- 04 Mar 2022
- Brian Foley
- Market Insight
Business Aviation analyst Brian Foley assesses a few of the ways the Russia-Ukraine conflict could impact the Business Aviation industry...Back to Articles
There are a lot of moving parts in the Business Aviation industry. Some onlookers who don’t understand it may wrongly conclude that sanctions on Russia only affect business jet manufacturers, when in fact it’s a much wider sphere of influence.
Here are a few examples of some of those Business Aviation segments which could be affected by the recent sanctions on Russia, and what the impact could be.
The most noticeable effect will be the inability for OEMs to sell and support new business aircraft in Russia. According to AMSTAT, there are currently 167 business jets registered in Russia.
Notionally, however, the number of Russian-owned jets worldwide is probably closer to 400-500 units since the majority are registered outside of the country. Thus, the number of affected jets represents a relatively small number of the world’s active fleet of 23,000 aircraft.
However, the types of jets typically purchased in this region are some of the most high-end, valuable jets produced, making the overall industry impact a little more significant. While future sales are of concern, existing orders which haven’t been delivered yet are also problematic.
The good news is that business jet sales are still very active elsewhere around the world, so any cancelled orders should be quickly refilled.
Collateral damage around the OEMs includes such things as local sales agents and customer service representatives, approved repair stations, parts warehouses, and other OEM-sponsored support networks. More significantly, any current supply chain affiliations in the region will send manufacturers scrambling for alternate sources, a key one being aircraft-grade titanium.
There are known concerns and ongoing questions within the pre-owned aircraft broker community. Clearly any deals that may have been in the works have been derailed, and any commissions or consulting fees that may still be owed have been thrown into uncertainty.
It’s possible that several pre-owned jets with Russian connections may be sold at any cost. While that would normally be good news from a broker’s perspective in a period of low inventory, the fact that it could be perceived as negotiating with a sanctioned entity raises the importance of “Know Your Customer” before doing business.
Finance and Insurance
These are complex areas, but aside from future lost business there are additional real-time obstacles.
Receiving lease or finance payments will likely be a problem with Russia’s banking system severely constrained. Should a repossession ever become necessary, the country has already announced that its leased Airbus and Boeing airliner fleets will remain where they are, which would be unwelcome news for business jets as well.
On the insurance side, if a financier has war risk coverage it would expose the insurer and the chain of reinsurers as well, whose resources may already be stretched from insured Western airliners stuck in limbo.
Greatly reduced aircraft operations will negatively affect FBOs, fuel and ground service providers, flight planning, and other support services. Flight crews, maintenance personnel and ground handlers based in Russia also stand to be idled.
This has the potential to perhaps be the most troubling sector of the industry. It’s been estimated that upwards of 10% of European business jet traffic is somehow related to Russia.
Some charter operators have an outsized exposure to this market and run the risk of significant business disruptions, which could affect their affiliates and partners around the globe.
Any downsizing or defaults in this segment could potentially cause a cascade of late model pre-owned jets entering the market, which would then compete directly with new aircraft.
This is only a partial list of cause and effect of sanctions on the industry. Still, there will inevitably be some localized business hardships throughout the year, which may even affect colleagues whom we personally know and respect in the region.
However, from a broader, global perspective the situation, unless escalated, should not yet significantly alter the course of what should still be a respectable year for the overall industry.
Global Flight Activity Report
The global headlines are focused on Russia’s invasion of Ukraine, with significant consequences emerging for the global aviation industry. WingX Advance provides an overview of the region, as well as global flight activity during February...
In terms of flight activity, Russia, Belarus and Ukraine saw precipitous drops in all flight activity at the end of February. In business jet activity, Charter and Aircraft Management operators saw the largest activity declines in the region, with Private Flight Departments proving a little more resilient. Business Aviation activity in Russia was trending down by 20% compared to the end of February in 2019.
The size of the Russian aviation industry, globally speaking, is small in some respects. It accounts for only 0.5% of global business jet deliveries, 0.7% of the active fleet, and there are under 100 aircraft on the Russian register. But Europe has relatively high exposure to business jets regularly operating out of Russia – an estimated 12% of all jets based in Europe in 2021.
Last year, 7% of all business jet sectors operated in Europe inter-connected with Russia or Ukraine, and 12% of globally active Ultra-Long-Range Jets had at least one movement in Russia during 2021. In the couple of days prior to this report being written, business jet connections between Russia and the Middle East had grown much faster than European connections.
Rest of the World
The global trend in business jet activity had yet to register any impact from the Ukraine crisis at the time of writing. The 2022 trend since the start of the year indicates a 13% increase over comparable 2019. By comparison, scheduled airline sectors still lag their 2019 trend by 31%, despite a 38% bounce so far this year.
The North American market is much less exposed than Europe to direct flight connections with Russia. Nevertheless, overflight restrictions are in force, and the leading US suppliers of Business Aviation services will be severely constrained in supporting Russian aviation concerns, with widespread sanctions implemented.
Within the US, the pattern of business jet demand for February was familiar: Florida was the primary hub, California and Texas were back above their 2019 levels, but the North-East was proving slower to recover – especially New Jersey, and Teterboro.
Overall, the biggest rebound this year in the US market has come from the Ultra-Long-Range Jet sectors, which is 24% above pre-pandemic records. Private flight departments were belatedly showing signs of recovering.
“For Business Aviation, the Ukraine crisis is having a direct effect on a relatively small share of overall flight activity,” said Richard Koe, Managing Director, WingX Advance. “But the proliferation of sanctions will significantly complicate the whole Business Aviation market – especially in Europe – across the field, from flight operations to charter brokerage, aircraft financing, management and maintenance.”
In-Service Aircraft Maintenance Condition & Marketability
Asset Insight’s tracked fleet ended February with 5.3% fewer aircraft (-39 units) for sale. The analysis, undertaken on February 28, covering 134 models revealed just 703 aircraft listed for sale. Listings are now down over 58% since the June 2020 peak...
Ask Prices for the listed fleet have increased 13.7% during the year’s first two months, following February’s 7.5% rise. Ask Prices are still down 7.1% year-over-year (YoY), as Large Jets are the only group in positive territory YoY.
Asset Insight believes actual transaction values to be higher, however. It’s important to note that younger, lower-time, unlisted aircraft continue to transact at a pace we’ve never seen before. The listed fleet is comprised of mostly picked-over assets.
Inventory Fleet Maintenance Condition
As we continually note, an aircraft’s maintenance condition and its age have no direct correlation. As proof, both the listed fleet’s Maintenance Rating and Exposure improved in February, signifying fewer upcoming maintenance events and a lower cost to complete them.
Maintenance Exposure to Ask Price (ETP) Ratio
Following two consecutive months registering all-time high/worst figures, the ETP Ratio improved to 77.3%, a substantial decrease from January’s 82.1%. The change was unsurprising given the increase in Ask Price and substantial decrease in Maintenance Exposure. But it should be noted that the key driver was the figure posted by Large Jets.
In fact, we predict ongoing challenges for most sellers of Mid-Size and Light Jet aircraft who expect to generate value-based prices.
For anyone not familiar with the ETP Ratio, the statistic 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’ (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 Q4 2021, assets whose ETP Ratio was 40% or higher were listed for sale more than 59% longer (on average) than aircraft whose Ratio was below 40% (340 versus 541 Days on Market). During February, nearly 51% of Asset Insight’s tracked models and 61% of all listed aircraft posted an ETP Ratio above the 40% excessive mark.
Inventory for the tracked fleet decreased to 3.4%, from January’s 3.5%. In February 2021 the listed fleet’s inventory was 8.3%, a figure that raised concerns about transaction opportunities during 2021.
Asset Insight expects demand to remain strong in 2022. However, with availability shrinking to 5.25 assets per tracked model, a figure that includes listings likely being operated by their final owner, it will be difficult for 2022 pre-owned aircraft transactions to exceed last year’s figure. Increased aircraft production may help, but OEMs will undoubtedly remain cautious with their production figures.
Moreover, first-time buyers of new production aircraft will not have assets to remarket, and will thus be unable to help increase the pre-owned inventory.
Large Jets: The tracked 43-model fleet’s availability is down to 2.6%, equating to just over three aircraft per model. By comparison, listings stood at 7.1% of the active fleet at the end of February 2021. The listed fleet decreased 10.2% in February 2022 (-15 units), 21.4% since December (-36 units), and is now nearly 65% below the June 2020 peak.
The group’s Quality Rating rose 0.5% to just below the 12-month average and, at 5.519, boosted Large Jets back into ‘Outstanding’ territory. However, Quality was 2.4% lower (worse) YoY. Again, maintenance status is not directly related to aircraft age, nor does it account for the asset’s specification. So, while an asset’s Quality may be high, it may not evoke buyer preference.
Maintenance Exposure improved/decreased nearly 15% for the month, and also improved over 4.5% YoY. And Ask Price rose 7% in February to post a 12-month high for the second consecutive month, bringing Ask Price up 23.1% since December.
These figures were impressive on their own, but also served to drop the ETP Ratio to 40.8%, a 12-month low for the group that is just above the 40% rate considered excessive. Whether these statistics will improve sales for a listed fleet seriously lacking young, low-time aircraft remains to be seen.
Mid-Size Jets: The 45-model tracked fleet of Mid-Size Jets decreased another 3.4% in February (-6 units), which brought the year-to-date (YTD) reduction to 25.1% (-58 units). Availability stood at 4% of the active fleet, compared to 10% in February 2021, and the bad news didn’t stop there...
The Quality Rating dropped a nominal 0.2% to 5.109, a figure that was just above the 12-month low (but the fleet did still manage to remain within ‘Very Good’ range). Maintenance Exposure also worsened, climbing 2.8% for the month to post a second consecutive 12-month high/worst figure, which was also 9.3% worse YoY.
While Ask Price rose 5.7% for the month, and 24.5% YTD, the figure was still below the 12-month average (as well as 13.3% lower YoY) and could not compensate for the Maintenance Exposure increase. The ETP Ratio increased as a result, to a figure just under the 12-month high/worst value.
Most sellers are unlikely to be pleased with the offers they receive, although some first-time buyers are tendering aggressive offers for assets that, on the surface at least, do not appear to be worth the price.
Light Jets: Ample Light Jets are listed for sale compared to listings for Large and Mid-Size Jets, but that still only equates to 3.3% of the active fleet (versus 8.7% in February 2021).
Availability decreased another 4.2% in February (-10 units) for the 29 tracked models, equating to a 13.9% drop over the first two months (-37 units) and nearly 58% since the June 2020 peak. The group’s Quality Rating improved another 1.6% that, at 5.134, kept it within “Very Good” territory, although the figure was 0.6% worse YoY.
Maintenance Exposure improved too, decreasing 2.4% to approach the 12-month low/best figure, and that value was 3.5% lower/better YoY. Even Ask Price aided the group’s statistics, rising 5.3% (a total increase of 5.6% since December), although that value is still 16.2% lower YoY.
The net effect of these changes was an improvement to the group’s ETP Ratio, although a decrease to 110.1% (spot-on the 12-month average) from 111.6% is not going to improve sellers’ fortunes. While an aircraft’s maintenance status may be ‘very good’, when Maintenance Exposure doubles the total cost of the asset, most savvy buyers will focus on other assets.
Turboprops: More Turboprop assets are available on a per model basis than for any jet group, although total Turboprop listings equated to only 3.1% of the active fleet (for Asset Insight’s 17 tracked models) compared to 6.3% one year ago. Unit availability decreased by eight aircraft (-4.5%) in February, 50 units during the first two months of the year (-22.9%), and nearly 36% since the 2020 June peak.
The latest fleet mix improved the Quality Rating by 1.2%. Although nearly 2% worse YoY, the latest figure kept Turboprops within the ‘Very Good’ range. Maintenance Exposure also improved, decreasing 0.8% to a figure half-way between the group’s average and 12-month high.
Buyers appeared to be focused on lower quality, and lower-priced assets during the month, as Ask Price increased 2.9%, although that value is still 5.9% below December’s figure and 6.6% lower YoY.
The Maintenance Exposure improvement and Ask Price increase improved the ETP Ratio to 47.7% from January’s 12-month high/worst 49.1%. The group’s Ask Price continues to be higher than that of Light Jets, while the various other statistics continue to give sellers a distinct edge.