What are the latest market indicators for business aircraft sales as we head towards the traditional summer slow-down? Aviation analyst Rolland Vincent presents his thoughts and observations…
While 2019 Paris Air Show attendees deal with eardrum-piercing, afterburner-inducing migraines in the wake of aerial displays of the latest, greatest and loudest fighter jets yet conceived, many Business Aviation industry stakeholders are preparing for that other pilgrimage to the sun, sand and sea of their favourite beachside resorts.
With sales of business aircraft about to hit the annual pause button as both sides of the negotiating table take a break, this is a good time to look at where the markets are at the halfway point in the calendar.
Slow Sales in the Used Market
Worldwide retail sales and leases of used business jets have had a comparably slow start in 2019, with transaction volumes from January through April at their lowest levels since 2011. In 2011, of course, the industry was still in recovery mode from the blunt-object impact of the global financial crisis.
Year-to-Date (YTD) transactions are off 19% according to JETNET databases, despite the fact inventory levels had actually increased by 6% to 2,100 jets by mid-June 2019.
“On market” inventory for sale has now inched up to 9.5% of the in-operation business jet fleet worldwide, although that ever-glittering diamond known as a late-model remains as elusive as low-priced SAJF fuel.
One of the challenges facing potential used jet buyers/lessees is the mismatch between their desire for younger aircraft and the aging status of much of the available inventory. In 2018, 65% of all retail sale/lease transactions involved jets that were initially delivered no more than 20 years ago.
As of mid-June 2019, just 57% of the used business jet inventory listed on industry databases was 20 years or younger.
In this environment, deals for young inventory that can be found (whether on-market or off-market) will continue to happen in an accelerated fashion.
Our assessment of this situation is that buyers/lessors should seriously consider working with highly experienced brokers and dealers who have the expertise, track record and in-depth market knowledge to identify and close on a targeted aircraft without delay.
Growing Prospects for Economic Downturn
With transactions down while inventory levels are slowly rising so far this year, prospects for an economic downturn have increased in many country markets where Business Aviation is concentrated.
GDP growth in the all-important US market is forecast to be 2.2% in 2019 according to The Economist Intelligence Unit, down from 2.9% in 2018 but in line with 2017’s growth rate.
In Q1 2019, US GDP growth was estimated to be 3.1% Year-over-Year (YoY) compared to Q1 2018, implying that a slower period of expansion is likely to be on the near-term horizon. Just don’t tell that to corporate CFOs, who continue to watch as stock markets rise, with the bellwether S&P 500 Index up 15% YTD.
After-tax profits of US corporations continued their torrid pace, estimated to be about $2tn on an annualized basis in Q1 2019 after accounting for inventory valuation and capital consumption adjustments. While US corporations are generally flush with capital, the $65m question continues to be how best to convince them to invest in a new or used business aircraft.
With another highly contentious US federal election season already underway a year and a half before the polls, and the never-ending Brexit divorce proceedings on full public display, investors will have plenty to worry about for the balance of this year and probably next.
Pilot and Technical Talent Challenges…
As with other industry stakeholders, business aircraft owners and operators are truly feeling the pinch of a constrained talent pipeline, driven by a long-sustained economic recovery. US unemployment slipped to just 3.6% in May 2019, its lowest rate in 50 years and down steadily since a post-crisis peak of 10% in October 2009.
In Europe, the EU-28 unemployment rate fell to 6.4% in April 2019, its lowest level since the start of the EU monthly unemployment records in January 2000.
Of course, these rates of unemployment encompass all job and skill categories – ATP-rated pilots and A&P-rated technicians with locational flexibility are essentially a fully-employed group, with individual and collective leverage to encourage employers to up the wage and benefits ante.
Respondents to the recently completed Q2 2019 JETNET iQ Survey, all of whom own and/or operate fixed-wing, turbine-powered business aircraft, identified pilot and technical talent as the biggest challenge facing the industry in the next few years.
Stemming the loss of talent, especially to the commercial airlines, and replenishing the talent pipeline with young, diverse and engaged new people is a high priority for many if not most Business Aviation industry stakeholders.
Business Aviation owners and operators typically like to carve their own discrete pathways, with most preferring anonymity and discretion to conspicuous consumption and flamboyance worthy of The Panama Papers. Ironically, the fact is that the low profile of Business Aviation is in itself a significant contributor to the challenges the industry faces convincing people 1) that we even exist and 2) that we offer a rich variety of rewarding career paths, both on the ground and in the air.
As much as ever, advocacy today isn’t just the job of lobbyists and industry executives. Advocacy is key to building tomorrow’s foundations for Business Aviation, whether in the halls of government, the corporate boardroom, or in the Margarita-serving BBQ shack by the beach.
As they say, you never know with whom you may be speaking…
Flight Activity – North America
According to ARGUS TRAQPak, Year-Over-Year (YoY) flight activity recorded a 1.1% increase in May 2019 (vs May 2018). May activity was also up almost 3.5% over April 2019…
Year-over-Year, the results by operational category were mixed with Fractional activity posting another significant yearly increase. While Part 91 activity also showed another month of positive growth, Part 135 activity declined for the twelfth straight month.
The aircraft categories were mostly positive with Mid-size Jets posting the largest increase from 2018. Large jets and Turboprops also increased.
May Business Aviation flight activity posted an expected month over month increase to finish up 3.4% from April 2019. Results by operational category were all positive for the month with Part 91 and Fractional posting the largest increases.
Aircraft categories were mostly positive for the month with Turboprops posting the largest increase.
June Activity Forecast
Looking ahead to June, TRAQPak analysts estimate there will be a 1.8% increase in overall flight activity YoY.
Flight Activity – Europe
According to WingX’s recent monthly Business Aviation Monitor, 77,189 Business Aviation departures were recorded in Europe during May 2019, representing a second successive YoY decline of ~3%...
Year to Date (YTD), European Business Aviation activity is now down by 1.7% (5.5k fewer flights) compared with the same timeframe in 2018.
Private activity represented the largest decline, with privately-owned business jet flights slumping 7% YoY. Charter/AOC activity was flat overall. Following two months of heavy decline, Charter/AOC activity stabilized. Small and Midsize Jet activity suffered most in May and there were 5.3% fewer flights from these categories. By contrast, Large Jet flights were up by 0.7% YoY.
Overall, declines in Business Aviation activity were the biggest out of France, Germany and the UK (down 4.5%), with all three markets down by at least 2% YTD. Meanwhile flight activity was flat in Spain.
Business Aviation flights within Europe were down 2.9% during May but are still trending up by 0.4% in the past 12 months. May 2019 flight departures to almost all global regions were down, most notably to Africa (-10%). Flights to South America, however, were up 5% YoY.
“A second consecutive drop of 3% in YoY Business Aviation activity confirms an increasing slowdown in the European market in 2019, reflecting the somewhat downbeat sentiment at EBACE,” Richard Koe, managing director, WingX summarises.
“Symptomatically, whilst Nice and Cannes had their usual busy months in May, comparable YoY activity at these airports was down at least 10%.
“The Brexit stranglehold on business activity in Europe, and especially the UK, is showing up in the continuing stagnation of flight demand out of London.”
JETNET Sees Mixed Signals for Bizjet Market
JETNET is optimistic about the business jet market, but also sees some reasons for caution on the horizon, it said in its ‘State of the Business Aviation Market’ presentation at EBACE 2019…
Offering an overview, Paul Cardarelli, JETNET vice president, sales, notes the business jet fleet remains geographically concentrated, with ~61% of the world’s fleet currently based in the US. Moreover, the 22,138 business aircraft in service today recorded 4.5m cycles in 2018. That’s a similar level of utilization to 2005, but back then the in-service fleet numbered approximately 14,000.
With around 33% more aircraft in 2019 than 2005 operating about the same number of cycles, “This is one of the things that gives us some concern,” Cardarelli says. “We have an oversupply situation and we have underutilization going on.”
Used Aircraft Market Summary
In the Used aircraft market, an inventory of <10% of the fleet for sale is traditionally considered a seller’s market. At the end of March JETNET data showed 9.3% of the business jet fleet was for sale and 6.7% for turboprops, the lowest levels since before the global economic downturn.
Also, with 513 retail jet sale or lease transactions in Q1 2019 versus 641 in Q1 2018, there has been a YoY decrease of ~20%. Among the possible causes for this, according to Cardarelli, is the partial US government shutdown in January, stock market turbulence, and (possibly) a limited pool of inventory.
New Aircraft Market Summary
On the new aircraft side, five of the major business jet OEMs have shown increases in backlogs in Q1 2019, with book-to-bill ratios all above 1:1. Embraer and Bombardier are approaching 2:1.
“We feel good about that…” Cardarelli adds. “We’re always conservative at JETNET iQ, we do want to call them as we see them, but we’re actually bullish, particularly for the OEMs.”
A Note on GDP
JETNET notes some decoupling in GDP growth between the US (which has been above 3% for the past two quarters) and Europe, which has remained flat at around 1.2%.
Some of the blame is attributed to the protraction of Brexit, which is estimated to be impacting the UK economy by £19bn annually.
Survey Respondents Less Confident
In addition, Rollie Vincent, JETNET iQ founder, shared data from the company’s Q2 2019 survey, which at the time was 85% complete. The survey asks respondents to describe the current market conditions for Business Aviation. In H2 2018, ‘net optimism’ hovered around 50%, but it plunged to 27% in Q1 2019. Optimism appeared to have eroded further in Q2 2019, to 24%.
In North America, >50% of respondents either ‘somewhat’ or ‘strongly’ believe there is increasing risk of a global economic slowdown in the next year, and in Europe >70% share that sentiment.
“It’s all across the market, the mood has changed,” Vincent notes. “We think this is a caution sign, and it’s going to affect used aircraft sales first, which we think are coming down.”
Light at the end of the Light Jet Tunnel…
For the first time in its surveys, JETNET noted the percentage of intent to purchase Light Jets, which had been as low as 11%, has finally exceeded 30%, meaning a long-awaited improvement in the segment is under way, fueled by the Pilatus PC-24.
The PC-24 topped the “what model are you most interested in for your next purchase?” poll, beating the Gulfstream G500, G650 and G650ER and Bombardier’s Challenger 350. Meanwhile, Vincent updated the company’s 10-year forecast to 7,100 jet deliveries worth $237bn through 2028.
Shearwater: European Bizjet Market to Grow
Analysis from Shearwater Aero Capital reveals that as many as 1,071 new private jets could be delivered across Europe between now and 2025, potentially costing in the region of $38.5bn…
The company’s analysis shows that Europe currently has a fleet of around 2,282 business jets, 1,119 of which are classified as ‘Heavy’ or ‘Large Jets’. Some 294 of them are Medium Jets, and the remaining 869 are classified as ‘Light Jets’.
Chris Miller, managing partner, Shearwater Aero Capital, summarized: “Europe is a very attractive region for Business Aviation finance companies like ours. It has larger, more expensive aircraft than other markets, and the market here is increasingly focusing on benefits of using financing to purchase business aircraft as opposed to just paying cash.”
In-Service Aircraft Values and Maintenance Condition
Asset Insight’s May 31 market analysis covering 96 fixed-wing models, and 1,653 aircraft listed for sale, revealed a 1.8% inventory decrease to the tracked fleet (31 units) and an average value increase of ~1%...
Of all the categories, Turboprops experienced the greatest percentage change by decreasing 6.2% in May. Medium Jet inventory followed with an inventory drop of 2.9%, while Large Jet inventory decreased 2.7%. Small Jets were the only group to record an increase (2.1%).
In terms of average aircraft value, while the tracked fleet increased just under 1% for a second consecutive month in May, Medium Jets posted another 12-month high figure, and Large Jets and Turboprops posted 12-month lows.
Inventory Fleet Maintenance Condition
Fleet Asset Quality deteriorated 0.7% in May, and Maintenance Exposure worsened 1.4%. Overall, Asset Insight’s tracked inventory posted the following figures…
Quality Rating: Remained below the 12-month average and receded back into the ‘Very Good’ range by falling from 5.251 to 5.212 on Asset Insight’s scale of -2.5 to 10.
Maintenance Exposure: Was worse than the 12-month average. Maintenance Exposure (an aircraft’s accumulated/embedded maintenance expense) increased to $1.45m from last month’s $1.40m.
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 Q1 2019, assets whose ETP Ratio was 40% or more were listed for sale over 62% longer on average than aircraft whose Ratio was below 40% (or 237 versus 384 Days on the Market).
May’s analysis also showed that 51% of all tracked models and nearly 60% of Asset Insight’s tracked fleet posted an ETP Ratio above 40%. In fact, the tracked fleet’s ETP Ratio worsened significantly in May, increasing to 69.8% from April’s 63.6%:
- As usual, Turboprops posted the lowest ETP Ratio at 54.5%;
- This was followed by Large Jets, setting a 12-month best figure at 57.1%;
- Medium Jets came third with 77.2%;
- Small Jets recorded an ETP Ratio of 77.7% in May.
May saw inventory levels decrease back to near March’s figures, while average Ask Prices increased for the third consecutive month (although they are still below the 12-month average).
Large Jets: Inventory decreased by 10 units in this category, with departures focusing more on lower quality assets, while additions represented assets of higher quality.
These positive trends did not translate into a hike in the average Ask Price, which actually posted a 12-month low figure – but only decreased 0.2%. The good news is that the group’s ETP Ratio posted the lowest/best figure of the past 12 months, increasing opportunities for buyers and sellers to transact.
Medium Jets: May saw the inventory fleet contract by 15 units in the Medium Jet category, while the group’s Ask Price strengthened 4.7% to a 12-month high figure. Asset Quality and Maintenance Exposure both worsened, the latter posting a 12-month worst figure, as higher quality assets were favored by buyers.
The price boost was insufficient to counter the maintenance condition deterioration resulting in the ETP Ratio climbing to 77.2%. However, the high ETP Ratio should not impede buyers from locating good values, assuming they have completed sound analytics on whichever units they elect to pursue.
Small Jets: Contrary to the other three groups, Small Jets experienced a net increase to the for sale fleet of 11 units.
While the current inventory is facing fewer near-term maintenance events, the cost of those events, based on the latest fleet mix, is projected to be substantially higher. With Ask Prices virtually equalling the 12-month average figure, it’s unsurprising to see the ETP Ratio increase to 77.7%.
Inventory additions have raised the listed units to 10.8% of the active fleet compared to last month’s 9.7%, but Asset Insight believes sufficient good values exist to allow buyers and sellers to reach common ground.
Turboprops: Inventory fell by 17 units in May, with both Asset Quality and Maintenance Exposure receding for the fifth consecutive month due, in large part, to buyer focus on higher quality assets.
With higher priced units departing inventory, average Ask Price posted a 12-month low that was only $10k above the group’s record low figure. Aircraft within this group continue to sell at prices that reflect their maintenance condition, making it clear that buyers are conducting the necessary analytics to justify their offer price.