- 08 Jun 2022
- Brian Foley
- Market Insight
Favorable market conditions have come together to raise the probability of a phenomenon not seen in 15 years: Brian Foley assesses whether we’re about to see the return of speculative aircraft buying...Back to Articles
Speculators are those who place orders for new business aircraft without any intent of ever actually taking delivery of them. Instead, they’ll buy as market demand and short supply push waiting times out to 2-3 years, or more, depending on the model (this compares to 12-18 months during normal times).
These prospectors will later offer their earlier delivery positions for sale, pocketing a hefty premium from the impatient buyer who wants their airplane sooner, rather than later.
In the 2007 timeframe when this behavior was last rampant, reports were rife of multi-million dollar offers over list price being made to early position holders, particularly for the newest models with the longest waiting lists, such as the Gulfstream G650.
What’s raising the probability of this happening again is simply the supply and demand environment today. A flood of new private aircraft flyers discovered Business Aviation as a way of avoiding crowds during the pandemic.
This influx further dried up an already low supply of pre-owned aircraft for sale, eventually driving buyers into the more expensive new aircraft showrooms.
How are the OEMs Responding?
The sudden increase in new aircraft sales activity caught the manufacturers a little off-guard, having become accustomed to the so-so shipment levels that have defined the market for the past decade.
Even as sales orders poured in and backlogs began swelling last year, OEMs were hesitant to increase production until several consecutive quarters of solid sales gains were seen.
They will, of course, still harbor memories of being burned during the 2008 financial crisis, when production had been raised to historically high levels just as the floor fell out and order books crumbled. It took them years to clear out unsold inventory and recover pricing power.
Consequently, today manufacturers are being more measured in their approach to increasing production, preferring to decrease discounts and raise prices to improve margins initially.
Some have already announced production increases to match the influx of orders. However, in 2022 Gulfstream only plans to roughly match last year’s shipment level due to a bottleneck brought on by bringing some wing production in-house.
Similarly, Bombardier has decided not to take the plunge into more units just yet, but will still match last year’s levels even after having shuttered its Learjet division.
All of this demand and constrained supply combine to make for extended buyer delivery wait times. In general, the industry likes to have a 12-18 month timeframe between contract and delivery.
Buyers have shown a willingness to wait this long as their aircraft is built and finished to their specifications, while, for the manufacturer, this lead time gives them confidence that they’re not overproducing and can sell what they build.
To be stuck with unsold units known as ‘white tails’ carries punishing holding costs for manufacturers as each can be upwards of a US$75m asset sitting on the tarmac without a home.
Raising the Specter of Speculators
As waiting times extend beyond two years, buyers may look to another manufacturer with shorter delivery times. However, eventually the industry as a whole has long lead times, raising the specter of speculators coming in to do what is hopefully a quick flip.
Speculators don’t even need to come up with the full cost of the airplane, since contracts stipulate that only a deposit plus progress payments be made periodically. Final payment isn’t made until delivery of the aircraft.
Having a backlog made up of an outsized number of speculators is not healthy for manufacturers, as during a downturn in the industry or economy these individuals cancel their contracts and run for the exits.
Manufacturers have tried to make life more difficult for speculators with such stipulations as not making the new aircraft warranty transferable, should the position be sold before delivery, but many still find a way around these disincentives.
Regardless, be ready for these opportunists to begin infiltrating order books once again. Doing so exacerbates the wait times of legitimate buyers while reducing the quality of backlogs.
History shows that certain buyers are willing to pay what is essentially a scalper’s fee in exchange for an early delivery, and given that some waits now exceed three years, these types of transactions will start becoming more common until more teeth are put into contracts to discourage it.
Global Flight Activity Update
May 2022 was the strongest May of flight activity on record for the global Business Aviation market. Data from WingX shows that through May 30, there were 317,222 business jet sectors flown worldwide, 22% more than in May 2019...
Corporate flight departments were 10% busier than three years ago, whilst Charter, Fractional and Private flight departments flew 30% more sectors than pre-pandemic May 2019. Unprecedented levels of business jet activity continued to correlate with under-par scheduled airline activity; with global scheduled airline sectors 22% below their May 2019 activity.
The Memorial Day weekend at the end of May provided a useful calibration of leisure demand. Last year, the holiday period provided early evidence of the rebound in demand for Business Aviation travel, with the long weekend seeing 12% more sectors than in 2019. This year’s Memorial Day weekend saw 32,559 jet and turboprop sectors, only 1% more than last year, but 13% up on May 2019.
Business jet activity in North America was still well ahead of pre-pandemic trends, with the overall month seeing 24% growth versus May 2019. The last week of May was up by 27% compared to the same week in 2019.
Europe had a stellar month in terms of business jet demand. Throughout May, activity was up by 20% compared with May 2019. Unsurprisingly, business jet connections between Europe and Russia remained at a standstill, although outbound flights from Russia to Turkey, Armenia, and Kazakhstan were all higher than in May 2019.
Business jet flights within Russia in May 2022 were down 9% compared with May 2019, but down by 52% compared to May last year.
In Western Europe, the Monaco Grand Prix and the Champions League Final were two of the biggest draws for business jet flights in May.
Arrivals into the Monaco GP airports were up 49% compared to the same event in 2019, whilst Champions’ League visitors to Paris airports exceeded inbound business jet arrivals to Spain (where the May 2019 Champions’ League Final was held), by 37%.
Rest of the World
Outside Europe and the US, one-third of the business jet traffic came from Canada and Mexico, which were seeing more activity this May than in May 2021, but less than in May 2019. Other relatively busy markets like Brazil, India, and popular hubs such as Bahamas and Dominican Republic were seeing record levels of activity, although arrivals into Bermuda hadn’t yet recovered.
Business jet movements in Singapore rebounded above pre-pandemic levels, but Business Aviation traffic in China was down by 66% in May 2022, compared to May 2021, with no obvious improvements since the lockdowns started to ease. Meanwhile, Hong Kong arrivals were up 10% on last year, but down 49% on May 2019.
“The start of summer saw more record-breaking demand for business jet travel, although the peaks were only modestly higher than May 2021,” notes Richard Koe, Managing Director, WingX. “Widespread disruption and delay across the scheduled airline network should sustain the momentum in Business Aviation. “Aircraft owners are flying a lot more, and there are signs of strong corporate business jet usage.”
In-Service Aircraft Maintenance Condition & Marketability
For the second consecutive month, Asset Insight’s tracked fleet rose by 28 units during May, equivalent to 3.9%, with all four aircraft groups posting an availability expansion.
Listings for the tracked business jet and turboprop models are still down 14.7% Year-to-Date (YTD), but increased to 754 aircraft in May.
Though total inventory is still about 55% lower than the June 2020 peak, there are ample signs that traditional aircraft buyers are taking delivery of new-production units, thereby increasing the number of pre-owned aircraft listed for sale.
Asset Insight’s tracked fleet’s average Ask Price increased 5.2% in May, following April’s 4.2% decrease, and is now up 39.8% YTD (10.6% Year-over-Year (YoY)). So called ‘off-market’ aircraft – mostly young, low-time units – continue transacting at higher prices without a formal listing, but their number will decrease as availability rises.
Inventory Fleet Maintenance Condition
The Quality Rating and Maintenance Exposure value did not trend in the same direction during May. Specifically...
Quality Rating: Following four consecutive monthly improvements, the listed fleet’s Quality Rating decreased slightly to 5.303, following April’s 12-month best 5.347, on Asset Insight’s scale of -2.5 (low) to 10 (high). That still left the fleet within the ‘Excellent’ range, but indicated more near-term maintenance events will be due. On a brighter note, the figure also represented a 1% improvement YoY.
Maintenance Exposure: On the other hand, Maintenance Exposure (the cost of embedded/accrued maintenance), decreased in May, the first improvement over the past three months. While it was slightly higher YoY, the change signified that upcoming maintenance events would be 2.7% less expensive to complete.
Maintenance Exposure to Ask Price (ETP) Ratio
With the average Ask Price rising and Maintenance Exposure decreasing, the stage was set for the ETP Ratio to improve. It did so, dropping to 61.5%, a 12-month low (best) figure, positively affecting all four groups.
For those not familiar with the figure, 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’ (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 Q1, assets whose ETP Ratio was 40% or higher were listed for sale more than 62% longer (on average) than aircraft whose Ratio was below 40% (308 versus 500 Days on Market).
In May, more than 43% of the tracked models, and nearly 50% of all listed aircraft, posted an ETP Ratio above the 40% excessive mark.
Availability may have increased to 3.3% from April’s 3.2%, but that simply means an average 5.4 units per model were available, based on Asset Insight’s tracked fleet, versus 5.3 units in April. Demand continues to be plentiful, as are the number of first-time buyers when compared to one year ago, when inventory equated to 8% of the active fleet.
Turboprops and Large Jets are the most marketable aircraft among the four groups. Traditional corporate buyers are starting to take delivery of new-production equipment, partly evidenced by the second consecutive monthly increase to pre-owned availability. However, shifting to a ‘balanced’ market will require a substantial production increase by airframe manufacturers, which won’t occur this year.
Large Jets: Availability increased by six units for Asset Insight’s tracked 43-model Large Jet fleet. But the listed-for-sale pool is still down 13.1% YTD, and over 61% from the June 2020 peak.
The group’s Quality Rating, which has recently exhibited some wild swings, decreased 6.4% in May following April’s all-time high/best 5.987. May’s 5.601 leaves the group in ‘Outstanding’ territory, and also represents a 0.5% improvement YoY.
Maintenance Exposure also decreased, but that represented a 6.7% improvement while remaining basically unchanged YoY. Following a nearly-incredible 13.6% increase in April to establish an all-time record high figure for the group, Ask Price receded 20.1% in May to the lowest figure since January. Still, the group’s average Ask Price has increased 21.6% YTD and 28.6% YoY.
Even with the price drop, the ETP Ratio improved to 34.1% to post the group’s third consecutive 12-month low/best figure. Clearly, Large Jet marketability, as it pertains to maintenance status, has improved quite dramatically over the past four months.
Mid-Size Jets: Availability for the 45-model tracked Mid-Size Jet fleet rose to 181 aircraft in May, a 1.7% increase (three units) that left inventory 21.6% lower YTD and nearly 64% below the June 2020 peak.
At 5.140, the group’s Quality Rating remained within ‘Very Good’ range but was worse than the 12-month average, and nearly 3.9% worse YoY. Following April’s unusually large improvement, Maintenance Exposure rose/worsened 7.6% to re-establish the trajectory it began back in November. May’s Exposure figure was also nearly 14% higher/worse YoY.
Ask Price increased, though, by 27.8% in May to set a 12-month high figure that was also nearly 109% higher YTD (no, that’s not a misprint) and 52.8% higher YoY. These changes had an extremely positive effect on the group’s ETP Ratio, reducing it to a 12-month low 62.2%.
With an average of only 3.9 aircraft available per tracked model, we continue to believe sellers hold the stronger hand.
Light Jets: Listed aircraft for Asset Insight’s 29-model tracked Light Jet fleet increased by 6.1% (15 units) to create a pool of 259 assets. That represents only a 3% inventory decrease YTD, although 52.3% fewer aircraft are currently available compared to the June 2020 peak.
The group’s Quality Rating worsened a minimal 0.2% following April’s 12-month high (best) Rating, but the 5.347 Rating kept Light Jets within ‘Excellent’ territory, and reflected a 5.3% improvement YoY.
Maintenance Exposure remained better than average, decreasing (improving) 0.5% in May, and 14.4% YoY. The group’s average Ask Price was a big surprise, as it rose 9.3% in May to set an all-time high figure that was also up 73.5% YTD and 43.2% YoY.
The Maintenance Exposure improvement, combined with the Ask Price increase, resulted in an 88% ETP Ratio representing a 12-month low/best, and the third consecutive month the group’s Ratio has been below triple digits. That may not sound like much, but it is music to the ears of many Light Jet sellers.
Turboprops: Continuing to sport the highest selection per model, at an average 9.2 aircraft across Asset Insight’s 17-model tracked fleet, Turboprop availability increased by four units in May, leaving the group down nearly 23% YTD, and almost 36% lower since the June 2020 peak.
Statistics for this group are all moving in the right direction, with the Quality Rating rising 3.4% in May and 0.5% YoY to 5.187, bringing the group back into ‘Very Good’ territory. Maintenance Exposure decreased 6.6% during the month, and 4.4% YoY – a better-than-average figure.
Last, but certainly not least, Ask Price increased 4.6% in May, setting a 12-month high figure, while also rising 12.6% YTD and 12.2% YoY.
The effect on the group’s ETP Ratio was, as one would expect, quite positive, reducing/improving the figure to 37.6%, a 12-month low/best that also placed the group below the 40% ‘excessive’ demarcation point for the first time this year.