerty Jet Group, offers his insights...
At the June NBAA Regional Forum at White Plains, the convention floor was booming with energy. Many of our peers report they are busier than ever. Charter demand is through the roof. Aircraft brokers all claim they have buyers and are closing deals. Business is challenging, but doing well.
I was quickly reminded why our industry is having a renaissance moment when I spent nearly 24 hours stranded at La Guardia upon my return from the Regional Forum. The commercial airline system is broken and it’s not an easy fix. We have a serious pilot and staffing issue to contend with.
If America and the rest of the world need to get back to business, they need reliable transportation.
We are just beginning to see pre-owned business jet inventory levels increase and stabilize, but we are still very far from the normal 8-10%.
Inventory levels for aircraft aged five years or younger remain at record lows. Backlogs at the OEMs remain strong with few – if any – positions remaining available in 2023. There has been a shift, however. We’re no longer seeing airplanes going under contract on the same day they enter the market.
And more brokers are publishing their ask prices. Those ask prices are higher than before, and we’ve seen only a handful of price reductions, but we are not seeing bidding wars. Buyers are slowing down their pace and taking their time. They do, however have factors working against them – such as interest rate hikes.
We note a few dealers nervously sitting on inventory they probably expected to sell by now. For US buyers seeking the 100% bonus tax depreciation by the end of the year, they had better get moving, because inspections are taking longer than ever. (The wait time to get a slot for a pre-buy inspection is 4-6 weeks.)
Parts are also becoming harder to find. Items like windshields have big backlogs and take weeks to deliver.
Prices Heading Down?
The word on the street is that aircraft prices are coming down. Hagerty Jet Group would tend to agree that the market arguably peaked earlier this year, but we don’t see a huge disruption in the immediate future.
Perhaps the market was overinflated by 10% in Q4 2021 and we see ourselves back at those price points by the end of the year. What we don’t expect is a 30% correction taking us back to 2Q 2021.
We would need to see a significant amount of inventory come available for sale to put that kind of pressure on the market.
Single-Engine Pre-owned Heli Market Trends
Aero Asset’s inaugural Heli Market Trends Report for single-engine pre-owned helicopters compares H1 2022 market performance with H1 2021, and reveals that supply of aircraft for sale continued to shrink on a slightly lower transaction volume.
According to Valerie Pereira, VP of Market Research at Aero Asset, “Retail sales volume decreased 10% in the first six months of 2022, compared to 2021. During the same period, supply for sale decreased by 65%.”
By far, VIP configured helicopters accounted for most of the single-engine deals in H1 2022, at 60%. EMS configured supply for sale dropped to historic lows and utility configured supply available for sale dropped 75% YoY.
The most liquid pre-owned market during H1 2022 was the Airbus AS350 B3/B3e/H125, followed by the Bell 407/GX/P/I and the Airbus EC130 B4/H130. All three models boast only three months of supply at 2022 trade levels. The least liquid pre-owned market during the same period was the Leonardo AW119K/Ke/Kx, with an absorption rate of 10 months.
In-Service Aircraft Maintenance Condition & Marketability
As Q2 2022 came to a close, Asset Insight’s tracked fleet inventory for sale increased for a third consecutive month, possibly signaling a trend.
While Large and Medium Jets were the only groups to post an availability increase, June’s 4.9% rise (+37 units), along with certain other data points, could possibly indicate the return of traditional aircraft buyers.
Total inventory increased 13.3% in Q2, and 10.5% Year-to-Date (YTD), equating to a 45.4% decrease Year-over-Year (YoY). Listings remain 52.9% below the June 2020 peak.
The average Ask Price for the tracked fleet increased 12.3% in June, 13.2% in Q2, 26.5% YoY, and 57.0% YTD. While transactions for young, low-time units are still closing at higher values, the volume of ‘off market’ assets is decreasing, partially evidenced by the higher number of listed aircraft for sale.
Inventory Fleet Maintenance Condition
Both the Quality Rating and Maintenance Exposure value remained unchanged for the quarter – specifically:
Quality Rating: The listed fleet’s Quality Rating improved 0.1% for June to 5.310, following May’s 5.303 on Asset Insight’s scale of -2.5 (low) to 10 (high). The fleet remained within the ‘Excellent’ range, and the figure also reflected a 0.5% improvement YoY.
Maintenance Exposure: The cost of embedded/accrued maintenance, what Asset Insight refers to as Maintenance Exposure, worsened/increased 1.6% in June to a figure that was also 3.7% higher YoY. The increase signifies that upcoming maintenance events will be more expensive to complete.
Maintenance Exposure to Ask Price (ETP) Ratio
After posting an all-time high/worst 82.1% value to start off the year, increasing Ask Price figures helped the ETP Ratio post a 12-month best/low figure in June, and all but the Light Jets experienced an improvement.
The ETP Ratio is a useful indicator of an aircraft’s marketability 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’ (DoM) 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, assets whose ETP Ratio was 40% or higher were listed for sale nearly 156% longer (on average) than aircraft whose Ratio was below 40% (183 versus 469 Days on Market).
In June, more than 39% of the tracked models, and over 42% of all listed aircraft, posted an ETP Ratio above the 40% ‘excessive’ mark.
Availability for the tracked models increased to 3.5% of the active fleet in June, compared to 3.1% at the end of Q1. Demand remained strong at 4.66 on our scale of zero (no demand) to five (maximum possible demand), but dipped slightly from 4.68 at the end of Q1.
The fact that no group posted an increase while demand for all jet groups decreased, may signal a softening in the first-time buyer frenzy. Quarterly sales increased to 523 during Q2 (versus 416 during Q1), which was down from 539 during Q2 2021, and YTD were down from 962 in 2021 to 939.
Average Days on Market decreased to 301, the lowest figure posted during the past four years. Keep in mind, though, that older listed aircraft with a high ETP Ratio continue to linger, as evidenced by the 156% DoM differential noted above.
Overall, the market is buoyant. While some data may suggest slower growth ahead, that’s to be expected considering the pace of recent activity.
Large Jets: Asset Insight recorded 140 Large Jet transactions during Q2 across 43 models, compared to 120 during Q2 2021, and 108 during in Q1 this year. Availability increased 17.1% (25 units) in June to 3.3% of the active fleet, 23.9% (33 units) during Q2, and 1.8% YTD (three units).
The figures represent an availability decrease of 50% YoY. Demand continued to be strong during Q2 at 4.82, although that was down slightly from Q1’s 4.87.
The group’s Quality Rating decreased 1% during June, 5% for Q2, and 0.5% YoY, but June’s 5.546 still left the group in ‘Outstanding’ territory. Maintenance Exposure took an unhealthy turn, rising/worsening 3.5% in June, and 2.7% YoY – but the change reflected a 0.1% improvement/decrease over Q1.
Ask Price increased 5.7% in June, but was actually 4.1% lower for the quarter. Compared to last year, the figure is up 38.5%, including 28.5% YTD. Based on these figures, the ETP Ratio remained steady at 34.1% (the group’s 12-month low/best figure), representing an 11% improvement (decrease) for the quarter, 44.2% YoY, and 48.1% YTD.
The ETP Ratio also represented the fourth consecutive month the Large Jet group has been below the 40% ‘excessive exposure’ point.
Mid-Size Jets: Asset Insight identified 158 transactions during Q2 2022, exactly matching Q2 last year, and an increase from the 102 trades posted during Q1.
Availability for the 45-model tracked Mid-Size Jet fleet rose to 205 assets during June (3.8% of the active fleet), an increase of 13.3% (24 units) that left inventory up 15.2% for the quarter, but 11.3% lower YTD, 46.6% lower YoY, and 59% below the June 2020 peak. Demand remained high at 4.57, and just below the 4.58 figure posted during Q1.
The group’s 5.207 Quality Rating was better than the 12-month average, and kept Mid-Size Jets within ‘Very Good’ territory. It also reflected a 1.3% improvement for the month and 1.7% for the quarter. Nevertheless, the figure was 2.2% worse YoY. Maintenance Exposure improved/decreased 6.5% for the month, and 6% for the quarter – but it was nearly 7% higher YoY.
In terms of Ask Price, the statistics are impressive with the group posting a 7.8% increase that equated an all-time high value. It was also 36.2% higher than last quarter, 66% up YoY, and 125% higher YTD.
Combined, the Ask Price and Maintenance Exposure figures led to an ETP Ratio improvement equating to 56%, a 12-month low/best figure that was also 19% lower than last quarter, 18.6% YoY, and 33% YTD. While the group’s ETP Ratio is not stellar, it is sufficiently low to provide many sellers with value-based transaction opportunities, considering the limited inventory.
Light Jets: Demand for Light Jets decreased slightly in Q2, dropping to 4.50 compared to Q1’s 4.53. Listed aircraft for the 29-model tracked fleet decreased by 2.3% (six units) totaling 253 assets (4.2% of the active fleet).
While inventory is down 5.2% YTD, it is 12.4% higher for Q2. There are still 36.4% fewer aircraft available compared to last June, and 53.4% fewer than the June 2020 peak. Transactions were down to 130 (compared to 159 during Q2 2021, and 144 in Q1 2022).
The Quality Rating worsened 1.6% to 5.264 in June, but was 0.9% higher for the quarter, and 3.9% YoY, and it kept the group within the ‘Excellent’ range. Maintenance Exposure rose 8.5% to post the group’s 12-month worst figure, which was also 13.1% higher than in Q1, and 2.3% worse YoY.
Ask Price decreased 1.2% following May’s 9.3% increase (a number that set an all-time high value), but the figure was 4% higher for the quarter, up 48.5% YoY, and up 71.4% YTD. Based on these values, the ETP Ratio rose to 88.5% from last month’s 88%, but the figure reflected a 2.2% improvement for the quarter, 22% YoY, and 25% YTD.
While the ETP Ratio figure is high, many sellers are no-doubt pleased the number remains comfortably below the triple-digit levels posted only a few months ago.
Turboprops: Demand remained at 4.75 for Turboprops. Availability decreased 3.6% (six units) leaving listings at 162 units (3% of the active fleet), a figure 25.7% lower YTD, 3.2% higher for the quarter, 50.3% lower YoY, and 38.2% lower since the June 2020 peak.
At 95 units, sales for Q2 2022 were below the 102 transacting during Q2 2021, although the figure was higher than the 67 trades posted during Q1.
The Quality Rating and Maintenance Exposure figures both set 12-month bests in June. The former, at 5.222, kept the group in ‘Very Good’ territory through a 1.9% increase for the month, 3.3% for the quarter, and 0.7% YoY. Maintenance Exposure decreased 0.8% during June, 5.6% during Q2, and 3.4% YoY.
Ask Price rose 5.9% (a 12-month high) during June, 11.8% during Q2, 14% YoY, and 19.2% YTD. Not surprisingly, these statistics lowered the ETP Ratio to a 12-month best 36.4% (the group’s second consecutive month below the 40% level) that was also a 17.9% improvement for the quarter, 13.8% YoY, and 14.6% YTD.
Offering the largest selection per model at 9.1 units, based on our 17-model tracked fleet, the average marketability figure should help Turboprop sellers maximize their aircraft’s transaction value.