What are the latest trends and observations in the business aircraft market? Rolland Vincent, editor, Business Aviation Market Overview, provides snapshots and pointers for those weighing up a purchase decision in 2020…
With the Northern winter and Southern wildfires bringing reminders to us all that there are bigger forces at play, many active and prospective buyers of business aircraft are undoubtedly anxious for snow- and smoke-free skies ahead. Clouding their horizons are a variety of fluctuating indicators that demand their attention, the key elements of which are outlined in the following pages.
These indicators highlight macroeconomic, geo-political, and environmental topics, as well as OEM industry, market inventory, flight operations, aircraft maintenance and aircraft valuation conditions. Collectively and individually, we believe that these remain among the most important variables to inform decision-making in the business aircraft marketplace.
As always, we recommend that serious buyers engage the services of a professional aircraft broker/dealer, who is ideally placed to navigate what can be the turbulent skies of a business aircraft transaction.
Early Indicators to Watch in the New Year
In early 2020, what are some of the indicators we are watching more closely than others, each of which has important implications for prospective buyers?
- The US GDP growth rate in 2019 is estimated at ~2.3%; most economic forecasters are expecting US growth to slip below 2% in 2020 (in line with its longer-term potential).
- GDP growth in the Euro area was an estimated 1.2%, continuing a sluggish trend that reflects a slowdown in the industrial heartlands of Germany and France. In December 2019, the European Central Bank forecasted GDP would increase by just 1.1% in 2020.
- Flight shaming and environmental topics have become more prominent, while industry players strive to stimulate demand for, and the supply of, sustainable aviation fuels (SAF).
- A dichotomy has emerged where OEMs have been relatively successful writing orders and delivering new business jets, against a backdrop of reduced pre-owned transactions and slowly increasing inventory for sale.
- Hyper-competition continues for new business jet orders, especially at the top of the market, keeping a lid on price inflation and (ultimately) aircraft residual values.
- Utilization of the business jet fleet continues to be relatively flat sequentially by most measures, despite underlying fleet growth as new deliveries outpace retirements and removals from service.
- Thousands of business aircraft remain non-compliant with ADS-B Out rules that came into effect in the US beginning on January 1, 2020, creating the potential for a wave of retirements of older aircraft that have reached the end of their economic lives.
- With some exceptions, OEMs are transitioning from an unprecedented era of heavy product development investment towards a period where derivative models are likely to become more prominent.
- The potential for industry consolidation is accelerating, which we believe will result in fewer production models and the potential for fewer OEMs in the months and years to come.
- Derivative model announcements and out-of-production status (OOPS) shifts can have particularly important impacts on the valuations of older aircraft that are best understood with the help of aircraft transaction specialists.
Pre-Owned Market Update
Approximately 10% of the business jet fleet was listed as for sale on the JETNET database (~2,200 aircraft) at the time of writing. That’s up from a low of about 9% that was reached as the market peaked 14-18 months ago.
Turboprop availability is hovering at about 7% of the fleet (~1,000 aircraft), although a remarkable 60% of aircraft for sale were initially delivered more than 20 years ago (the corresponding data for business jets was ~44%, as of this writing).
This is certainly not to say that these aircraft have come to the end of their economic and useful lives. In fact, a pulsing of the JETNET database reveals that about half of business jets are still in operation 42 years after initial delivery. The same proportion of turboprops are ~50 years old.
What’s impressive is how well the industry players – the owners and operators, flight crews and maintenance technicians, MRO shops, suppliers of parts, systems and services, and brokers/dealers – have remained engaged in the market. This despite the costs and hassles of keeping aging aircraft in the skies.
JETNET iQ’s recently completed Q4 2019 survey of more than 500 business aircraft owners and operators in 61 countries revealed numerous insights, including aircraft brand/model purchase preferences, intentions, timing and likelihood.
Beyond the pre-owned models that were highlighted to be of most interest to buyers throughout 2019 (specifically, the Phenom 300, Citation Model 560XL, Falcon 2000, Gulfstream G550, Beech King Air 200/250/350 and Pilatus PC-12), owners and operators have clearly become very comfortable operating aircraft that may no longer have that “new aircraft smell”.
This is particularly the case in North America (US and Canada), where 80% of decided respondents indicated they do not agree with the statement that they fly new aircraft for up to five years and then replace them.
Based on unit volumes in 2019, the ratio of pre-owned to new business jet transactions was about 3-to-1, one of the main reasons we believe that it is vitally important to monitor the activity and velocity of both the used and new aircraft markets.
This is particularly the case when we consider pre-owned transactions tend to move more quickly (on average) and are therefore more likely to reflect current market conditions… at least to most.
OEMs are certainly in the best position to monitor the pulse of the market as regards new aircraft orders and cancellations, but few monitor the market outside their competitive segments, and fewer still communicate net order details in a systematic way in their various investor and informational reports.
All of this should highlight that reading and absorbing the many important details on the following pages is smart, due diligence as you seek to make the most informed decision possible. Despite the number of zeroes involved (and maybe because of it), that next aircraft promises to dramatically improve your access to personal and professional opportunities - from A to Z and back again!
Flight Activity - North America
Year-over-Year (YoY), North American flight activity for December 2019 vs. December 2018, indicates an increase of 6.9%, according to TRAQPak. December’s flight activity also posted an unexpected Month-over-Month increase finishing 1.3% up on November 2019…
Comparing YoY results, the operational categories were all positive for the period. Fractional activity posted the largest increase while Part 135 activity also enjoyed a sizeable increase compared to December 2018.
The aircraft categories were also positive for the month, with Mid-size Jets posting the largest yearly increase. Light Jets and Large Jets also saw solid gains YoY.
Activity has historically declined 7%, on average, from November to December. In 2019, however, results by operational category were mostly positive. Part 135 flight activity posted the largest monthly increase, closely followed by Fractional activity. However, Part 91 activity slid.
The aircraft categories were mostly positive for the month, too, with Large Jets posting the largest increase. Turboprops recorded the only monthly decline in December.
Looking ahead, TRAQPak estimates there will be a 5.8% increase in overall YoY flight activity in January 2020.
Flight Activity – Europe
December saw some growth in Business Aviation activity in Europe. Flights were up by 2.9% YoY. Most of the growth came in the business jet sector, up by 4.5%. For the full year, total activity was down 1.6% compared to 2018.
Flight activity out of the UK slipped 3% in December, but most of the other larger markets were up, notably Italy and Austria. Spain had the strongest growth in 2019, while Germany declined the most. For the full year, the UK and Germany were the weakest regional markets.
Large Jet activity was the motor behind the growth in December, most markedly in France, Germany and Italy. Small and Mid-size Jet traffic was up 15% in Italy while. The standout growth in AOC activity came in Italy (20%). Germany, Spain, Austria and Russia each had >10% growth. UK Charters fell 5%. Private activity was up 20% in the Czech Republic, but down by 13% in Spain.
Intra-European flights were up 3% in December 2019, reducing the YTD deficit to 1.7% vs 2018. Flights to North America rose by 2% this year, but flights to Asia-Pacific fell 9%.“
December activity was surprisingly positive, up 3% YOY,” notes Richard Koe, managing director, WINGX. “Partly this is due to December 2018 being particularly weak (this December’s activity was still well below the peak December activity back in 2007).
“The overall trend for this year is negative, with 2% fewer flights than 2018,” he added. “The growth this month has clearly come from the Super Mid-size, Super Light and Ultra Long-Range Jets, reflecting growth in the size of the active fleets in Europe towards the end of last year.”
Flight Shaming Hits BizAv & Other Predictions for 2020
Brian Foley suggests that for private aviation, there are developments suggesting 2020 may shape up very differently to 2019. Here are his abridged thoughts, trends and predictions for the year.
The Big Trend: Aircraft owners risk being publicly called out à la Prince Harry for his now infamous Gulfstream jet trip to pal Elton John’s. In 2020, private flyers will gravitate towards ways to evade this kind of judgement and public humiliation, either by voluntary third-party carbon offset programs (a good alibi if confronted), or via charter, fractional or other non-ownership models (that better protect identities).
To create favorable corporate identities, companies in the Business Aviation industry will tweak their ad copy and concoct PR stunts to demonstrate their commitment to the environment. Others will offer voluntary access to pay-as-you go carbon taxes to accommodate those who really care and others who want to avoid public shaming.
What to Watch: Follow the money. With the US stock market up around 30% in 2019 and a repeat performance unlikely, investors are looking to overseas financial markets for better returns in 2020. This will have the effect of stimulating non-North American and emerging markets which have been on hiatus for much of the decade.
An inflow of investment due to attractive stock valuations coupled with an improved outlook for global growth and the probability of a successful Brexit will create a decent uptick in offshore business jet sales.
The Unconventional Wisdom: A lot has been said of the sharing economy’s effect on the industry. It’s been popularized that a younger generation of fliers want nothing to do with aircraft ownership, only wanting access and the experience of private flying.
The theory was this would further dent new aircraft sales while benefiting non-ownership models such as charter, fractional and jet cards. That’s certainly not showing up in FAA flight statistics or even notionally.
Charter continues to be an oversupplied market. Fractional aircraft providers are still a shadow of their former selves since the great recession. Feedback from leaders in the charter business suggests millennials are barely moving the needle.
The Misplaced Assumption: US stock markets and corporate profitability have been consistently breaking records. In previous times this would have signaled a booming jet sales environment. Instead, sales have been flat for a decade and much of the stock market run-up can be attributed to artificial government interest rate stimulus rather than fundamentals.
It could even be argued that sales have remained stable and not fallen any further only because of a good economy. This kind of reasoning would then portend a decrease in sales should economic growth falter in any way.
The Bold Prediction: There are 41 models of new business jets from seven OEMs vying for just 700 total worldwide industry sales per year. With such a relatively small market and workforce cutbacks, it wouldn’t be surprising for a least one of the participants to call it quits.
A ‘culling of the herd’ hasn’t occurred since Hawker Beechcraft went bankrupt a few years ago. Cessna ended up buying its ruins and four Hawker Beechcraft jet models were permanently removed from the market.
Bombardier has surely been evaluating its Learjet division which saw only nine aircraft delivered through Q3 2019. The recent move to offer the stripped-down, no frills, discounted ‘Liberty’ edition could be interpreted as a move to get rid of the last of the inventory rather than a tactical market strategy.
In short, looking at the above projections, 2020 will not be just another cookie-cutter 2019.
G700 Announcement: What’s Next for Gulfstream?
In the last Gulfstream Aircraft Quarterly Market Update, Hagerty Jet accurately predicted the announcement of the new G700. But what’s next for the OEM?
While there were few surprises for Hagerty Jet Group in the announcement of the Gulfstream G700, the company had predicted the announcement of a sister ship called the G800 which would incorporate the upgrades of the G700 but maintain the shorter fuselage of the G650ER and have a range of 8,000nm.
“A G800 model is a natural follow-up to the G650ER and will likely be announced eventually, but certification of the G700 is the primary focus,” Hagerty Jet suggests, adding “the G700 will be a great airplane and a strong competitor to the Global 7500 but with a price tag of $75m.
“Our concern is the limited number of potential buyers in a saturated market where Bombardier and Gulfstream have capacity to build 120 airplanes each and are competing head to head.”
Prices of pre-owned G650s have dipped towards $40m, giving a strong argument for buyers to remain focused on the used market. “The next logical product for Gulfstream to announce, apart from the G800, would be a new G400 model,” Hagerty suggests.
This aircraft would be a shorter version of the G500, with two and a half living areas, a price point below $40m and a range of 4,000nm or more. “This segment of the market has been neglected by Gulfstream, Dassault and Bombardier. The Citation Columbus which would have filled this segment would have been a great opportunity for Cessna to gain market share, but plans have been put on hold indefinitely.
In-Service Aircraft Values & Maintenance Condition
The final month of 2019 saw Asset Insight’s tracked inventory fleet of 96 fixed-wing models decrease 1.6% to 1,748 units. December’s ‘for sale’ assets equated to a 9.9% annual increase…
All four aircraft groups experienced inventory escalation: Small Jets led the way with a rise of 15.4%; Medium Jets followed at 9.8%; Large Jets increased 8.7%; and Turboprop availability grew 2.1%. During 2019, the average Ask Price for aircraft in the tracked fleet decreased 3.1%, with three groups losing ground. However, Medium Jet pricing increased 11%.
Inventory Fleet Maintenance Condition
With the traditional Q4 transaction frenzy coming to a close, owners of lower quality assets apparently decided they needed to sell, slightly improving the quality of inventory assets entering 2020, while concurrently reducing availability of aircraft harboring higher near-term maintenance costs.
Our tracked inventory registered the following figures…
Quality Rating: The ‘for sale’ fleet’s Quality Rating rose (improved) a nominal 0.2% in December, from November’s 5.198 to 5.206. This Quality Rating is within the ‘Very Good’ range on Asset Insight’s scale of -2.5 to 10.
Maintenance Exposure: At $1.345m, Maintenance Exposure (an aircraft’s accumulated/embedded maintenance expense) posted the lowest (best) monthly figure for all of 2019.
Maintenance Exposure to Ask Price (ETP) Ratio
The ETP Ratio is a useful indicator of an aircraft’s marketability. It’s 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 Q4 2019, assets whose ETP Ratio was 40% or more were listed for sale nearly 84% longer on average than aircraft whose Ratio was below 40% (215 versus 395 Days on the Market).
December’s analytics also revealed that over 52% of the tracked models, and nearly 60% of the tracked fleet, posted an ETP Ratio greater than 40%.
December’s fleet ETP Ratio worsened (increased) slightly to 64.8% from November’s 64.3%, the latter being the lowest (best) monthly Ratio since April.
- In their ongoing battle for the best ETP Ratio, Turboprops ended the year in the lead by posting the lowest ETP Ratio (52.1%);
- Large Jets dropped to second place (55.1%);
- Small Jets remained unchanged (67.3%);
- Medium Jets worsened to 75.5%.
The new year could result in some dramatic price decreases for older aircraft that have not met the January 2020 ADS-B equipage mandate. As mentioned last month, we believe non-equipped turbine assets will not be ‘worthless’, but their values will be negatively impacted.
For aging assets, especially those with little time left before reaching their engine TBO, salvage value is a very real possibility.
Large Jets: The tracked fleet total stayed the same, with inventory remaining 30 units higher than the previous year. The group’s Quality Rating has been in the ‘Outstanding’ range for the past eight months, and Maintenance Exposure improved (decreased) another 2% in December to post a 12-month best (low) figure.
Unfortunately, Ask Pricing decreased an additional 1.2% to finish down 7.6% for the quarter and 9.1% for the year. Entering 2020, buyers who do their homework can benefit from low pricing available on higher quality assets.
Medium Jets: While the tracked inventory decreased by nine units, the group ended the year with 48 more listed assets. At 5.046, the Quality Rating registered in the ‘Very Good’ range, but March 2019 was the last time this figure was lower (worse).
Curiously, Maintenance Exposure improved (decreased) 1.1% in December, but that still left it 2.7% worse (higher) for Q4 compared to Q3, while the ETP Ratio was up (worse) for the month and the quarter.
Amid all this negativity, the group’s performance relative to Ask Price continues to amaze us. Ask Price worsened 3% in December but was up nominally for the quarter and 11% for the calendar year. Careful and detailed analytics are key for buyers seeking good value in this arena.
Small Jets: The last time this group posted an ‘Excellent’ Quality Rating was in May 2019, and to find a better (lower) Maintenance Exposure figure one needs to look back to April 2019. The problem for sellers (a negotiating edge for buyers) is the high inventory level for many models, as the tracked fleet increased 73 units during 2019, even though December’s inventory decreased by 16.
Pricing, not surprisingly, decreased 2.9% for the month, 1.8% for the quarter, and 5.7% for the year. If aircraft not equipped with ADS-B remain in the listed fleet, prices are expected to drop further now we have entered 2020.
Turboprops: This was the only group to post an Ask Price increase this month (2%). Pricing was 4.7% higher for Q4, but down 2.2% for the calendar year. Turboprop asset Quality spent most of 2019 in the ‘Good’ range, after falling from the ‘Very Good’ slot it occupied in January. It was in March 2019 when Maintenance Exposure and the group’s ETP Ratio were better (lower) than December’s figure.
Unlike the other three groups, Turboprop inventory remained quite stable throughout the year, ending only nine units higher. With pricing just about at the 12-month average, buyers and sellers should be in a good position to structure mutually beneficial transactions.