What’s the health of the Business Aviation marketplace moving into August? What’s impacting the current market trends, and how are prospective buyers approaching new and used aircraft sales with talk growing that a recession could be on the horizon?
Used/pre-owned retail jet transactions (whole aircraft sales and leases) were down 20% Year-over-Year (YoY) through June 1, 2019 compared to the same period in 2018, according to JETNET databases.
Meanwhile, used jet inventory has been on a slow but steady increase, with more than 2,100 jets listed as for sale – representing 9.6% of the worldwide fleet – at press time.
Limited availability of late-model inventory, particularly of the more popular models, continues to confront and no doubt frustrate would-be customers and their dealers and brokers. In the Light Jet segment, just 16 Embraer Phenom 300/300E aircraft (3.2% of the worldwide fleet of more than 500 jets) were on-market as of mid-July.
The situation mirrors that of the Super Mid-size Jet segment, where only 10 used Bombardier Challenger 350 aircraft are listed (3.3% of the installed base of almost 300 aircraft). And availability is only marginally higher in the Large Jet segment, with 27 Gulfstream G550 aircraft (4.7% of the worldwide fleet of almost 575 aircraft) available for purchase according to industry listing services.
OEM Health Check
At press time, it was too early to know how the OEMs were performing on various key metrics, including orders, deliveries, backlogs and book-to-bill in Q2 2019. Results from Q1 2019 were generally encouraging, with a notable uptick in book-to-bill performance bolstered by several fleet deals, including a $1bn order for 14 Gulfstream G650ER and four Gulfstream G500 jets from Qatar Executive.
The backlog increased by an estimated 6% in Q1 2019 at the ‘Big Five’ business jet OEMs over 2018 Year-End results, based on the latest JETNET iQ estimates. Much of the order activity is reportedly for newly or recently certified models as customers continue to be attracted to the latest and greatest technologies on offer. Our current outlook is that the momentum of orders and backlog will be enough to support ‘somewhat higher’ overall delivery rates, at least through 2019 and 2020.
Depending upon its severity and duration, an economic slowdown in the next 12-24 months will cause industry leaders to reset output rates and almost certainly make some of the tough, but necessary calls to take certain low-volume models out of production.
This has important implications for future residual values, and should, in our opinion, be factored into purchase offers for both new and used models.
Buyer Sentiment Update
The sentiment of business aircraft owners/operators has slipped back over the past year, after reaching a post-2008 crisis peak in Q2 2018. About 32% of respondents to the Q2 2019 JETNET iQ Survey believe that we have not yet reached the low point in the current business cycle, up from just 15% one year ago.
The drop in sentiment occurred in Q1 2019 and continued in Q2 2019, and is likely a reaction to a confluence of developments over the past several months that have destabilized economic activity. These include:
- A sharp stock market correction at the end of 2017;
- The 35-day partial shutdown of the US Federal Government;
- Seemingly endless back-and-forth volleys in what has become an escalation and expansion of tensions between the US and several of its largest trading partners, including China, Europe, Canada and Mexico;
- Hostilities towards Iran, Venezuela and most recently Turkey; and
- The mess that is Brexit which continues to fuel uncertainty on both sides of the Channel with the two leading candidates to replace UK Prime Minister Theresa May both vowing to pursue divorce from Europe at almost any cost, including a ‘hard Brexit’.
The latest forecasts of 2019 GDP growth in the US and Europe have been scaled back. As of its early July forecast update, The Economist’s poll of forecasters reset US GDP growth to 2.2% in 2019, while Germany’s economy is expected to expand at just 0.8%, with France (at 1.2%) and the UK (at 1.3%) not faring much better.
US after-tax corporate profits closed out 2018 above $2tn on an annualized basis, an unprecedented level that continues into 2019 based on the latest information from the US Bureau of Economic Analysis. Generally speaking, companies are continuing to allocate a significant proportion of these proceeds to share buybacks and dividends, which is fueling stock prices.
The lofty trajectories of bellwether US stock market indices, including the Dow Jones Industrial Average and S&P 500, apparent favorite metrics of US President Donald Trump, are bright on the radar as investors weigh these positive indicators against other developments, including slowdowns in international trade and investment, and inverted yield curve in the US Treasuries.
Historically, yield curve inversions, where the interest rates offered for short-term bonds are higher than for the benchmark 30-year US Treasury bond that matures in 30 years, have preceded the last seven US economic recessions, including the most recent four recessions in 2007-2008, 2001, 1991 and 1981-1982.
What Does This Have to do With BizAv?
Investment, trade, and travel decisions are tightly linked with the sentiment of business leaders, high net worth individuals and their families – many of whom remember only too well the horrors of the 2008 worldwide financial crisis and its immediate and longer-term aftershocks.
The risk of a US recession is now on an increase, ironically just as the nation’s economy extends its record-length expansion. A June 7-12, 2019 poll of economists published by Bloomberg suggested that the risk of a US economic recession in the next 12 months has risen from 25% to 30%.
Excluding the 12% who were uncertain, fully 18% of respondents to JETNET iQ’s Q2 2019 Survey of business aircraft owners and/or operators in 59 countries ‘strongly’ agreed with the statement: “I believe that there is an increasing risk of a global economic slowdown in the next 12 months”, while a further 47% were ‘somewhat’ in agreement.
Naysayers might be quick to point out that simply talking about the possibility (let alone the probability) of a recession does little but encourage its eventual onset.
While there may be some dark logic to that approach, our view is that business aircraft buyers and sellers are already factoring in the potential for changes in the market, especially with exogenous factors like Brexit and another highly contentious US Presidential election already in play.
BizAv Flight Activity – North America
TRAQPak’s review of Year-over-Year (YoY) flight activity indicates that June 2019 recorded a decrease of 0.5% compared to June 2018. Flight activity also posted a Month-over-Month decrease to finish down 4.2% from May 2019…
The results by operational category, YoY, were mixed with Fractional activity posting the only increase from June 2018. Part 91 activity cooled for the period to record a drop while Part 135 activity declined for the thirteenth straight month.
The aircraft categories were mostly negative with Mid-size Jets posting the only increase from 2018. Large Jets posted the largest decrease.
North American Flight Avtivity - June 2019 vs June 2018
Results by operational category were all negative compared with May 2019, with Part 91 flight activity posting the largest decrease. Aircraft categories were also down for the month with Large Jets posting the largest decrease.
North American Flight Avtivity - June 2019 vs June 2018
Forecast for July Activity
TRAQPak analysts estimate there will be a 1% increase in overall flight activity Year-over-Year in July 2019.
BizAv Flight Activity - Europe
According to WingX, 87,236 Business Aviation departures in Europe during June 2019 made it the busiest month of the year so far. But flight activity is still down in the region by 1.7% YoY. Trailing 12 month flight activity is flat for Europe…
Turboprop activity was most severely impacted with flights down 6% (-9% in AOC). Business jet flights also declined 2% (charters were flat while owner-flown activity slipped). In June, Large Jet flights were up by 3.4%, with Small and Mid-size activity down 3.9%.
The top market in June was France where departures gained 4% YoY. Flights out of the UK fell 6%, and slumped 11% in Germany. Another key market, Spain, saw departures grow 9% YoY during July. YTD, activity in France remains down 1%, while the UK, Germany and Switzerland have recorded declines ranging between 3% and 5%.
Charter/AOC activity fell sharply in the UK, Germany and Switzerland, but gained 5-10% in Spain, Netherlands and Greece. Private flights, meanwhile, were well up in Belgium and Spain but well down in Germany and Russia.
Although Business Aviation traffic was down 2% within Europe in June, flights to North America and Latin America were up 5% and 23% YoY, respectively.
“All but one month this year so far have seen declines in flight activity compared to last year, with the first half of 2019 some 2% down on 2018,” Richard Koe, managing director, WingX summarized. “Clearly this reflects the gloomier macroeconomic picture, with Germany´s economic slowdown and the UK´s Brexit chaos reflected in significant declines in flight activity from both countries.
“Much of the Charter market is up for grabs in the next two months, and suppliers will be hoping that some early summer growth in hotspots like Mykonos, Ibiza and Nice are signs of that demand staying robust through the third quarter of the year.”
Jetcraft Expands on Market Forecast
Having released its Five-Year New & Pre-Owned Business Aviation Market Forecast recently, Jetcraft’s Chad Anderson provided a further breakdown of the findings…
The findings within the Five-Year New & Pre-Owned Business Aviation Market Forecast showed that our industry will continue to grow in size, scale and strength over the next five years, hitting nearly $30bn in revenue annually by 2023.
“This is the first time a value like this has ever been assigned to the industry,” Anderson notes. “We also expect to see the Business Aviation fleet grow by 12.1% in that timeframe.”
The forecast also predicted continued and significant growth in the pre-owned industry, with an expected 11,765 transactions over the next five years, totalling $61bn in value. “By 2023, we forecast four times as many pre-owned transactions vs. new deliveries,” Anderson elaborates, “primarily due to the growing value proposition of these aircraft.
“Maintenance capabilities are increasing, and we’re seeing greater accessibility, rapidity and cost-efficiency of high-quality refurbishment. This is resulting in higher demand for older or out-of-production aircraft, including amongst buyers who previously exclusively bought new models.
“Our forecast reveals that the average aircraft retirement age is now 32 years – nearly a decade older than previously thought.”
A continued shift towards large aircraft types in both new and pre-owned markets worldwide has also been seen. “Buyers are looking for larger and longer-range models and as a result of this, manufacturers are focusing on producing aircraft almost entirely in the Mid-size segment and above,” Anderson notes.
New unit deliveries are predicted to stay flat throughout the forecast period whilst generating higher revenues, due to the increase in large aircraft transactions. “Over the next five years, we’ll see many more customers turn towards Large Jets rather than Light Jets, as the needs of business travellers evolve on a more global scale,” Anderson projects.
Observations on Business Jet Values
Cirium shared the perspectives of senior analyst Daniel Hall recently about business jet values. Following are his key observations…
- Business jets are depreciating assets – but there is far from an accepted approach on how to deal with residual value forecasting.
- Value retention is dynamic. Cirium’s analysis using actual market values (rather than list prices) tells us that five-year-old business jets have averaged at 61% value retention from their original value when new. Since 2012, this has translated to 9.4% depreciation per annum in years 0-5; preliminary 2019 data shows a marked improvement in Small and Medium category aircraft.
- The overall health of the business jet market has improved by some metrics, one of which pertains to values. A strong 2018 resulted in just a 3.5% YoY decline in Current Market Values from 2018 to 2019. However, the volatile past five years cannot be ignored when projecting residual values in absence of other methods.
- The concept of Base Value is an important tool for financiers and lessors to manage their future asset risk. It has been stated that “residual values are flattening out now as a result of the market pickup”. This is an extremely risky approach to take. This analysis illustrates examples of this and discusses the concept of a balanced market.
- The analysis further substantiates the need to use external and impartial sources to validate the internal analytics being conducted to support investment decisions. Aircraft value forecasts are a cornerstone of any asset risk strategy. A prudent investor would be wise to take a range of opinions from more than one source.
In-Service Aircraft Values & Maintenance Condition
Asset Insight’s latest market analysis covering 96 fixed-wing models and 1,680 aircraft listed for sale was conducted on June 30, 2019 and revealed a 1.6% inventory increase to the tracked fleet (+27 units). Here are the details…
Large Jets posted the largest percentage increase (5.9%) while Medium Jets and Turboprops each registered a 1.2% increase. By contrast, Small Jet inventory decreased 0.5%.
Ask Prices for the tracked fleet decreased 1.1% in June but the figures were up 0.7% for Q2. All four groups averaged a lower Ask Price in June, but Medium Jets were able to end Q2 with a higher figure than Q1.
Inventory Fleet Maintenance Condition
Fleet asset quality deteriorated for the second consecutive month, posting a 0.3% decrease in June, although the Q2 ending figure was an improvement over Q1.
Maintenance Exposure improved 3.1% for the month (and 1.1% for the quarter) signifying more maintenance events will be coming due to the inventory fleet but their average cost will be somewhat lower. Overall, the tracked inventory posted the following figures:
Quality Rating:Only slightly better than the 12-month worst figure, with the Rating remaining within the ‘Very Good’ range after decreasing from 5.212 to 5.196 on Asset Insight’s scale of -2.5 to 10.
Maintenance Exposure:The figure was $15k better than the 12-month average as Maintenance Exposure (an aircraft’s accumulated/embedded maintenance expense) decreased to $1.4m from May’s $1.45m.
Asset Insight June 2019 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, usually by more than 30%. During Q2 2019, assets whose ETP Ratio was 40% or more were listed for sale 71% longer on average than aircraft whose Ratio was below 40% (226 versus 386 Days on Market).
June analytics also revealed that over 52% of all tracked models, and nearly 62% of Asset Insight’s tracked fleet, posted an ETP Ratio above 40%. The tracked fleet’s ETP Ratio improved in June, decreasing to 65.4% from May’s 69.8%.
For the first time ever, Large Jets posted the lowest (best) ETP Ratio at 52.5% (which was also the group’s 12-month best figure), followed by Turboprops setting the group’s all-time highest (worst) Ratio at 56.6%. Small Jets were third with a Ratio of 68.8% while Medium Jets improved slightly, decreasing to 75.2%.
Asset Insight June 2019 Exposure to Price Ratios
Following three consecutive monthly increases, average Ask Prices decreased in June to just above the 12-month low figure. At the same time, asset availability rose to four units shy of April’s year-to-date high inventory figure.
While this may create some opportunities for buyers, sellers must swallow hard and quite possibly accept a price they never thought they would.
Large Jets:Availability expanded by 21 units in June. Between departures and additions to inventory, the new mix has led to a 12-month high (best) Quality Rating, along with a near 12-month low (best) Maintenance Exposure figure.
At the same time, the average Ask Price hit a record low figure in June, as values decreased 8% during Q2 (and -13.3% since December 2018). Sellers may not be happy, but buyers have some of the best opportunities this year to extract real value out of a deal – assuming they run the necessary analytics.
Asset Insight June 2019 Large Jet Fleet Analysis
Medium Jets:Asset quality improved nearly one percent in June and over 2.8% during Q2, while Maintenance Exposure improved 4% and 1.4% during the same time periods.
Six units joined the inventory fleet, and while all this jockeying did not dramatically improve the group’s ETP Ratio, June’s figure was at least better than the 12-month average, which will undoubtedly help some sellers.
As for buyers, average Ask Price receded 1.3% in June, but the group’s values appear to be holding well with an increase of 7.5% during Q2 and 11.2% since December 2018. If you’re in the market for one of these aircraft, take care not to select a lower-priced asset at the expense of true value.
Asset Insight June 2019 Medium Jet Fleet Analysis
Small Jets: With an aircraft inventory decrease of three units and mostly higher quality assets transacting, the Small Jets ended June with some unusual figures. While asset quality worsened more than 2% for the month and 3.2% for Q2, Maintenance Exposure improved 11.4% for the month (primarily due to a lower anticipated cost for upcoming maintenance events) yet posted a 6.7% degradation for Q2.
Average Ask Price fell 1.2% in June, and 1.8% during Q2, and the figures for that month – while hovering around the 12-month average – was virtually identical to pricing posted in December.
Maintenance associated with aging aircraft is the primary cause behind these odd statistical changes, and buyers are cautioned to focus on overall cost during their planned ownership period – not just the cost of acquiring the asset.
Asset Insight June 2019 Small Jet Fleet Analysis
Turboprops: Year-to-date, buyers of Turboprops have focused on higher quality assets, thereby leading to a steady degradation of inventory Quality Rating and Maintenance Exposure figures.
June continued this trend with asset quality worsening a slight 0.4% (2.2% during Q2), and Maintenance Exposure worsening 2.5% (6.3% for Q2). With pricing decreasing 1.6% in June (2.4% for Q2, and 3.5% since December), the group’s ETP Ratio rose (worsened) to a record-high figure.
Quality assets are still available, but they have become more challenging for buyers to identify with cursory analytics.
Asset Insight June 2019 Turboprop Fleet Analysis