- 07 Jan 2022
- Brian Foley
- Market Insight
Will the hot Business Aviation marketplace spur more mergers and acquisitions in 2022? Brian Foley believes it's possible. Here’s why…Back to Articles
Sixteen years after starting my own business, I still don’t have a good elevator speech. Judging by public forums alone, one could reasonably assume that I must write articles, speak at conferences, or develop industry outlooks and forecasts. While all of these activities would be true, none of them are even remotely what I consider to be my day job.
A snapshot of 2021 saw my activities range widely, from writing expert witness reports to analyzing future market opportunities for such random items as ice detection and avionics. I also did a lot of market research as a subcontractor for other consultancies, including in the fields of Maintenance, Repair & Overhaul (MRO), Fixed Base Operator (FBO), aviation software, and aircraft finance.
One of the more interesting aspects of my activities involves mergers and acquisitions. I help investors with the due diligence of their target acquisition, such as its market positioning and future prospects.
For those selling their companies, I provide guidance and help to develop a Confidential Information Memorandum (CIM) – which is a company presentation to investors, bring the deal to market, and negotiate. Having previously been a licensed Series 7 Registered Representative with a Wall Street firm provides a firm foundation.
From this unique perspective I’ve provided some thoughts on how Mergers and Acquisitions (M&A) could play out in our industry in 2022. Keep in mind that Business Aviation is a very broad industry and its multitude of segments can’t all be mentioned here.
Charter and Aircraft Management
Past outside investment in this space has primarily been for purely strategic reasons, such as a foreign charter entity needing a company with a US charter certificate to be able to satisfy cabotage rules. Foreign aircraft can’t just come to the US and begin shuttling passengers around – they need a local partner with the right to fly domestic flights.
In the past, Merrill Lynch tried a rollup of charter companies only to be burned by their naivety, which may have poisoned the well for others.
However, a recent development has been the re-emergence of the Special Purpose Acquisition Company (SPAC), allowing companies like Wheels Up to raise funds and be listed on the New York Stock Exchange.
Otherwise, investors have generally shied away from this segment, due to the perception that the business is only as firm as the Rolodex of clients who can change when their contract is up.
Pre-owned Aircraft Brokerage
This is another segment which has traditionally been snubbed by investors, who consider the lack of brick and mortar as a no-go. To them the real value lies in the client lists, which run the risk of morphing over time as clients and salespeople come and go.
A recent exception was outside investment in a newer pre-owned company which provides a suite of pre-owned aircraft services, rather than just buy- and sell-side assignments. This could prove to be a blueprint for others seeking investors.
These have been the big investment news stories in the industry for over a decade. Investors see value in consolidating these fragmented markets, and targets generally have the required revenues and profitability to be considered a sweet spot.
There will certainly be more activity in these spaces for the foreseeable future, but nowhere near the level of the recent Atlantic Aviation and Signature Flight Support deals.
One could argue that Bombardier has been hard at work window-dressing for a future potential buyer. And let’s not forget the makers of smaller General Aviation propeller-driven aircraft, who could become more interesting targets from an investment standpoint as more aircraft are needed for pilot training, and for new owners circumventing the whole airline experience.
Software as a Service (SaaS)
This is a favorite of investors, providing the company is established with a proven revenue and profit history. Start-ups, not so much.
While this is in no way an exhaustive list, Business Aviation companies riding a wave of popularity should be in their best position for years to raise growth capital, divest, or seek an acquisition.
Tremendous balance sheet growth, and the lack of high yield investing alternatives, should make 2022 a very active M&A year. In the interim, I’ll keep working on that elevator speech.
Global Flight Activity Update
According to WingX Advance, 2021 marked the busiest year on record for global business jet activity, with 3.3 million flights from January through December. Business jet traffic was 7% higher than in 2019, the previous high point.
The growth in business jet flying activity was at its highest in December 2021, with 23% more sectors flown than December 2019. Over the holiday period (December 20th–Jan 2nd), business jets flew 127,000 sectors, 41% more than in the same period in 2019.
In contrast, scheduled airline passenger traffic was down by 28% compared to December 2019, in line with the full year trend.
In North America (including Mexico and Canada), business jets flew 6% more sectors compared to 2019. The demand was fueled by the United States market where business jet activity was 10% higher than in 2019. Canada saw 24% fewer sectors than in 2019.
The rebound in business jet demand in the US came from Fractional and branded Charter operations, up by 20% and 18% during 2021, respectively, compared to 2019. Private and Corporate Flight Departments saw a more modest recovery in activity, but nonetheless surpassed comparative 2019 activity by the end of 2021.
The high points in business jet demand across the US showed up in holiday periods, and were geographically concentrated around leisure destinations. Demand was exceptionally high during the Christmas and New Year period: Between December 20th and Jan 2nd, business jets in the US flew 46% more sectors than for the same period in 2019.
Despite the hesitant recovery of European economies from lockdown, business jet activity in the region clearly surpassed 2019 levels, with 5% more sectors flown by year-end 2021.
As in the US, business jet demand peaked during the Christmas and New Year holiday period, with 30% more sectors flown than during the same period in 2019. Demand was variable geographically, with the three largest markets – France, Germany and the UK – ending the year still some way short of 2019’s levels, in terms of sectors flown.
In contrast, Italy and Spain saw the strongest rebounds in the EU in 2021, reflecting robust leisure demand. Russia and Turkey, with large domestic markets and looser travel restrictions, both saw consistently strong increases in business jet sectors, up by ~25% compared to 2019.
Rest of the World
Business jet activity outside the North American and European regions constituted a small minority of the global total, with around 200,000 sectors representing around 6% of worldwide activity in 2021. There was substantial growth compared to pre-pandemic trends, with 28% more business jet flights operated than in 2019.
The trends were diverse regionally, with Asia getting modest growth in business jet traffic, activity buoyed up in India and Australia, but stunted in China – especially in the latter half of the year.
The Middle East saw some of the strongest growth in business jet demand in 2021, notably in the United Arab Emirates where sectors were up by 73% compared to 2019, contrasting with very modest growth in Saudi Arabia. Elsewhere, Brazil, Nigeria and Egypt saw much more activity in 2021 than in 2019.
“Business Aviation flourished in 2021, with a very strong rebound in demand from Q2 onwards, characterized by leisure demand, and unleashed as the travel restrictions loosened,” said Richard Koe, Managing Director, WingX Advance.
“The prolonged slump in scheduled airline capacity, and the persistent hygiene concerns over new virus variants appear to have migrated Business Aviation services to many new customers. The resilience of the rebound in 2021 will be tested in early 2022 by the travel behavior of business executives.”
In-Service Aircraft Maintenance Condition & Marketability
While Q4 2021 sales for Asset Insight’s tracked fleet of business jets and turboprops were lower than in Q4 2020 (587 vs. 624 units), the cause was not a lack of demand…
Lack of availability was at the core of the reduction in sales during Q4 2021; especially availability of young, low-time aircraft. The 134-model fleet reviewed by Asset Insight decreased another 6.6% in December (126 fewer units), 25.7% during Q4 2021, and 53.8% year-over-year (YoY) – or 1,028 units – exceeding 2020’s inventory fleet decrease of 902 units.
Aircraft values require an understanding of the difference between Ask Prices and Transaction Values. Average Ask Price for our meagre, and heavily picked-over, tracked fleet decreased 18.7% during December, 17.5% during Q4 2021, and 18.9% YoY, resulting in a record low figure.
On the other hand, younger, lower-time inventory has moved quickly, often without a public listing, and sometimes at a Transaction Value that has exceeded the seller’s expectation, primarily due to buyer demand. Thus, to assume that values have decreased for desirable aircraft would be wrong.
Inventory Fleet Maintenance Condition
With buyer preference being centered on the best available aircraft, both Quality Rating and Maintenance Exposure registered 12-month worst figures…
Quality Rating decreased 0.8% in December to 5.146, the tracked fleet’s third consecutive 12-month low, equating to a decrease of 1.9% during Q4, and 3.8% YoY. The available assets remained within the ‘Very Good’ territory, although most listed aircraft are facing more near-term maintenance events.
The listed fleet’s Maintenance Exposure (an aircraft’s accumulated/embedded maintenance expense) increased (worsened) 7% in December, 2.7% during Q4 2021, and 6% YoY. The result is that buyers should expect maintenance events (for the limited inventory) to cost more to complete.
Maintenance Exposure to Ask Price (ETP) Ratio
The year closed with the ETP Ratio at 81% - a record high figure, but not surprising, considering the 12-month high Maintenance Exposure and record-low Ask Price figures.
All four groups were negatively impacted, some more than others. The current ETP Ratio statistically evidences the difficulty sellers are encountering in remarketing their aircraft, and the reason why the listed fleet’s Days on Market increased 11% during Q4.
For anyone not familiar with the ETP Ratio, the statistic 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’ (DoM) 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 2021, assets whose ETP Ratio was 40% or higher were listed for sale more than 59% longer (on average) than aircraft whose Ratio was below 40% (340 versus 541 Days on Market). Additionally, nearly 59% of our tracked models, and over 64% of all aircraft posted an ETP Ratio above the 40% excessive mark.
Asset Insight’s tracked fleet posted a new record-low inventory figure of 4.1% to end the year, with availability for the overall active aircraft fleet recording an even lower percentage. By way of comparison, inventory rested at 10.1% of the active fleet in December of 2020, and availability has now decreased every month since peaking during June 2020.
Overall demand ended the year at a record-high 4.40, on Asset Insight’s scale of 0.00 (lowest) to 5.00 (highest). With factory-new aircraft positions not available for up to 24 months, production figures unlikely to increase during H1 2022, and an inventory comprised of too many undesirable assets, private aviation truly finds itself in uncharted territory.
Large Jets: Registering the highest demand among the four groups of 4.65, and the lowest availability (3.5% of the active fleet), Large Jets posted 172 transactions during Q4 2021. In December, listings dipped 25% (56 units), equating to a 40.8% decrease during Q4, and 61% (263 units) for the year.
The group’s Quality Rating decreased 2.3% to post a 12-month low figure that was also 0.5% lower for the quarter, and 4.5% for the year. At 5.426, the Quality Rating decrease dropped Large Jets from the ‘Outstanding’ to ‘Excellent’ range, but a decent Rating does not mean assets suddenly become more appealing.
Maintenance Exposure did improve by 7.0%, but was still 1.6% higher (worse) than the previous quarterly figure, along with 8.9% higher YoY. Ask Price decreased 6.5% for the month, but was still up 14.5% in Q4, and 11.5% for the calendar year.
All these changes negatively impacted the listed fleet’s ETP Ratio, increasing the figure to 65.7%, a number half-way between the group’s 12-month average and high. In a rush to close before year-end, some buyers agreed to acquire their aircraft with a limited pre-purchase inspection (in rare cases no inspection at all) – a financially dangerous practice.
Mid-Size Jets: Q4 2021 produced 140 Mid-Size Jet transactions. There was a 5.2% availability decrease during December (27 units), a decrease of 22.5% in Q4 (69 units), and 55.7% fewer listings YoY (290 units). The number of sales came from an all-time high Demand of 4.32, combining with lowered availability to 4.9% of the fleet compared to 10.7% a year ago.
The fleet mix change resulted in Quality Rating and Maintenance Exposure scoring 12-month worst figures. The Quality Rating, at 5.012, decreased 1.9% for December, 4.6% for Q4, and 6.5% YoY, but remained within the ‘Very Good’ range. Maintenance Exposure increased 3.1% for December, 3.6% for Q4, and 3.1% YoY.
Ask Price set a new record-low figure, tumbling 20.1% in December, 33.3% during Q4, and 30.4% for the year. As you would expect, these statistics did not bode well for the ETP Ratio, which rose to 83.6% - the group’s 12-month high (worst) figure.
With only 231 assets listed for sale as 2021 closed, spread across a 45-model tracked fleet, buyers are likely to be having difficulty identifying aircraft with the specification they desire.
Light Jets: With Demand at a record-high 4.16, 155 transactions closed during Q4 for the tracked 29-model fleet, resulting in a 3.1% inventory decrease during December (17 units), 16.3% during Q4 (52 units), and 51.7% YoY (a 286-unit decrease). The group’s availability ended 2021 at 4.0% of the active fleet, compared to 9.6% the previous year.
The latest inventory fleet mix led to a 1.0% lower (worse) Quality Rating, that was also 3.8% lower for Q4, and 2.4% lower YoY. However, at 5.025, the Rating was insufficient to drop the group out of ‘Very Good’ territory. Maintenance Exposure worsened (increased) 2.1% during December, but actually improved (decreased) a nominal 0.1% during Q4, and 7.7% YoY.
The listed fleet’s Ask Price average continued to be lower than that for Turboprops, and posted a 12-month low by decreasing 13.6% in December, 12.6% for Q4, and 24.3% YoY. The impact on the ETP Ratio was an increase to 118%, which was 10.5 percentage points higher than December 2020’s figure.
The problem facing sellers is not so much their aircraft’s maintenance status as its age – making its pricing incongruous with the asset’s embedded maintenance, and the unrecoverable cost for any refurbishments desired by the buyer.
Turboprops: With 120 transactions compiled during Q4 2021, the group’s 17 tracked models represent 7.1 trades per model, the highest ratio among the four groups. Turboprops also registered the second-highest demand rate at 4.45, and the statistics led to a 6.4% inventory decrease for December (26 units), along with a drop of 24.6% for the quarter (71 units) and 46.4% YoY (189 units).
Interestingly, the latest fleet mix improved the group’s Quality Rating by a nominal 0.2% during December, and 1.4% during Q4, but the figure was 2.4% lower (worse) YoY. Maintenance exposure increased (worsened) 0.5% for December, 0.6% for Q4, and 7.85% YoY.
Ask Price decreased 0.6% in December (to a figure just above the group’s 12-month low), 0.1% during Q4 2021, and remained fairly consistent YoY by decreasing a nominal 0.3%. At 42.7%, the ETP Ratio continues to hover just above the 40% excessive point.
Considering the tracked fleet’s availability is as low as 3.9%, advantage remains with sellers, as has been proven during the past few months by the higher Transaction Values generated by younger, desirable units.