The expected slow-down in used aircraft transactions appears to be materializing in the early months of 2019. What are the factors that are influencing this? Business Aviation analyst Rollie Vincent explores…
Looking back to a torrid pace of activity last year, the volume of used business jet transactions (as measured by retail sales and full leases of whole aircraft) reached all-time high levels in 2018, based on the latest available information in JETNET’s databases.
With the sales of more than 2,800 jets in 2018 (up about 2% Year over Year), used transactions outnumbered new business jet shipments by a factor of 4 to 1, reflecting a healthy market where transactions were equivalent to 12.9% of the in-service fleet of business jets.
Sales data for the first few months of 2019 are still being verified and tabulated, but early indications are that the pace of the market has begun to decelerate somewhat, in line with expectations for slower growth in the national economies of many of the countries that are important to Business Aviation.
The business jet inventory for sale was hovering just above 2,000 aircraft worldwide at press time, equivalent to 9.2% of the world business jet fleet, which is up from 8.9% near the end of 2018.
Less than 150 jets that are currently listed as for sale in the JETNET database were delivered factory-new in the last five years, representing just 7% of the available inventory.
As has been the case for some time, much of the fleet that is listed for sale was delivered more than 20 years ago, and at press time these older assets represented about 45% of the total inventory (similar to this time a year ago).
Many of these aging may not have much economic life left in them with looming Communications, Navigation and Surveillance (CNS) global mandates approaching in 2020, including ADS-B Out and FANS 1/A.
Business jet owners/operators who have not yet upgraded their aircraft to meet these mandates are quickly running out of time to do so, and potential buyers should beware of the very real costs and schedule challenges of getting this work accomplished in the months that remain in 2019.
Limited MRO shop capacity and the lead times to secure the necessary parts and systems are a real potential problem. Existing owners and would-be buyers of non-compliant business jets should expect upgrades to become very price-inelastic as we move into the last few months of this year. This is a short-term, but nonetheless lucrative, margin opportunity for MRO shops with additional capacity for “got to have” last-minute shoppers.
Looking back at 2018, it is revealing to note that there were 38 different models of new business jets delivered, according to the year-end GAMA shipment report. We estimate that just five of these models – including the Bombardier Challenger 350, Cirrus Vision SF50, Citation Latitude, Embraer Phenom 300 and Gulfstream G650/650ER – accounted for a remarkable 42% of all factory shipments.
These high-volume programs helped cover factory overheads in Montreal, Duluth, Wichita, Melbourne/San Jose dos Campos and Savannah, much to the satisfaction of stakeholders, and prime the pump for future used markets in these popular aircraft.
A Note on European Uncertainty
With the original March 29 deadline now passed for the UK to say “Cheers, mate!” to their colleagues in European Union, it is a decidedly strange time in what has been up to now the largest single regional market in the world. In a sobering bit of analysis, Her Majesty’s Treasury determined in November 2018 that the UK was likely to be worse off financially under all Brexit scenarios.
While this might simply reflect the high cost of ‘independence’, the historical ties that bind Great Britain and Northern Ireland together with the rest of Europe go well beyond trade and transport.
With most national economies in Europe expected to experience slower GDP growth in 2019 Year over Year, it would not take much for at least some countries to slide into recession in the near-term, whether influenced by Brexit-related disruptions, export slowdowns linked to tariffs escalations, or fluctuations in consumer and business sentiment, and investment.
From the perspective of business aircraft operations, the brave new world of post-Brexit life is complicated enough to keep lots of otherwise busy aviation professionals on both sides of the Chanel/la Manche wondering how all of this is going to work…or not.
Uncertainty in Europe and elsewhere, long the bane of corporate investors and aircraft buyers, is unfortunately on the uptick.
Flight Activity – North America
TRAQPak’s review of Year over Year (YoY) ﬂight activity (February 2019 vs. February 2018) indicates an unexpected decrease for North America (-1.4%). Month over Month (MoM) activity (February versus January) was down -2.9%.
The YoY results by operational category were mixed with Fractional activity posting the only increase. Part 135 activity declined for a ninth consecutive month. YoY, the aircraft categories were mixed with Mid‐size Jets posting the only increase from 2018. Light Jets recorded the largest drop.
February Business Aviation ﬂight activity posted a larger than expected MoM decrease from January 2019. The Fractional segment posted the only monthly increase. Part 135 ﬂight activity declined the most for the month.
Aircraft categories were all negative MoM, with Mid‐size Jets posting the smallest decline and the Turboprop segment posting the largest.
Forecast for March Activity
Looking ahead, TRAQPak analysts estimate a 0.2% increase in overall ﬂight activity YoY in March 2019.
Flight Activity - Europe
There were 58,090 Business Aviation departures in Europe during February according to WINGX’s latest monthly Business Aviation Monitor. That figure represented a 1.7% increase Year over Year (YoY), boosted by a big increase in piston traffic.
Business jet activity was down by 1.3% with a 1.6% fall in Charter/AOC flights. The trend for the last twelve months' in business jet activity stands at 1%.
The top markets saw overall growth, with Germany and Spain registering most activity increase YoY. Flights from the UK were flat with a notable drop in Small and Mid-size Jets.
So far in 2019, the UK, Italy and Germany have around 1% growth in total activity, France is up by 2% and Spain almost 10%. Flight activity out of Turkey and Greece, by comparison is down 20% YoY.
Europe’s YTD trend of 0.5% is slowing on the last twelve months' trend of 1.7%.
“The overall trend in Business Aviation activity, up 2% YoY, hides a significant underlying decline in business jet activity across all the top markets except Germany, with notably large falls in Heavy Jet activity out of Spain and Small to Mid-cabin activity from the UK,” Richard Koe, Managing Director of WINGX, summarized.
“These declines are most obvious in Charter activity, and on longer sectors. This year’s falling trend in business jet charters reflects softer demand in the context of weaker economic growth and heightened political risk across Europe.”
Honeywell Civil Helicopter Deliveries Forecast
In its 20th annual ‘Turbine-Powered Civil Helicopter Purchase Outlook,’ Honeywell forecast 4,000 to 4,200 new civilian-use helicopters to be delivered through 2022…
“In addition to better global economic conditions expected in the coming years, potential positive impacts of US tax reform on new helicopter demand and lower volatility in oil and gas-related markets have helped fleet managers confirm what they told us last year,” said Ben Driggs, president, Americas, Honeywell Aerospace.
“With the expectation of stable purchase plans for new helicopters over the next five years, Honeywell is focused on bringing increased value to operators' current and new fleets by offering Connected Helicopter engine, Health and Usage Monitoring Systems, and avionics solutions that help boost a platform's efficiency and availability.”
Key survey findings this year included:
- Over the next 12 months, helicopter fleet utilization is expected to increase significantly in North America and modestly in Europe and Latin America.
- When choosing their make and model, operators purchasing new helicopters are largely considering factors like brand experience and performance, with cabin-size and range factors declining from last year's survey.
- The outlook showed stable new purchase-plan rates for the next five years for North America, Europe and Asia. Latin America showed higher growth rates for the next five years with lower rates in the Middle East and Africa.
Aero Asset Presents First Heli Pre-owned Market Report
Aero Asset, a new global helicopter brokerage headquartered in Toronto, Canada presented the industry’s first pre-owned market trends report recently…
“The pre-owned market took an upturn in 2018, after several years of flatlining…” Aero Asset co-founder and sales director William Sturm revealed. The Aero Asset report analyses 15 twin-engine models in the Light, Medium and Heavy categories, from the Airbus H135 to Sikorsky S92A.
Twin-engine helicopter trading was up 9% in 2018 vs. 2017, with the Light Twin market generating the most activity, up 13%. Average absorption rate decreased 40%, compared with 2017, with the most significant reduction showing in the Medium Twin market.
Out of the 13 pre-owned markets covered, nine had lower absorption rates than 2017, two were on par and two had a higher rate. Nine had higher trade volume than 2017, two were on par and two had lower trade volume.
The top performer in 2018 was the Airbus EC135, with 30% of models traded being less than 10 years old and 80% less than 15. Only 10% of buyers were outside the US and EU and 80% of transactions involved EMS or EMS conversions. The EC135’s absorption rate in 2018 was one year. A total 33 pre-owned EC135s were traded in 2018.
The Leonardo A109E Power ranked second, with nearly twice the absorption rate of the EC135. With 24 units sold in 2018, the type maintains strong liquidity. A total 40% of these aircraft were sold in Africa, Latin America and Asia, with a minority (15% of the total sales) as EMS variants. Ranked third is the Leonardo A109S/AW109SP.
In its retail sales and supply analysis (by weight class) Aero Asset’s Report shows Light Twin helicopter transactions totalling 90 (up 13% over 2017). Medium helicopters are unchanged at 44 and Heavy helicopters (the EC/H225 and Sikorsky S92) up 30%, with three pre-owned models sold in 2018.
In-Service Aircraft Values and Maintenance Condition
Asset Insight’s market analysis on February 28, 2019 covering 94 fixed-wing models and 1,624 aircraft listed for sale revealed a 2.6% increase to the tracked inventory fleet (41 units). Here are the details…
Small Jets led the increase (up 4.4%), while Medium Jets also increased (4.3%). The Turboprop inventory increased a marginal 0.4%, but the Large Jet fleet listed for sale experienced a minor 0.6% decrease.
The average aircraft value for the tracked fleet remained virtually unchanged and for the second consecutive month matched the average value figure for the past twelve months. Only Turboprops lost ground, posting a 12-month low figure in the process.
Inventory Fleet Maintenance Condition
Fleet asset quality deteriorated substantively during February, posting the worst figure since last July. Specifically:
- Large Jet transactions were focused more on higher quality aircraft, with buyers able to negotiate some good values.
- Medium Jet buyers picked up some of the best assets listed for sale, and lower quality assets entered inventory to suppress the available aircraft quality.
- Small Jet additions to inventory lowered the asset quality for this group.
- Turboprops – the only group to suffer an average Ask Price reduction – saw sufficient higher quality aircraft trades to lower the group’s asset quality.
Overall, the tracked inventory posted the following figures:
The Quality Rating receded into the ‘Very Good’ range, after holding an ‘Excellent’ Rating since September 2018. It dropped from 5.318 to 5.219 on Asset Insight’s scale of -2.5 to 10.
In line with a lower Quality Rating, Maintenance Exposure (an aircraft’s accumulated/embedded maintenance expense) deteriorated 4.5% to $1.46m, the highest (worst) figure posted during the past twelve months.
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% and, during Q4 2018, assets whose ETP Ratio was 40% or more were listed for sale over 57% longer (on average) than aircraft whose Ratio was below 40% (246 versus 386 Days on Market).
Asset Insight’s February analysis revealed that nearly 53% of all tracked models and over 62% of the tracked fleet posted an ETP Ratio above 40%.
The tracked fleet’s ETP Ratio increased (worsened) during February to 70.2% from January’s 64.8%. All groups worsened, with Turboprops rising to 52.9% from 49.6%, Large Jets increasing from 57.8% to 59.4%, Small Jets hitting 76.8% versus 65.8%, and Medium Jets rising to 79.7% (marginally better than the group’s 12-month worst figure of 80.0%) following January’s 77.1%.
February’s inventory changes saw the fleet’s asset quality decrease 1.8%, while Maintenance Exposure rose 4.5% to a 12-month high (worst) figure. With the net increase of 41 aircraft to inventory, Asset Insight was surprised that (weighted) average prices remained relatively unchanged, especially since pricing increased for three of the four groups.
However, this is simply one more example of why detailed analytics can be a buyer’s, and seller’s best friend.
Large Jets: Inventory decreased by two units, with February’s transactions focused on higher quality assets. Changes to the inventory mix brought the number of upcoming maintenance events for the average asset up to a 12-month high, with the cost for those events hitting a 12-month high (worst) figure too.
On the positive side, and specifically for sellers, Ask Price increased 2% in January, although that was not sufficient to combat the Maintenance Exposure increase, leading to an increase (worsening) in the group’s ETP Ratio. The opportunity for buyers and sellers to find middle ground just became a bit tougher to locate.
Medium Jets: Inventory for the tracked fleet increased by 25 units in February, but the group’s average Ask Price increased another 1.4%. Those figures make little sense when you consider that both Quality Rating and Maintenance Exposure posted 12-month record-worst figures.
However, many sellers believe the time has arrived to test the value impact of limited availability, hence the conflicting figures.
Small Jets: Inventory increased by 21 units, and Maintenance Exposure worsened (increased) by nearly 12% in January. Yet, Small Jet sellers apparently believe they can leverage a lack in asset selection and increased Ask Prices by 3.1% in January.
Even with the ‘desired’ price increase, the group’s ETP Ratio still posted a worse-than-average ETP Ratio which does not bode well for sellers. Buyers on the other hand can probably justify some very attractive offers, assuming they understand how to use these statistics.
Turboprops: Inventory only moved one unit higher, but the inventory fleet mix changes worsened the group’s Quality Rating by 4.2% and Maintenance Exposure by 4.6%. Unlike the other three groups, average Ask Price decreased 1.4% to the lowest 12-month figure, and that led to an ETP Ratio increase (degradation).
Still, the pricing stability of this group (which has traded within a $50k high/low range during the past twelve months) should not to be underestimated, nor should the potential to identify some good values.
GAMA 2018 Year-End Shipment Analysis
The General Aviation Manufacturers Association (GAMA) issued its most up-beat new airplane shipment and billings report in a very long time in late February. All three segments reported significant gains YoY. Mike Potts analyses…
Total airplane shipments were up by 4.7% compared with Year-End 2017, and the industry finished 2018 with 2,443 shipments, up from 2,325 the year before.
Specifically, business jet deliveries were up 3.8%, reaching 703 units (the first time jets have finished above 700 units since 2014), squaring nicely with the 690-710 unit range we predicted. Turboprops totaled 601 units, up 5.2% to record the strongest gain among any segment. Piston shipments also finished strong, up 5% compared to 2017.
Total billings were also up over last year, by 1.5% at $20.6bn, versus $20.2bn a year ago. The billings increase trailed percentage gains in the other segments, reflecting some continuing softness in the upper ends of the jet market.
On the surface this was the best GAMA report in a while – but looking at the specifics of the market situation you quickly discover things aren’t quite as rosy.
In the jet market, for example, six of 11 manufacturers reporting to GAMA had numbers lagging last year’s results. Looking at just Q4, five jet makers were ahead of last year, five were behind and one was even. Based on those numbers the jet market is not in full recovery mode yet.
The Jet Market
Looking at jet market specifics, we see a familiar picture with Cessna comfortably in the lead with 188 units, up from 180 last year. For Q4 2018 Cessna had 63, up from 58 a year ago. Cessna’s best-selling jet continues to be its Latitude model, which accounted for 57 deliveries in 2018, up from 54 in 2017.
The Mid-size Latitude is one of Cessna’s newest products, with first deliveries coming in 2015. Cessna’s other new model, the smaller M2, recorded 34 deliveries, down slightly from the 39 shipped in 2017.
Coming second for jet deliveries (but one unit short of 2017’s total) was Bombardier with 137 units, including 41 for Q4. Bombardier’s Q4 surge was weaker than in either of the previous two years. The OEM’s best-selling product continued to be its Challenger 350 super mid-size model, with 60 shipments in 2018.
Gulfstream captured third place with 121 deliveries, up a single unit over 2017. For Q4, 42 units were shipped. In 2017 Gulfstream delivered 30 airplanes in each of the four quarters, and earlier this year Gulfstream appeared be to on pace for total deliveries in the 105-unit range. It was the unusual Q4 delivery surge that allowed Gulfstream to surpass last year’s results by a small margin.
Gulfstream’s strong Q4 cemented its position as the industry leader in billings, finishing the year with an estimated total $6.783bn. Without Gulfstream’s Q4 shipment surge, the industry would not have reached $20bn in total billings.
Fourth place in jet deliveries was captured by Embraer (91 units), trailing the 109 shipments it reported in 2017. Embraer’s Q4 total of 36 deliveries also failed to match its 50 Q4 2017 units.
Cirrus, in just its second year in the jet market, slid comfortably into fifth place in jet deliveries with 63 units, up from 22 the year before. The Cirrus Vision Jet represents the largest-selling jet model in the industry, though it will be interesting to see where Cirrus settles once its production and deliveries stabilize.
Honda and Dassault engaged in a tight race for sixth place in jet deliveries, with Dassault prevailing at year-end, finishing the year with 41 deliveries on the strength of a strong second half. At the mid-year point Honda was sixth with 17 units, slightly ahead of Dassault’s 15.
Honda experienced market weakness in Q2 and Q3 2018, delivering just nine airplane units. The 43% Q4 surge Honda experienced was insufficient to keep up with Dassault, which reported 26 deliveries in the H2 2018. Honda reported 37 shipments in 2018.
Newcomer Pilatus finished the year in eighth place in jet deliveries, reporting 18 units for the year. Yet it will be surprising if Pilatus isn’t placed higher by Year-End 2019. Nine of its deliveries came in the Q4 2018, but this was less of a Q4 surge and more a spool-up in production.
Bringing up the rear in the 2018 jet market were Boeing, Airbus and ONE, in that order. Boeing led the group with six deliveries, including one in Q4. Airbus reported a single delivery, which came in Q3. ONE reported no deliveries, down from six in 2017.
The business jet market, then, is not exactly thriving. But companies invested in new products are generally seeing better results than those who haven’t, and the market appears to be poised to support continuing growth in the years ahead.
The Turboprop Market
Compared with the business jet market the turboprops are similarly roiled. The total business turboprop market, not counting agricultural airplanes, totaled 422 units. GAMA doesn’t publish the number, but it is derived from taking GAMA’s turboprop total of 601 aircraft and deducting 179 agricultural airplanes (141 by Air Tractor and 38 by Thrush).
The overall turboprop market benefitted from a very classically-sized Q4 market surge, with 43.94% of all turboprops delivered in the last three months of 2018.
Collectively, Textron Aviation units own the turboprop market. Its Beechcraft segment is the market leader with 94 deliveries for the year, followed closely by its Cessna segment (92). Beechcraft also led for Q4 with 35 deliveries in the last nine months of the year, with Cessna in hot pursuit at 32.
Occupying third place in turboprops, and not hopelessly behind the Textron entries, was Pilatus, with 83 deliveries for 2018 and 30 in Q4. Pilatus trailed its 2017 results when it had 86 for the year and 32 in Q4.
Fourth place in turboprop deliveries went to Piper, with 56 for 2018, up from 47 in 2017. In Q4 2018, Piper had 18 deliveries, up from 16 in Q4 2017. Daher, meanwhile, finished fifth in the turboprop race with 50 units for 2018 (17 for Q4 2018), down from 57 airplanes in 2017 (21 for Q4 2017).
Of the remaining turboprop players, Quest captured sixth place (23 units for 2018, and only three in Q4 2018), while making its GAMA debut Viking Air shipped nine units, Piaggio reported four and AVIC reported no deliveries in 2018.
Overall the business aircraft market in 2018 had areas worth cheering about, and we can perhaps be hopeful that this marks the beginning of an upturn. In truth, however, the market still has a long way to go before we can pronounce it fully recovered. We’ll continue to monitor it throughout 2019.