As 2019 gets underway, there’s much uncertainty around the world that could impact the buying decisions of business aircraft users. Rollie Vincent, Editor, Market Indicators offers his perspective of today’s market…
Aircraft sales professionals and their customers who fly in and around the US and UK should be as aware as anyone of the impacts of the unusual level of uncertainty that has been creeping into the marketplace.
With the two leading English-speaking democracies dealing almost simultaneously with the self-inflicted wounds of a prolonged government shutdown (in the case of America) and Brexit (impacting the future relationship between the UK and Europe), innumerable intended and unintended consequences have already become apparent.
Why, you may be wondering, should this be a concern to a business aircraft sales person or aircraft buyer? The livelihoods of Mary the TSA agent, Johnny the ATC officer, Annie the civil aviation authority analyst, Simon the pub manager, Jonathan the aerospace engineer, and Joe the plumber are all affected by events they feel powerless to control.
Today, they may be working without pay, serving a smaller clientele, preparing paperwork to transfer certain processes of authorizations onto the European Continent, or generally feeling somewhat powerless in the face of uncertainty. If there is one thing that the movers and shakers of industry should agree upon, it is that increasing uncertainty is one of the last things we all need right now.
Human nature is such that many people will hold off, or reduce spending, or will delay investment decisions when faced with unexpected change.
While these individual choices may not show up immediately in broad-based measures of economic activity (think national GDP statistics) 70% of the US economy is driven by consumer spending, and slower spending means slower growth.
On Sunday, January 20, 2019, fully 10% of US Transportation Security Administration (TSA) employees scheduled to work over the Martin Luther King, Jr. holiday (MLK Day) weekend took the day off, with many claiming they were not able to report to work due to financial limitations.
According to a TSA statement, this compares to 3.1% on January 20, 2018, a Saturday the weekend following MLK Day last year. Although the TSA does not provide these data by airport, it is known that higher rates at specific airports – including Atlanta Hartsfield International and other key airline hubs – has already necessitated the shutdown of some entry points.
Why, you might ask, is all this important to Business Aviation? Even though the commercial airlines are currently preying on talent anywhere they can find it (including BizAv), Business Aviation companies are highly dependent on a fully-functioning commercial airline system to be an attractive and cost-effective logistics partner - moving people, parts and components wherever needed.
Logistics disruptions can quickly lead to clogs in the system that rival the Great London Fatberg, especially when you sprinkle in a winter storm as hit the US Northeast on MLK 2019 weekend. Despite all honest efforts, this can be a clog that even Joe the plumber may be ill-equipped to handle (assuming, of course, that he did not also call in sick).
Business Aircraft Market Indicators
So, what were some of the key indicators of the health of the business aircraft market in 2018, and what do we expect in 2019? Although the final numbers are still being tallied, the good news is that the US Gross Domestic Product (GDP) looks to have grown by 2.9% in 2018, a respectable performance and almost double the 10-year average of 1.5% measured from 2008-2017.
Fueled by mostly one-time impacts of the US tax and depreciation law changes and a spike in government spending, the US economy motored on, at the expense of higher long-term debt and increased budget deficits, even though the US is not fighting a major war or still recovering from an economic recession.
A consensus of forecasts suggest that the US economy will grow at about 2.2% in 2019 (similar to the pace last seen in 2017) after the past year’s flirtation with a 3% growth rate.
Just five of the ‘top 20’ national economies that are important to Business Aviation are believed to have grown at a rate in excess of 3% in 2018, although these collectively are home to less than 5% of the world’s business jet fleet.
From a business aircraft sales perspective, new business jet deliveries in 2018 appear to have come close to 2017’s numbers, at least based on units. The much-anticipated GAMA shipment report is due for publication on February 20, at which point we will have a clearer picture of how the year ended.
At this point in time, we estimate that 2018 business jet shipments were down about 2-3% YoY, excluding the single-engine Cirrus Vision Jet as well as twin-aisle Boeing and Airbus business jetliners.
Used business jet retail sales were virtually identical in January-November 2018 (with 2,425 jet sales, as recorded by JETNET) as they were in the same 11-month period in 2017.
Paperwork related to sales in the always-strong month of December was still being reviewed at press time, but if 2017 was any indication, sales in December 2018 may have approached last year’s final month tally of 325 jets.
Despite the stimulating impact of the US tax and depreciation laws on year-end 2018 sales, the industry closets of available inventory are becoming increasingly bare.
With just 8.9% of the business jet fleet listed for sale in JETNET databases at press time (that’s a little more than 1,900 aircraft), almost half of that inventory is more than 20 years old. Although December 2018 will probably be remembered as a very good sales month, it is unlikely to have matched the post-recession high of 397 jets sold in the final month of 2015.
What should industry sales professionals and their customers look forward to in 2019? Economists are predicting broadly slower GDP growth in 2019 in North America, Europe, and key markets in Asia Pacific, with a few countries (like rebounding Brazil) being notable exceptions.
Limited inventory, a very strong US$, expectations for a slowdown in YoY corporate profit growth, a continuation of last year’s gyrations in equity markets, the harsh realities of a dysfunctional US Government, and the distinct possibility of a ‘hard’ Brexit with no intergovernmental agreement will likely conspire to dampen the enthusiasm of business aircraft customers.
In such an environment, some of the spoils, as always, will go to the fast-moving, the fast-thinking, the fast-talking and the deal-seizing.
Smart buyers will remember to work with organizations and sales professionals that they have entrusted in the past to help them make one of their most important transportation equipment decisions of the year.
Overall, however, we expect new business jet shipments (especially total dollar value) to exceed the levels achieved in 2018, driven by production ramp-up of newly certified models like the Pilatus PC-24, Gulfstream G500 and Bombardier Global 7500, and initial deliveries of in-development and soon-to-be-certified aircraft such as the Cessna Citation Longitude, Gulfstream G600 and Global 6500.
If a slowdown in new business jet orders occurs as expected in 2019, this should not become apparent in shipment rates until 2020 or more likely 2021 due to the long production lead-times involved and the fact that much of the near-term delivery slots have already been sold to eagerly-awaiting customers.
Short Term Gain, Mid-Term Pain?
Business jet deliveries should heat up in 2019, according to analyst Brian Foley. But improvement could be short-lived. Here’s why…
Before hazarding a guess as to what happens in 2019 and beyond, some perspective is useful. In 2008 the number of new business jets delivered worldwide numbered an unsustainable 1,300 units (not a very high-volume business even in the best of times). Following the Great Recession, deliveries dwindled to around half that amount and have stubbornly remained there through today.
“I anticipate that things will change for the better this year as brand-new models, which tend to excite the market and cause a spurt of sales, begin to enter the market,” Foley offers. “These spanking-new ships include the G500 and G600 from General Dynamics' Gulfstream division, Global 7500 from Bombardier and Citation Longitude from Cessna.
“Hence, I feel 2019 will be a better year than last as these additional jets move the needle upwards on overall industry delivery values and units.”
However, Foley sees several factors that question the sustainability of this increase. For example, emerging markets – which once accounted for 40% of all business jet deliveries – are struggling and account for just 15% today.
“As a whole, Asia, Latin America, Europe, the Middle East and Africa are displaying a relative weakness for now,” Foley elaborates. “That leaves the North American powerhouse, principally the US, to drive the market. However, there is growing evidence that its current economic strength won't last forever as the stock market, consumer sentiment and other metrics begin to suggest otherwise, and with increased talk of a recession looming somewhere around the corner.”
Another damper on new business jet sales is that they now depreciate quickly like new cars do as soon as they're driven off the lot. Like a car, in five years a jet will be worth just 50% of its new value, meaning a $35m jet will have a whopping equity loss of over $17m which has taken the market some getting used to.
In summary, 2019 results could easily see upwards of a 10% boost over 2018 driven primarily by the impact of several new jet models simultaneously coming to market. However, the duration of the upturn will be challenged as the novelty of the new aircraft wears off and economic reality sets in.
Adam Twidell, CEO, PrivateFly
PrivateFly Offers 2019 Industry Predictions
Adam Twidell CEO of PrivateFly has offered his industry predictions for 2019, as the company releases its annual trends report for 2018. Following is a selection…
Make or break for shared charter programs: For the past few years there has been lots of noise and investment around seat sharing in private jets. However, no-one has yet been able to prove the viability of the business model. 2019 will be make or break time. Investors will not be willing to keep pouring money in if these companies continue to make losses.
Industry consolidation ramping up: We’ve seen an increasing trend towards consolidation of businesses within the industry over the past few years. And we’ll see more mergers and acquisitions within the on-demand charter segment this year. It’s still very fragmented and both the customer and the industry would benefit from this being less so.
Regulation impact - including Brexit: This year our industry needs to grapple with several global regulation challenges. Brexit will have a major impact, although exactly how is still unclear. Private jet operators need to be able to optimize their flight plans within Europe to make sense commercially. Limitations on inter-European flights will mean more complexity, less choice and, ultimately, customers paying more.
In the US, the clock is ticking for the incoming ADS-B requirement set by the FAA which means older aircraft require an expensive upgrade to their tracking systems to comply from January 2020 (Europe follows suit in June 2020). This will impact the used market, and potentially increase charter costs on aircraft over 10 years old.
New jets will stir up the Super Mid-size market: The Super Mid-size segment will be one to watch this year, as Embraer’s Praetor 600 enters the market alongside Textron’s Citation Longitude. Both will be vying to dethrone the popular Bombardier Challenger 350.
More Ultra-Long Range demand: Following the trend seen in the airline segment, at the top of the market we expect to see more long-range clients looking to fly further and choosing higher-priced non-stop flights over fuel stops, for faster overall journey time and uninterrupted sleep. All eyes are on the Global 7500 as it enters service.
Q4 2018 Market Update for Gulfstream Aircraft
2018 was a success for the used Business Aviation industry in North America, according to Hagerty Jet Group, as aircraft values stabilized, transactions increased and relative supply decreased…
In some cases, pre-owned values increased by as much as 15% for late model, low time aircraft. The manufacturers managed to decrease backlogs and balance inventories for a better delivery mix.
Market sentiment in developed economies certainly changed in 2018. Following several years of lacklustre demand and false starts, 2018 started and finished with strong and consistent demand across all sectors. In the US, 100% bonus depreciation compelled many hesitant buyers to engage the market. Pent-up demand along with improving US economic conditions created demand unseen since 2006-2007.
In Q4 2018, would-be buyers were frustrated with the lack of used inventory. Suddenly, volatility in US equity markets is making some buyers reluctant to pull the trigger on an aircraft purchase which means less competition and a potential for inventories to grow again.
G500 Used Market Impact?
As new G500s enter service, we’re hopeful the upgrade cycle will introduce used G450 and G550 inventory in the six- to 10-year-old age range. The new supply will help, but not entirely satisfy strong demand for very new used aircraft less than five years old.
Gulfstream’s most notable achievement in 2018 was officially delivering the G500, and it delivered eight G500s in Q4. As with all clean sheet design aircraft, there are sure to be a series of growing pains with the G500. Experience from initial G500 operators will be the proving ground for the success of the G500’s future.
Next, Gulfstream will shift attention to certifying and delivering the G600 which was anticipated in Q4 2018. Continued delays could heavily impact the anticipated delivery schedule for Gulfstream in 2019.
Going Head-to-Head in 2019
Gulfstream and Bombardier will go head to head in 2019 on competing aircraft pairs such as the Global 6500 and 5500, the G500 and G600 as the two newest models to enter service.
The first Global 7500 entered service in December 2019 and will serve as the corporate demonstrator. More aircraft are expected to enter service in Q1 2019. Although it’s been six years since the G650 entered service, Bombardier has a great product to compete in the Ultra-Long-Range Jet segment and Bombardier needs to get this aircraft to market to establish a reliability record and generate more sales and a larger market share.
Once again, Gulfstream is first to market with the G500 and G600, but Bombardier is close behind with expected certification of the Global 5500 and 6500 by the end of 2019.
Super Mid-Size Segment
In the super mid-size segment of the market, Gulfstream’s G280 has strong competition with the Challenger 350, as always, but the entry of the Embraer Praetor 500 and 600, along with the Citation Longitude, could dilute market share. Meanwhile, the used G280 market is healthy with resale values remaining relatively strong.
We can expect a choppy used business jet market in 2019 due to political uncertainty and Equity Market volatility. Demand for aircraft less than five years old will remain strong, but older aircraft will continue to decline in value, although at a slower pace than in 2017.
FBO Industry Review: 2018
According to John L. Enticknap and Ron R. Jackson, as FBOs begin to close their books there’s evidence that 2018 was another banner year for the industry, which experienced a peak in Business Aviation flight activity and wild fluctuations in fuel costs.
At NBAA-BACE in Orlando in October, Enticknap and Jackson had the opportunity to talk to numerous FBO owners and operators who indicated that 2018 was stacking up to be a very good year for fuel sales. These reports are consistent with the findings in the Annual FBO Fuel Sales Survey conducted in January. Fifty-nine percent of survey respondents said then that they expected fuel sales to increase in 2018 compared to 2017.
In the survey at the beginning of the year, 73% of participants said the economy is headed in the right direction. Although the stock market has experienced recent declines, basic economic metrics indicate a strong economy headed into 2019 with unemployment nearing 3% (the lowest in 49 years), a positive gross domestic product growth rate of 3.4%, an increase in both personal and disposable income, and lower fuel costs helping keep inflation in check.
Flight Activity – North America
TRAQPak’s review of Year-over-Year (YoY) North American flight activity (December 2018 vs. December 2017) indicates a decrease of 0.5%. December flight activity posted a Month-over-Month decrease, finishing down 7.7% from November 2018.
The results by operational category, YoY, were mixed with Fractional activity, again, posting the largest yearly increase. Part 91 activity also posted an increase, while Part 135 activity declined for the seventh straight month.
The aircraft categories were mostly negative with Mid-Size Jets posting the only increase from 2017. Turboprops posted the largest decrease.
Results by operational category were all down MoM in December, with the Part 91 segment posting the largest monthly decrease. Aircraft categories were all negative, as well, with Turboprops posting the largest decrease.
Next Month’s Forecast
Looking ahead, TRAQPak analysts estimate there will be a 0.6% increase in overall flight activity Year-over-Year in January 2019.
Flight Activity - Europe
There were 53,546 Business Aviation departures in Europe during December according to WingX, representing a slight increase in YoY activity, boosted by an exceptional growth in business-related piston traffic…
December proved to be a strong growth month in France, Spain and Germany, with the UK flat, and Switzerland and Italy down. Russia experienced a 10% drop, and Turkey a 20% decline in departures. For FY2018, Germany had the most growth with flights up 5%.
For the full year, 13 of the 20 largest markets in Europe were up in 2018, though of the biggest markets only Germany and Spain experienced what could be described as ‘robust’ growth. Activity clearly slowed in H2 2018 in the UK, France and Italy.
Flight activity within Europe was essentially flat during December. A big gain was recorded in arrivals from North America while there was a drop-off in flights from Africa, the CIS region and the Middle East. Business jet flights from China into Europe were up by 11% in 2018.
AOC/Charter activity comprised almost 60% of all flights in December but was flat YoY with solid declines in business jet flights. ‘Short’ sectors were up by 4% this month due to piston flying activity.
“Overall flight activity trends in December were flattered by the big increase in business piston traffic,” summarized Richard Koe, Managing Director of WingX Advance. “Clearly business jet demand slumped in France and especially Paris due to the widespread protests.
“The outlook for 2019 will depend significantly on the genuine demand for replacement and upgrade of older aircraft as new business jets come off the production line in larger numbers.”
Used Aircraft Values and Maintenance Condition
Asset Insight’s market analysis on December 31, 2018 (covering 94 fixed-wing models and 1,591 aircraft listed for sale) revealed a 4.3% decrease to the tracked inventory fleet (71 units), with all four groups contributing to the reduction…
Small Jets led the way with a 6% decrease, Medium Jets were next at 5.1%, Turboprops decreased 4.3%, while Large Jets posted the smallest inventory fleet decrease at 2.8%.
Sales transactions put a serious dent in the inventory fleet during the last month of 2018. Large Jets won the 2018 value competition, while Medium Jet sellers absorbed the largest value loss. Small Jets and Turboprops experienced a minor value change – the former an improvement and the latter a decline.
Inventory Fleet Maintenance Condition
Fleet asset quality remained steady as 2018 closed. Large Jet transactions focused on lower quality, and higher priced assets (presumably due to good values) while the asset quality of Medium Jets sold was mixed.
Higher quality assets traded among the Small Jet group, while Turboprop inventory quality recorded a 12-month best with respect to the number of upcoming maintenance events for the remaining fleet, although these will, on average, be more expensive to complete. Overall, the tracked inventory posted the following:
The Quality Rating remained in the ‘Excellent’ range, although it decreased a bit to 5.300 on Asset Insight’s scale of -2.5 to 10.
The year ended with Maintenance Exposure (an aircraft’s accumulated/embedded maintenance expense) remaining virtually unchanged since November and, at $1.415m, the figure was slightly better (lower) than the 12-month average.
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).
December’s 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 worsened slightly to finish 2018, increasing to 65.6% from November’s 65.1%.
As usual, Turboprops led the way at 51.1%, the best (lowest) ETP Ratio; Large Jets followed with an improvement at 58.8%; Small Jets worsened to 66.4%; and, Medium Jets worsened to 77.8% following three consecutive monthly improvements.
Overall asset quality for the inventory fleet decreased a bit due to higher quality assets transacting. Still, both Quality Rating and Maintenance Exposure remained better than the 12-month average, giving both buyers and sellers the opportunity to structure transactions offering good value.
Large Jets: Inventory decreased by 10 units of mostly lower asset quality aircraft, resulting in the highest (best) Quality Rating for the year along with the lowest Maintenance Exposure figure over the past four months.
Ask Price decreased 2%, but the group still posted a strong YoY increase. With an ETP Ratio at its lowest figure since April, buyers can still find good deals, while sellers can secure some good values in return.
Medium Jets: Our tracked fleet’s inventory decreased by 26 units while Ask Price remained steady. Asset Quality fell 0.4% due to higher quality assets trading last month, but the fleet still improved 1.4% over the past quarter. The real problem for sellers in 2018 was the 14.6% decrease in Ask Prices, even though they remained steady during the past month and lost less than one percent during Q4.
With Maintenance Exposure registering higher (worse) than average, the group’s ETP Ratio has also taken a pounding, increasing (worsening) nearly 20% since last December. This group’s marketability indicators are simply not creating a transaction-friendly environment.
Small Jets: The fleet for sale decreased by 30 units in December. With primarily higher quality assets changing ownership, both asset quality and Maintenance Exposure worsened for the month and the quarter. The average Ask Price decreased 2% in December, but still improved 4.4% for the quarter and nearly 1% since December 2017.
The good news lies in the group’s marketability, as its ETP Ratio improved from 80% last December to 66.4% in December 2018. Sellers can only hope that trend continues into the new year.
Turboprops: Inventory decreased by five units in December erasing November’s equal unit increase. The fleet mix change reduced the number of upcoming maintenance events, but those events will cost more to complete, as Maintenance Exposure increased (worsened) 1.5% in December and 3.6% during Q4.
As suspected, November’s Ask Price increase could not be supported with the figure dropping 1.1% in December, although pricing did increase 1.7% during Q4. The ETP Ratio is not stellar, but it has consistently been the best among the four groups, and we anticipate demand and marketability to remain strong for Turboprops as we enter 2019.