Business Aviation analyst Rollie Vincent takes stock of the marketplace as 2020 looms large on the horizon. How should those in the market for a business aircraft be playing their cards right now?
Destructive weather patterns. Divisive political rhetoric. Divergent market indicators. The state of the Business Aviation market never ceases to be a study in complexity. Behavioural patterns that might have made sense and been predictable are today more nuanced and context-specific…
For buyers and sellers of high-dollar assets such as business aircraft, the stakes at year-end have been upped, and the game table set for players who know the lay of the land and can act decisively to seize opportunities and win. Business aircraft transaction professionals are facing a very different landscape than they were just 12-18 months ago.
While the rules are still basically the same, times have changed, and a new set of cards have been dealt. Some around the table are well prepared having seen something resembling this before. Others seem obliviously less so.
As with any deadline, decision time is looming: Are they “all in”? Ready to cash out? Or about to fold? As California burns, Hong Kong riots, Venice floods, and Washington and Westminster fume, the world manages to turn.
A Divergent Market
If there is one term that defines today’s Business Aviation market, ‘divergent’ probably fits as well as any. According to the good and studious folks at Cambridge Dictionary, the term typically refers to pathways or directions that are, well, different.
Divergent interests, approaches, inquiries and initiatives invariably attract different followings, convictions, momentum and rates of progress. While that might seem straightforward enough, what has always and ultimately worked in the past – mutual collaboration, joint actions, common objectives – have taken backstage to headlines touting the extremes.
While these may make for eye-catching headlines, at the end of the day even a simple DNA analysis would indicate that we are all about 99.9% the same, living together with minimal differences and without a Planet B.
Forces outside the day-to-day world of Business Aviation flight operations - macroeconomics, geopolitics, climate change, the Internet of Things – are undeniably changing the way business aircraft markets operate. The good news is that many of these extraneous factors are simply doing what they have always done, but in different ways, with divergent outcomes. They’re shaping the way we live, play, work, travel and plan.
What continues to change is the rate of acceleration at which events pop onto our individual and collective radar screens, each seemingly vying for attention and mindshare in a world that contrasts substantially with the one that our parents knew.
Business Aviation leadership in times like these is not for the uninformed and unprepared – we believe that the key is to sift through the distracting noises and visual information overload to focus on the vital few indicators that clarify and illuminate the pathway ahead.
On the one hand flat flight operations; increasing levels of pre-owned inventory for sale; an aging fleet with diminished market value; and an ADS-B Out regulatory compliance deadline in the one key country market that accounts for >60% of the world business jet fleet.
On the other hand, sparkling new aircraft and service offerings with got-to-have features and technologies that are tempting (to say the least) as the customer continues to find themselves exactly where they should be - at the industry’s center of attention.
The ‘Haves’ and ‘Have Less’
While the business aircraft OEMs enjoy better times, with a long-awaited firm order uptick that is refilling contractual backlogs and providing much-needed momentum, the fortunes of those who have and those who have less appear to be increasingly divergent.
The latest JETNET iQ forecast of demand for the next ten years suggests that there will be ~7,100 new business jets delivered over the 2019-2028 period, at an average list price value of $32m each (i.e. something that looks a lot like a shiny new Falcon 2000 or Challenger 650).
This is a far cry from when our parents’ generation was buying and selling aircraft (even 20 years ago). Back then, the typical new business jet commanded a price much closer to $10m and looked conspicuously more like a Mid-size Jet than today’s Large Cabin beauties.
The market has clearly changed - with OEMs and those individuals and organizations who could afford the table stakes collectively upping the ante – as larger and more capable business jets enter service.
Buyers of earlier-generation aircraft, whether still in production or not, can truly leverage their dealt hand and leave the table with good deals, especially if they are not expecting to fly halfway across the world non-stop.
There continue to be some amazing opportunities in the marketplace but finding the right aircraft and ensuring all the complexities of the various contract details are managed well are roles best managed by business aircraft transaction specialists.
In a world of divergent energies, alternative interpretations of information and heightened uncertainty there has perhaps never been a more important time to work with a trusted aircraft dealer/broker. They are best placed to provide just the right insights and intelligence that these deals demand.
For those taking a bigger picture view of the environment – investors, financiers, and market-makers – the time to play an ace or two is fast approaching.
With macroeconomic storm clouds looming and business sentiment diminishing, a market and weather update – and a tightening of the seat belt – sound like good ideas, regardless of whether you command the front or back office of the aircraft.
Flight Activity - North America
In North America, Year-over-Year (YoY) flight activity recorded a slight 0.5% increase for October 2019, compared to October 2018. Moreover, a 6.8% increase was recorded in October, compared to September 2019 according to ARGUS TRAQPak…
By operational category YoY results were mostly in negative numbers during October. Fractional activity was the exception to the rule, posting the only increase.
In contrast, the results by aircraft category were mostly positive. Light Jets posted the largest increase compared to October 2018, and Mid-size Jets weren’t far behind. Turboprop activity recorded the only yearly decrease.
Month-over-Month Activity Trends
October’s Business Aviation flight activity posted the expected Month-over-Month (MoM) increase over September 2019. Results by operational category were all positive, with Part 135 and Part 91 flight activity posting the largest monthly increases. The aircraft categories were all positive, for the period, with Mid-size Jets posting the largest increase.
TRAQPak analysts estimate there will be a nominal 0.1% increase in overall flight activity YoY in November 2019.
Flight Activity – Europe
According to WingX Advance, in October 2019 there were 74,420 Business Aviation departures in Europe, which was essentially flat compared to October 2018. The rolling 12-month trend for Europe was down 1.4%.
In these latest results, business jet AOC activity was up for the first time in 2019, though private flight activity declined 5% YoY. Overall Business Aviation flying was up in France during October (boosted by turboprop activity), but that contrasted with declines in other major markets – most notably a 6% drop in activity out of the UK, and a 5% decline in Germany (where Large Jet activity fell 6%).
Nevertheless, Germany did register an increase in charter activity.
“October’s flight activity shows some stabilization in demand after several months of decline,” says Richard Koe, managing director, WingX.
“Heavy and Super Mid-size aircraft are flying more, especially in the fractional and charter fleets. This reflects a raft of new aircraft models coming into the market in the last 18 months; notably the Cessna Citation Latitude and new Bombardier Global jets,” he added.
“Clearly there is still volatility in the market, with big dips in activity in key hubs such as London and Paris during October. Overall, Business Aviation is on track to lose around 2% activity in 2019 versus 2018.”
JETNET Q3 2019 Used Aircraft Market Update
JETNET released details of preowned business jet, turboprop, piston, helicopter, and commercial airliner sales for January-September 2019. In total, there were 6,402 used aircraft sold, a decrease of 954 compared with the same timeframe in 2018.
With 13% fewer sale transactions overall, compared to 2018, the piston helicopter market was the only one to show an increase, gaining four (0.6%) more used helicopter transactions.
Fleet for sale percentages for all market sectors except for business jets and piston helicopters were down in the September comparisons, increasing 1.5% (131 aircraft overall). Business jets showed the largest increase in percentage for sale compared to the other markets, up to 9.8% compared with 8.9% in September 2018.
Business jets are also showing a decrease (-16.9%) in pre-owned sale transactions, including leases, YTD (January-September) in 2019 compared to the same period in 2018. However, those transactions are taking nine fewer days to sell at 276 days on average.
The average days on the market for business turboprops increased by one day compared to last year as well, while sale transactions declined by 12.2%. And turbine helicopters showed a decrease of 9.7% in YTD sales transactions, whereas piston helicopters saw an increase of 0.6%.
Duncan Aviation: Shift in Focus From ADS-B Upgrades
In early November (with only nine weeks remaining until the FAA’s mandate deadline for aircraft to upgrade to ADS-B), Duncan Aviation noted a shift away to other upgrade types on other avionics equipment…
According to Bill Gunter, Oxford, Connecticut-based Duncan Aviation satellite avionics manager, most customers in the Oxford area have already upgraded, and Gunter had just one more ADS-B upgrade scheduled before the January 1, 2020 deadline (at the time of reporting).
Instead, he’s been fielding questions and preparing quotes for equipment that’s facing obsolescence.
“Some of our Gulfstream GIV customers are asking us about the Honeywell Service Bulletin for the Honeywell Laseref, the Inertial Reference Unit (IRU) system,” Gunter shares. “They’re interested in upgrading to the Laseref IV because the previous versions are facing obsolescence.”
Duncan Aviation’s US East Coast regional avionics manager Michael Kussatz knows there are still hundreds of aircraft throughout the US that need to be upgraded to ADS-B but has seen a similar shift in quote requests.
“Customers who have already brought their aircraft into compliance with the ADS-B mandate are requesting quotes for connectivity, such as the Gogo AVANCE L5 and L3,” says Kussatz.
“We’re also encouraging customers who are dealing with the obsolescence of their Honeywell Laseref II or III to take advantage of the financial incentives Honeywell is offering on upgrades to the Laseref IV, now through the end of 2019.”
In-Service Aircraft Values & Maintenance Condition
On October 31, 2019 Asset Insight’s monthly market analysis examined 96 fixed-wing models, comprising 1,769 aircraft listed for sale – an increase of 17 units compared to September. But how did the fleet for sale’s quality fare for the month?
The total inventory for Asset Insight’s tracked fleet has now increased 11.2% since December 2018. During October:
- Large Jet inventory expanded another 2.1%
- Medium Jets increased 1.1%
- Small Jet inventory rose 0.9%
- Turboprops decreased 0.7%.
Although down 1.4% since December 2018, the average Ask Price for the tracked fleet increased in October, with all four groups contributing. Three of the four groups are still below their end-of-year figure, however, with only Medium Jets posting a substantive 13.3% YTD Ask Price increase.
Inventory Fleet Maintenance Condition
Fleet asset quality remained virtually unchanged during October, while Maintenance Exposure increased (worsened) 6.1%. Overall, the tracked inventory registered the following…
- The for-sale fleet posted a nominal Quality Rating improvement during October, increasing to 5.218 versus September’s 5.217, and remaining within the ‘Very Good’ range on Asset Insight’s scale of -2.5 to 10.
- At $1.44m, Maintenance Exposure (an aircraft’s accumulated/embedded maintenance expense) closed October just shy of the 12-month high (worst) figure.
Maintenance Exposure to Ask Price (ETP) Ratio
The ETP Ratio is a useful indicator of an aircraft’s marketability and is computed by dividing the asset's Maintenance Exposure (the financial liability accrued with respect to future scheduled maintenance events) by its Ask Price.
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 Q3 2019, assets whose ETP Ratio was 40% or more were listed for sale 76.2% longer (on average) than aircraft whose Ratio was below 40% (218 vs 385 Days on Market).
October’s analytics also revealed that nearly 55% of the tracked models, and over 61% of the tracked fleet posted an ETP Ratio greater than 40%. During October, the tracked fleet’s ETP Ratio worsened to 70.9% (compared to September’s 64.9%), setting a 12-month high (worst) figure.
- Turboprops recaptured first place with the lowest ETP Ratio (55.8%)
- Large Jets dropped to second position (57.1%)
- Medium Jets remained steady at 74.3%
- Small Jets recorded their highest (worst) figure for the past 12 months (83.6%), surprisingly high compared to September’s 67.3%.
While mostly young, low-time jets are transacting (as are certain older models sporting high asset quality and upgraded cabin amenities), the inventory fleet continues to expand due to older aircraft being listed for sale whose owners often do not appreciate their inability to move such equipment at anything close to a ‘reasonable price’.
There are buyers willing to become the asset’s final owner, but they will only play that role based on a very low acquisition cost that makes it financially sensible for them to run the aircraft until its engines are no longer airworthy.
Large Jets: The tracked Large Jet inventory increased by eight units during October and has expanded by 37 units YTD (10.8%). Fleet mix changes worsened asset quality slightly, increased Maintenance Exposure and worsened the group’s ETP Ratio. Essentially, the higher quality aircraft were the ones that transacted in October.
There’s no question that September’s statistics set up some great value opportunities, and savvy buyers clearly took advantage in October. With asset quality still in the ‘Outstanding’ range and Ask Prices rising 1.4%, good values are still available, but locating them requires detailed analytics.
Medium Jets: There are fewer upcoming maintenance events for the latest Medium Jet inventory mix, but the cost to complete these is expected to be higher. Thus, Maintenance Exposure posted the group’s 12-month high (worst) figure in
However, Ask Prices increased 2.5% resulting in no change to the ETP Ratio. The problem sellers face centers on competition, as inventory increased by another six aircraft, creating a 10% YTD fleet expansion. Again, good values can be uncovered if buyers understand what they’re purchasing.
Small Jets: The tracked Small Jets posted a 1% Ask Price increase during October, but the good news ends there for sellers. Inventory increased by another five units and is now up 98 aircraft Year-to-Date (21%). For the latest inventory mix, asset quality fell >1%, Maintenance Exposure rose (worsened) >19% and the ETP Ratio skyrocketed from 67.3% to 83.6% (a 12-month high/worst figure).
The group’s Quality Rating has remained within the ‘Very Good’ range for the past five months, but it is trending lower, making it unlikely sellers will realize the latest price increase, especially during the most competitive selling quarter of the year.
Turboprops: Tracked Turboprop have posted ‘Good’ asset quality for the past nine months, while Maintenance Exposure and Ask Prices remained within a narrow band. Buyers seem to have a keen eye for creating value while not necessarily acquiring the highest quality inventory units.
The good news for sellers is the group’s inventory level, which decreased another two units in October and is now down 2.1% YTD. This may help them realize the 1.2% Ask Price increase.
New Business Jet Deliveries Forecast to Grow
Bizjet deliveries will grow 7% next year, and average 760 units annually throughout the coming decade, according to Honeywell’s latest forecast. By contrast, JETNET expects sales to average 700 to 710 units annually. Mike Potts analyses the two projections...
Honeywell’s forecast represents significant market growth compared to the past eight years when deliveries have surpassed 700 units only once. This year’s market is projected to total 690-700 units and Honeywell believe the years ahead will feature “a healthy market with steady annual growth”.
The recent upturn in the market, according to Honeywell, is largely driven by the introduction of new aircraft models. Honeywell’s forecast suggests the market will peak in 2020 or 2021, turning down by 2024, and then growing again toward the end of the ten-year forecast period.
At no point is the market expected to sink below the levels of 2018, which proved to be a pretty good year. But while Honeywell’s outlook is very good, the company doesn’t expect a return to the 1,000-plus unit years seen in 2007- 2008.
Overall Honeywell predicts the delivery of 7,600 jets worth $248bn for the period 2020-2029, down about 1.2% from the 7,700 units worth $251bn forecast last year (2019 to 2028). However, the difference between the two sets of numbers is statistically ‘insignificant’.
Reinforcing Honeywell’s outlook is JETNET iQ, which projects a slightly smaller market of 7,050 jets worth $241bn for the period 2019 to 2028. Thus, JETNET iQ expects business jet sales to average 700 to 710 units annually across the coming decade.
Like Honeywell, JETNET iQ expects the market to peak in 2020 then tail off gradually until 2023/2024 when it could reach as low as 600 units. This is forecast to pick up again, climbing to around 900 units a year by the end of the forecast period. (Interestingly, JETNET iQ expects the market to include some supersonic jets by 2027 that are not referenced by Honeywell.)
Forecast by Category
‘Big cabin’ airplanes will constitute 42% of the units sold and 73% of the dollars spent according to Honeywell, while ‘Midsize’ and ‘Small cabin’ aircraft will total 29% each. Mid-size purchases will total 19% of the dollars while Small cabins will account for just 8% of the total.
By contrast, JETNET iQ believes Large Jets will account for 28.3% of the units sold over the next one-to-five-years; Medium Jets 47.5%; and Small jets 24.2%, though the company does not project how the expenditures will break down.
The JETNET iQ forecast covers a wider range of subjects than Honeywell’s, including OEM backlogs, purchase intentions, inhibitors to aircraft purchases, perspectives on the industry and market sentiment.
Regarding backlogs, JETNET iQ notes that 2019 was the first time since the post-2008 financial crisis that the five key business jet OEMs (Bombardier, Dassault, Embraer, Gulfstream and Textron) have all seen increase in backlogs from the previous year.
JETNET iQ puts the H1 2019 backlog at $32.6bn (up from $30.5bn in 2018 and $30.7bn in 2017, but still lagging the $34.1bn the industry enjoyed in 2016 and well below the whopping $46.2bn that existed in 2014).
Regional Market Outlook
Honeywell breaks the market down by regions. In North America purchase expectations are off slightly, although Honeywell still expects the region to account for 60% of the jet market over the next five years. Slow economic growth and uncertainty related to Brexit are expected to curtail European jet purchases somewhat, but the region is still expected to account for 19% of global demand.
The Latin American market is stable, although purchase plans in Brazil may be down in the next year or so. The region accounts for 7% of global demand in the forecast period. Purchase plans in Asia and the Pacific Rim are running ahead of last year and the region should account for 10% of the jet market over the next five years. Fully 40% of purchases are expected in the next two years, the highest among all the regions.
In the Middle East and Africa political tensions and ongoing conflicts are tending to inhibit purchase plans somewhat, says Honeywell. These regions are expected to account for 4-6% of global demand, which is consistent with its historical performance.
In a final aside, Honeywell notes that 12-14% of jet sales over the next five years will be to fractional programs.
MI www.jetnet.com or www.honeywell.com