Many Business Aviation customers are more likely to be dipping toes into the beach sands currently than thinking about their next business aircraft transaction. Nevertheless, Rollie Vincent analyses where the trends point for a busy second half of 2018.
Although thankfully not darkening the sunny skies, business aircraft flight activity is rebounding steadily on a Year-over-Year (YoY) basis, especially in Europe. North-South traffic into the Mediterranean basin is particularly noteworthy in the seasonally busiest months of flying in July and August, when well-to-do vacationers seek out the idyllic azure waters of one of the world’s air travel hotspots.
Year-To-Date (YTD) through the end of June 2018, European flight departures across all business aircraft propulsion and size categories were up 2.7% YoY, reflecting continuing economic expansion and wealth creation, consumer and business confidence, and steadily declining unemployment.
In the US, flight activity continues to grow on a steady if unexciting pace, with business jet cycles up about 2% YoY through the end of May 2018 on a YTD basis. US domestic flights, which accounted for about 85% of all business jet cycles in the last 12 months, are setting the overall pace of the American market, growing 80% faster than international cycles over the past year based on the latest FAA information.
Worldwide, used business aircraft transactions (full retail sales and leases) have increased on a YoY basis through the end of May 2018 for both the business jet and business turboprop segments.
According to JETNET databases, there were about 1,600 retail sales and leases in the first five months of 2018, with jet transactions outpacing turboprops by a factor of about two-to-one.
Used business jet sales and leases were up about 1.4% YoY in the first five months of 2018, while turboprop transactions were up a more robust 5.1% YoY.
As we have discussed in previous issues of AvBuyer, ‘For Sale’ inventory continues to decline as a percentage of the installed base, representing about 9.1% of the jet fleet and 6.6% of the turboprop fleet as we went to press.
Business jets that are transacting are averaging about 300 days on market, which is down about 7.5% YoY, based on about 1,100 transactions.
Aging Fleet ‘For Sale’
Of the approximately 3,000 business jets and turboprops currently listed ‘For Sale’ worldwide, almost half (~47%) were factory-delivered more than 20 years ago, when the term ‘Millennial’ was more closely associated with an impending Y2K computer doomsday than an up-and-coming generation of consumers, who at the time could not differentiate between the pointy end of an airplane and that of their milk bottle.
The current generation of buyers of business aircraft can certainly not be faulted for excluding all but the most modern, reliable, efficient, WiFi-enabled, glass-configured, and ADS-B compliant aircraft in their consideration set.
Classic aircraft on their radar are more likely to be turbine-converted de Havilland Beavers on floats than Hawker 125-700s, even though the price points are about the same.
Within the business turboprop segment, more than 62% of the ‘For Sale’ fleet is more than 20 years old, a market opportunity that has not been lost on OEMs from Stans to Wichita, from Vero Beach to Tarbes, Victoria and beyond.
A Note on Transaction Prices
Anecdotally, transaction prices have at least stabilized (if not increased somewhat), at least on an overall basis as macroeconomic forces coupled with prudent (read ‘flat’) new aircraft production rates continue for the time being.
Consolidation forces impacting the commercial aircraft segment (UTC and Rockwell Collins; Airbus and Bombardier; Boeing and Embraer) may seem of little direct interest to the business aircraft transaction community in the heat of August, but these developments could very well shape industry competition and product development investments for years, and years to come.
How these strategies impact business aircraft markets, OEMs and service providers is something we will be watching closely over the next months and quarters, with the potential upside that is something for all of us to ponder...
Flight Activity - North America
Year-over-Year flight activity (June 2018 vs. June 2017) indicates that June 2018 recorded a decrease of -0.1%. Business Aviation flight activity also posted an expected Month-over-Month decrease to finish down -2.6% from May 2018…
The Year-over-Year results by operational category were mostly red, with Fractional activity showing the largest yearly decline. Part 135 activity recorded six fewer flights to remain flat. Aircraft categories were mixed with Large jets posting the largest gain from 2017, though Light jets and Turboprops posted YoY declines.
Results by operational category were all negative Month-over-Month, with the Part 135 segment posting the largest monthly decrease. Aircraft categories were all negative too, with Mid-size jets leading the way.
Next Month’s Forecast
Looking ahead to July’s activity, TRAQPak analysts estimate there will be a 3.6% increase in overall YoY flight activity.
Flight Activity - Europe
According to WingX-Advance, there were 89,289 Business Aviation departures in Europe during June, a 4.4% increase YoY. Year-to-Date (YTD) growth stands at 2.7%, compared to 3.3% over the last 12 months. June 2018 was 0.4% less busy than June 2008.
There was growth in activity across all the big markets (though fairly modest in France). Activity was up 4% in Italy; 5% in the UK; 7% in Germany and Spain; and 9% in Switzerland. After six months of the year, Spain and Germany had the strongest growth trends (+5%) versus H1 2017.
Elsewhere, June saw 11% growth from Ireland, 12% from Russia and 33% from Portugal. YTD, flights from Greece are up by 14%.
Growth this month came mainly from flights within Europe, up 5% YoY. There were, however, exceptions with domestic French activity being flat and flights between Germany and France falling more than 10%. Flights to the Middle East fell 9%, and flights to the US fell by 1%.
Charter and Fractional activity drove the demand in June, with AOC jet sectors up by 7%, (and more than 10% from Switzerland and Russia). Ultra-Long-Range and Light jet AOC activity was up more than 10%, with Super Mid-size jets gaining more than 20% YoY.
“As anticipated, this summer is seeing strong growth in Business Aviation activity, with activity levels finally back where they were a decade ago,” summarized Richard Koe, Managing Director, WingX. “Demand in Germany is providing much of the momentum. So, too, is the growth in flights to top Mediterranean resorts in Croatia, the Balearics and Cote d’Azur...Overall, Light jets are adding most of the growth in European activity.”
ADS-B: What to Consider Before Buying an Unequipped Jet
Is now really a wise time for would-be aircraft owners to be buying jets that don’t have ADS-B installed yet? If so, how should you negotiate on a sale price accordingly? American Aircraft Sales’ Jet Tolbert discusses…
For the present an offer for an aircraft that is not ADS-B equipped should be adjusted to reflect the upgrade cost dollar-for-dollar, as compared to aircraft that are already equipped to comply with the mandate.
While it is true that shop space has tightened (we’re hearing of some MROs turning away stand-alone ADS-B installations), there are still several satellite shops within the US that will provide installations with a couple of months’ or even weeks’ lead-time. We wouldn’t recommend waiting till the very last minute to comply, however.
Many of the bigger MROs will still install ADS-B upgrades, however ADS-B-only jobs requiring several weeks of downtime are getting pushed to the back of the queue with priority given to the projects that combine large maintenance packages or other upgrades in conjunction with the ADS-B upgrades.
Offers Reflecting ADS-B Pricing
It’s true to say that prices for ADS-B have come down since the first solutions were being introduced. In the last year, as more options became available some lower-cost solutions have come to market.
However, the level of capability provided by each solution can vary – and in some cases the only way to comply with the ADS-B mandate that will allow future upgrades is to use the solution being offered by the aircraft’s OEM, which may still be comparatively costly.
Aircraft buyers who are considering purchasing a used aircraft that does not yet comply must have a strong understanding of the upgrade options available to any aircraft they’re considering for purchase and adjust their offer to reflect these.
The closer we come to the January 1, 2020 deadline, the harder you will need to think about the offer you make for an unequipped aircraft. While there is still time to buy an aircraft and upgrade it before 2020, any acquisition of an unequipped aircraft will certainly need to account for the maintenance status and compliance options for ADS-B.
With the hard deadline for compliance looming, it is imperative for buyers to have a plan for compliance before purchasing their aircraft.
JETNET Sees High Optimism in BizAv Market
70% of the 450 business aircraft operators surveyed by JETNET iQ to date believe the current market cycle is now past the low point.
“In seven and a half years of doing this work, we’ve never seen stronger numbers,” Rollie Vincent, co-founder JETNET iQ commented. “We’ve been in the doldrums the past several years, but we’re very optimistic about what we are seeing.”
Paul Cardarelli, JETNET’s VP sales, noted that the percentage of jets on the used market has declined from a high of nearly 18% in 2009 to just over 9% in the most recent data, indicating a switch from a Buyers' to a Sellers' market.
Cardarelli estimates that 45% of the approximately 2,000 available used jets are antiquated aircraft and unlikely to sell, indicating that the young inventory is evaporating.
Yet, the company noted, not all was positive. The approximately 4.5m cycles by the US business jet fleet last year were accomplished by more than 14,000 aircraft. In 2003, fewer than 9,000 business jets achieved that number of cycles.
“This is something that gives us a bit of concern about Business Aviation,” said Cardarelli. “We’d like to see this per-aircraft utilization back where it once was.”
Bizjet Pricing: Worst is Over
Bloomberg says the worst is over for the business jet market as prices for low-time used jets have started inching up…
The news organization said an expanding economy, lower corporate taxes and a bizjet-friendly president have taken the chill out of the market and buyers who were sitting on their money waiting for a better deal are now buying.
It also said the average price for used bizjets went up 1.5% in April and 2.4% in May. “What we’re left with now is [a] very light amount of inventory in the pre-owned sector of quality, late-model business jets,” Bloomberg quoted Joe Carfagna Jr., president of aircraft brokerage Leading Edge Aviation Solutions, as saying.
“It shifted from a buyer’s market to a seller’s market around the end of the year.”
OEMs have repeatedly cited the glut of almost-new aircraft that were virtually abandoned when the markets went sideways and even sector leaders like Gulfstream have admitted to weathering “headwinds” in the current market. But with the used market becoming “incrementally less attractive”, the fortunes for new planes, with all the latest technology, are looking better to potential buyers.
“We’re certainly seeing less competition from the used side,” Bloomberg quoted Scott Donnelly, CEO of Textron, as telling analysts. “There’s certainly not the number of them out there that created some of the issues for us on new aircraft sales in the past.”
Growing Asia-Pacific Charter Demand
Interest and utilization of business jet charter is growing in Asia-Pacific, according to Asian Sky Group (ASG)…
According to ASG’s second Asia-Pacific Business Jet Charter Report, 311 business jets were used for charter in the region in 2018, a 5% increase over 2016. Furthermore, the business jets being utilized for charter represented 26% of the total regional business jet fleet.
The Asia-Pacific charter market saw 84 business jets added, while 69 were removed from the market.
- Among the additions were 57 aircraft that changed their mission to charter, 25 used and two new deliveries.
- Deductions included 37 aircraft that were no longer available for charter, 19 sold or relocated, and 13 placed into retirement.
Unsurprisingly, mainland China had the largest (40%) fleet expansion over 2016, while the Philippines followed with 30% fleet growth.
“After two years, the regional charter fleet has seen growth, directly correlated to the overall regional business jet fleet. Charter is now in higher demand and operators and brokers alike are accommodating this in all ways possible," said ASG Managing Director, Jeffrey Lowe.
"This increased utilization and need for business jet charter means there will equally be an increased interest in where the market stands.”
In-Service Aircraft Values and Maintenance Condition
Asset Insight’s June 29 market analysis covering 93 fixed-wing models and 1,599 aircraft listed ‘For Sale’ revealed a 3.5% decrease (58 units) to the tracked fleet, while average Ask Price increased substantially…
In terms of inventory reduction, Large jets led the way (-7.3%), Small jets followed (-3.9%), then Turboprops (-3.5%) and finally Medium jets (-0.9%). Average Ask Price climbed 7.8% in June and saw a total increase of 1.2% during Q2 2018 and only a nominal loss of 0.3% YTD in 2018.
The inventory of young, low time assets has decreased to the point where some buyers have resorted to pursuing aircraft not listed for sale, and such transactions have a tendency to increase values. At present, this is particularly true with respect to the Large jet category.
Inventory Fleet Maintenance Condition
Large and Medium jet asset quality saw a second consecutive monthly improvement while Small jet and Turboprops quality degraded. Maintenance Exposure increased (worsened) for all but Medium jets.
Overall, Quality Rating fell to ‘Very Good’ as the figure decreased to 5.199 on Asset Insight’s scale of -2.5 to 10. Average Maintenance Exposure (an aircraft’s accumulated/embedded maintenance expense), meanwhile, increased (worsened) 1.9% to $1.438m, a figure worse than the twelve-month average.
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%. The June analysis revealed that 51.3% of all tracked models and 62.5% of that fleet posted an ETP Ratio more than 40%.
The tracked fleet’s ETP Ratio worsened each month during Q2, climbing to 67% from May’s 64.8%. Turboprops continued to post the lowest (best) ETP Ratio (52.4%); Large jets followed (59.8%), up over May’s 62.6%; Medium jets posted a record high (worst) figure (72.1%); and, Small jets worsened to 74.5% (from 72.8%).
Large Jets: Inventory aircraft decreased by 25 units and the fleet has now retained its ‘Excellent’ Quality Rating for 13 consecutive months, rising to 5.394. However, the group’s Financial Exposure experienced a 2.2% increase (its third consecutive degradation) as the remaining inventory has more expensive maintenance in its future than the transacted units.
It would appear buyers acquired Large jets while asset quality was high. Seeing limited options, some sellers have opportunistically elected to raise pricing, and average Ask Price climbed 18.2% to a 12-month high figure.
Medium Jets: In May we advised that timing could not be better for those seeking a Medium jet. We were wrong. June’s figures improved further, with Ask Price falling 7.1% to post another record low, while Asset Quality rose nominally – maintaining a ‘Very Good’ rating – and Maintenance Exposure improved an additional 1.2% to a new low (best) 12-month figure.
We expect challenges for sellers to continue due to the large number of assets listed ‘For Sale’.
Small Jets: The group experienced strong sales in June, with the inventory level dropping 19 units. Assets leaving inventory leaned toward higher quality, resulting in the ‘For Sale’ fleet experiencing a worsening in both Quality Rating (-1.94%) and Maintenance Exposure (+3.3%). The group managed to retain its ‘Excellent’ Quality Rating.
Sellers of above average assets can generate better pricing, assuming they are able to justify their aircraft’s quality relative to their model’s competing listings.
Turboprops: As proof that higher quality assets are the ones primarily transacting, the group’s Quality Rating dropped to ‘Good’ as its Quality Rating decreased 4.1% while its Maintenance Exposure increased (worsened) 6.5% - both being 12-month worst figures.
Total inventory decreased nine units, while average Ask Price remained relatively stable. Based on these changes, the group’s ETP Ratio registered a 12-month high figure. Buyers can identify some good values through an appropriate level of due diligence, but statistics slightly favor sellers at present.