- 01 Mar 2018
- Rolland Vincent
- Market Insight
What are the multiple indicators pointing to warmer days ahead for a Business Aviation industry that has been largely wallowing in the doldrums for almost 10-years? Explore the latest market trends with Rollie Vincent...Back to Articles
In the Business Aviation markets, multiple indicators align that point to warmer days ahead for an industry that has been largely wallowing in the doldrums for almost 10-years following the global financial crisis. Rollie Vincent explores…
Amongst the bright spots on the near-term radar are aircraft utilization levels and used aircraft inventory levels, the first of which is steadily climbing, and the second of which is steadily falling.
Flight operations in the all-important US and European markets have increased systematically in the mid-single digit percentage range for much of the past year (see several detailed reports on this topic below).
At press time, the number of used business jets being offered ‘For Sale’ had slipped to about 2,000 aircraft, representing 9.4% of the worldwide in-service fleet of more than 21,600 jets, according to JETNET records.
Notably, almost half (46%) of jets currently offered ‘For Sale’ have been in service for more than 20 years, with technology obsolescence, high direct operating costs and relatively high upgrade costs relative to the remaining residual value of the asset all conspiring against a sale.
With more than 15,300 business turboprop aircraft in operation worldwide, just 6.9% of the fleet was listed as ‘For Sale’ in mid-March. As with business jets, these percentages are the lowest recorded in over 10 years. Tellingly, 62% of the ‘For Sale’ turboprop fleet has been in service for more than 20 years, with all the associated challenges of aging aircraft limiting the pool of potential buyers.
As we have highlighted previously, the most attractive inventory – delivered within the past five years or less – has been mostly ‘picked over’ by savvy buyers who have recognized the value opportunities that have been a feature of this extended market recovery period.
Only one in 15 of the business jets currently offered ‘For Sale’ fits this definition, and only one in 14 of business turboprops.
The good news for the aircraft OEMs is that this paucity of young inventory is no longer much of a factor inhibiting new aircraft sales. The not-so-good news is that, despite reasonably strong corporate profitability and the tailwind effects of the new US tax law on corporate coffers, sales of new aircraft have yet to perk up.
OEM Order Books
Firm order backlogs at the ‘Big Five’ OEMs (Bombardier, Dassault, Embraer, Gulfstream and Textron Aviation) slipped 9% in value in 2017, while book-to-bill performance (the ratio between new orders and deliveries) came in below 1.0 for all of the aforementioned OEMs with the exception of Textron.
Textron’s relatively strong and consistent book-to-bill performance over the past five years has been impressive, but must be viewed in the context of its total firm order backlog of $1.18bn (representing just 3-4 months of total production across a broad portfolio of business jets and turboprops, pistons, and military/missionized aircraft).
With protectionist trade rhetoric from the US Administration now morphing into trade and tariff policy, America’s international allies and foes alike are facing the prospect of tariffs on steel and aluminium exports, something that could easily trigger a tit-for-tat reaction targeting specific US export products. Potential victims of an escalating trade conflict are as numerous as weeds in a spring garden, and include the majority of businesses and consumers on either side of the tariff.
Despite these emerging trade concerns, business aircraft owners and operators appear to be relatively optimistic about the industry’s condition, as evidenced in the recently completed Q4 2017 JETNET iQ Survey.
Optimists (those who believe that the industry is beyond the low point in the current business cycle) outnumber pessimists by a factor of about 2.8-to-1 (see chart below).
Assuming that the current trade tensions do not erupt into an all-out trade war between friends and foes alike (where nobody wins and, in fact, everyone stands to lose), marketplace conditions favour stronger aircraft sales performances in 2018.
Flight Activity - North America
Reviewing Year-over-Year (YoY) flight activity for February 2018 vs. February 2017, ARGUS TRAQPak indicates that February 2018 recorded an increase. Month-over-Month (February 2018 vs January 2018), a slight decrease was recorded…
The YoY results by operational category were mixed with Part 135 activity, once again, producing the largest yearly gain. Part 91 activity also recorded a slight increase, although Fractional activity dropped marginally.
By aircraft category, results were all positive with Large jets posting the largest gain over February 2017 activity.
February’s North American Business Aviation flight activity posted an expected decrease to finish down from January 2018. Results by operational category were all red for the month, with Part 135 posting the largest monthly decrease. Aircraft categories were mixed, with the top of the market posting gains and the lower end posting losses.
TRAQPak analysts estimate there will be a 4.2% increase in overall flight activity YoY in March 2018.
Flight Activity – Europe
Business aircraft usage during February in Europe climbed 4.5% YoY, to 57,037 flights, according to the latest data from WingX Advance. That’s on top of 6.6% YoY growth in January.
Business jet departures in Europe rose 3%, with a decline in private flights offset by a 5% gain in charter activity in this segment for February.
While Western and Central Europe experienced “robust growth” in flight activity, the UK was flat and Italy recorded only modest gains.
Overall, Germany saw the strongest growth in Business Aviation flying, though mainly in the piston segment. Spain reported the largest gains in business jet activity, with an increase of +9% in this segment over the last twelve months.
WingX noted that 90% of Business Aviation flights originating in Europe stayed within the region during February, with this volume up by 5% from a year ago. Flights inbound to Europe from other regions were weaker YoY, with arrivals from the Middle East down by 15% and transatlantic arrivals falling 5%. (Words courtesy of AIN)
Retrofit Avionics Sales Exceed $2.3bn
With the 2020 ADS-B Out mandate rapidly approaching, and as more and more aircraft operators realize the benefits of advanced cockpit systems, an increasing number of owners are opting to add retrofit avionics systems to their aircraft, notes AEA…
Worldwide Business and General Aviation avionics sales for 2017 amounted to over $2.3bn according to AEA’s latest Avionics Market Report. The figure represented a 2.9% increase in sales compared to the previous year, and reverses two straight years of declining sales.
TABLE C - 2017 Year-End Worldwide Business and General Aviation Avionics Sales
Of the >$2.3bn total sales, ~$1.34bn was for retrofits to airplanes after original production and ~$984m accounted for forward-fit avionics (retrofit avionics installed by the aircraft OEM at the time of production). Actual retrofit installations saw an increase in sales of more than 20%, and 73.5% of the retrofit sales took place in North America.
“Many avionics shops are telling us that aircraft owners are electing to order full-panel avionics upgrades rather than just the ADS-B equipment,” said AEA president Paula Derks. “It will be interesting to see whether the retrofit market continues to grow significantly in the next two years as the mandate draws closer.”
TABLE D - Percentage of Total General and Business Aviation Avionics Sales, By Market
Sales for just Q4 2017 were a fraction shy of $600m, up 0.3% over Q4 2016 sales, with just less than $340m reported for retrofit, and just under $260m for forward fit sales.
Global Jet Capital Lands More Financing
Global Jet Capital has completed an inaugural securitization for $608m, marking the first asset-backed security (ABS) capital markets financing backed solely by business jet operating leases and loans.
The notes were structured in three tranches: an A-rated $497m tranche; a BBB-rated $74m tranche; and a BB-rated $37m tranche.
According to Global Jet Capital, the transaction was almost three times oversubscribed, generating more than $1.7bn in orders from more than 30 investors.
The deal was structured and booked by Deutsche Bank Securities, with assistance from Bank of America Merrill Lynch, Citigroup and Morgan Stanley. Global Jet Capital said it will continue to service the assets.
“The investor community is increasingly looking to diversify their portfolios to reduce risk and find new opportunities,” said Global Jet Capital CEO Shawn Vick. “Their response to our offering is testament to both the strong portfolio of assets we have created and the expertise of the management team.
We are especially pleased at the range of investors we have attracted.” Global Jet Capital plans to continue to use the ABS market as an “integral part” of its funding strategy in the future.
ADS-B: Act Now or Pay the Price
Business Aviation is an important part of many businesses, however the convenience of air travel comes with its hurdles and costs. PNC has highlighted the urgency of equipping the Business Aviation fleet for ADS-B by January 2020.
Automatic Dependent Surveillance – Broadcast (ADS-B) systems automatically transmit information on an airplane's position, speed, altitude and other data to other aircraft and FAA ground stations on a regular basis. Rather than rely on a transponder and radar alone, ADS-B Out transmits the airplane’s data once every second.
ADS-B In, meanwhile, is a system that allows the airplane to receive and display ADS-B data, giving pilots information on other nearby aircraft, weather and advisories, Notices to Airmen, and important real-time notifications about temporary no-fly zones and restrictions. The combination of these features makes ADS-B a big step forward in aviation safety.
When asked if ADS-B improves aviation safety, Denver-based Certified Flight Instructor, Jason Steele, replies, “Absolutely…ADS-B offers pilots more time to react to nearby aircraft, and does so without a need for radar.” (Radar takes 5-7 seconds to update locations for other aircraft, versus ADS-B’s update every second.)
Essentially, ADS-B could prevent everything from aircraft getting too close together to unknowingly flying into poor weather conditions. Anything that makes flying safer is a good thing, and that's why the FAA created the ADS-B requirement.
The 2020 deadline requires all airplanes flying in airspace that requires a Mode C transponder to equip hardware that transmits ADS-B Out. This is the airspace that surrounds all large airports or any airspace over 18,000ft (and in many cases airspace over 10,000ft).
Because virtually all business air travel for large companies includes flying to Class B or Class C airports or into Class A airspace, all business aircraft should be equipped with ADS-B Out before the January 2020 deadline.
Supply, Demand and FAA Mechanics
The cost for parts and installation of an ADS-B system for corporate jets can reach from five to six figures, and could rise with demand. The 2020 deadline means lots of airplanes will be adding ADS-B over the coming months.
As the deadline to install ADS-B approaches, more and more pilots and airplane owners will be competing for limited parts and mechanics for installations. An ADS-B installation can take more than 24 hours of labor, and must be completed by an FAA-certified mechanic.
Lots of airplanes looking for a limited supply of parts to be installed by a limited number of mechanics in a short period of time will potentially lead to higher costs, and even intense competition for time from mechanics to keep airplanes flying.
Jeff Dunn, PNC Aviation Finance
Jeff Dunn, Head of Aviation Asset Management for PNC Aviation Finance, notes that “2020 is going to roll around, and there are going to be aircraft not allowed to fly”. Airplane owners should take steps to upgrade today and avoid issues.
There are “not enough slots and not enough days to service the number of aircraft that need to be serviced” by the deadline, Dunn adds.
Act Soon to Avoid Cost and Stress
While many airplanes are going to squeeze in the repairs at the last minute, getting the upgrade done as early as possible could lead to big savings. Getting your ADS-B upgrade today not only helps you avoid the costs of taking care of it later, avoiding procrastinating and adding ADS-B will improve flight safety right away.
Some aircraft owners choose to finance the ADS-B upgrade on their own while others refinance the airplane and roll the cost into one loan.
(PNC Aviation Finance is standing by to help those concerned by the costs to upgrade and can help operators stay airborne by installing ADS-B with competitive interest rates and affordable payments.)
“We don't want to risk aircraft not flying,” summarizes Dunn. “The more of those we can get upgraded, the better.” The worst-case scenario is that an operator waits too long, tries to get a last-minute upgrade, and can't find a mechanic or the parts to get the work done by the deadline, leading to their aircraft being grounded.
Those investing in the upgrade today, however, will fly safer and can put any worries about January 2020 aside.
Embraer: Flat Business Jet Market in 2018
Embraer expects a flat market for new business jets this year. The Brazilian aircraft manufacturer’s business jet shipment estimate for 2018 exactly mirrors those given last year: 70 to 80 Light jets and 35 to 45 Large jets…
Last year, Embraer delivered 109 business jets, which was within its ‘outlook ranges’, but eight aircraft fewer than in 2016. That total included 72 Light jets (Phenom models) and 37 Large jets (Legacy and Lineage models) versus 2016's 73 Light jets and 44 Large jets.
Last year’s business jet revenues, totalling $1.485bn, missed Embraer’s estimates due to an “unfavorable mix” of aircraft deliveries. The OEM expects its executive jet division to post revenues of $1.35bn to $1.5bn in 2018.
In-Service Aircraft Values & Maintenance Condition
Asset Insight’s market analysis of February 28, 2018 covering 92 fixed-wing models and 1,687 aircraft listed ‘For Sale’ revealed the total number of used assets continued to decline.
Large jets and Turboprops led the way, while Medium jet inventory remained steady and Small jet figures posted a surprisingly high 5.9% increase. Meanwhile, ask Prices decreased an overall 1.3% to register another record low figure, as Large jet prices dropped 0.8%, Small jets dropped 2.3% (to post a record low), and Turboprops posted a 12-month low by falling 1.2%.
The lone winner was the Medium jet group, whose average Ask Price increased 2.2% in February.
Inventory Fleet Maintenance Condition
Buyers continued to focus on higher quality assets, worsening the Maintenance Exposure and Quality Rating figures for the remaining inventory within all four aircraft groups.
The tracked inventory fleet maintained its ‘Very Good’ Quality Rating, although it did post a decline to 5.220 from January’s 5.238, on Asset Insight’s scale of -2.5 to 10. The tracked fleet’s average Maintenance Exposure (an aircraft’s accumulated/embedded maintenance expense), meanwhile, increased 1.4% to $1.468m, a 12-month high (worst) figure.
CHART A: Business Aircraft Fleet Maintenance Condition
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. During Q4, 2017, the average Days on Market were 42% greater for aircraft whose ETP Ratio exceeded 40% (199 versus 284 days).
The tracked inventory fleet’s ETP Ratio climbed to a 12-month high (worst) figure, reaching 66.9% compared to January’s 64%. Turboprops continued to post the lowest (best) ETP Ratio at 49.2%; Large Jets followed at 59.2% (a record high (worst) figure for this group); Medium Jets worsened slightly, increasing to 68.4% (also a record high); and Small Jets worsened to 81.5% (the group’s worst 12-month figure).
CHART B - Business Aircraft Expoure to Price Ratio
Our tracked inventory decreased by 12 units this month. Nearly 53% of all tracked models, and 60% of all units, posted an ETP Ratio above 40% by virtue of increased Maintenance Exposure and (except for Medium Jets) lower Ask Prices.
It may not look like it but, as Asset Insight pointed out last month, the Large Jet market is stabilizing. The tracked fleet decreased by 4.2% (16 units), with aircraft of mixed asset quality transacting and the inventory pool’s Quality Rating increasing to 5.303 to maintain its ‘Excellent’ status.
Ask Price decreased by a nominal 0.8%, but conspired with a substantive 1.4% Maintenance Exposure increase to worsen the group’s ETP Ratio from January’s 57.2% to 59.2%.
The group has maintained a ‘Very Good’ Quality Rating for the past ten months, hitting a 90-day high figure of 5.141 in February with the ‘For Sale’ number remaining unchanged. Maintenance Exposure worsened 2.4% and, even though Ask Price improved a surprising 2.2%, the increase was insufficient to positively impact the group’s marketability as the ETP Ratio rose to 68.4% from last month’s 65.4%.
After decreasing by 25 aircraft in January, Asset Insight’s tracked fleet increased by 27 units in February (up 5.9%), and February’s transactions focused on higher quality aircraft. Quality Rating for the remaining inventory dropped 1.4% to 5.288, but held within the ‘Excellent’ range.
Maintenance Exposure also worsened, increasing 4.2%. With Ask Price falling 2.3% to post a new record low, the group’s ETP Ratio jumped 2.9% to a 12-month worst (high) figure. Asset Insight’s prediction last month that prices will soon begin to strengthen appears to have been slightly premature.
In the last market review Asset Insight advised that highly positive quantitative figures demonstrated that good values were available to buyers. Obviously, serious buyers also identified this opportunity, decreasing the ‘For Sale’ fleet by 7.4% (23 aircraft transactions).
The remaining inventory’s Quality Rating fell 0.5%, but Turboprops stayed within the ‘Very Good’ range at 5.158. Ask Price fell to another 12-month low, and Maintenance Exposure worsened by 1.5%.
The combined effect raised (worsened) the ETP Ratio to 49.2% from January’s 47.3%, but that is hardly surprising, given that higher quality assets were the ones acquired.