- 31 Jan 2018
- Rolland Vincent
- Market Insight
As we enter March, are things finally looking up for Business Aviation? Rollie Vincent analyses the mounting evidence to discuss how these interesting times are changing. The ‘facts’ certainly seem compelling...Back to Articles
As we enter March, are things finally looking up for Business Aviation? In the face of mounting evidence, there is a growing sense that these interesting times are changing. The ‘facts’ (whatever they are anymore) seem compelling. Rollie Vincent explains…
At a more macro-level, business aircraft utilization levels are clearly trending upwards. People are finally flying more sectors and more hours. They are booking charter flights. They are once again using business and private aircraft for what they were designed to do (to be flown, not stored in a hangar and kept polished).
Year-over-Year (YoY), the rates of increase in business aircraft utilization are highest in Europe, up about 6-7% according to some of the latest readings, with the US, up by a more modest – but still respectable 3-4%.
In 2017, the European economy surged back to life, beating almost all pundit forecasts by expanding at an estimated 2.4%, with much the same expected in the latest 2018 outlook.
Business and consumer confidence levels are elevated in both the Euro Area and the US, supported by a spirited cocktail of lower unemployment, lower corporate and personal income taxes (US), 100% bonus depreciation for new and used aircraft (US), higher real wages and continuing equity market strength.
Despite an early February 2018 correction of more than 10% in the Dow Jones Industrial Average that took some by surprise, the stock market remains a good place for investors to park their cash. At the time of print, more than half of the correction had dissolved, with exchanges returning to previously unheard-of levels of market capitalization.
Many an airplane salesperson is no doubt dreaming of the days when at least some of that cash will be once again put towards a new and/or larger aircraft. With a flood of repatriated corporate profits expected to come on-shore into US corporate coffers, beginning Q1 2018 and a bevy of shiny, newly certified business jets soon landing at an airport near you, things are definitely shaping-up for better times ahead for the Business Aviation industry.
Used Jet Transactions
In the world of used business jet transactions, 2017 looks like it was the best-ever year for sales volumes, with JETNET recording 2,668 whole retail sales or leases during the year (Chart A, below). The ‘For Sale’ inventory dipped just below 10% of the in-service fleet at the end of 2017, with 2,143 jets listed in the JETNET database.
Tellingly, only 116 jets on the market at press time were delivered new in the last five years, representing less than 6% of the available inventory. With almost 80% of the jets listed ‘For Sale’ of a more ‘Classic’ status (i.e. older than 20 years), it is clear that this market has been rather cleanly picked over by savvy buyers (who, to their credit, have probably been reading AvBuyer).
New Jet Stimulation
With innovative new products expected to enter into service this year, we expect to see buyers pulling out their wallets with greater frequency in conjunction with FAA/EASA certification announcements. This will help bolster new aircraft order books at the OEMs, which would be a welcome development as the investment payback period begins.
With a backlog representing the initial three years of production, Pilatus expects to deliver 23 new PC-24 light jets as it prepares to ramp up production to a rate of four, perhaps five airplanes per month. This is contingent on expanding its widespread sales success with the PC-12 into wider applications, including additional corporate flight departments, charter and fractional programs, and special mission applications.
Textron, meanwhile, will soon receive certification for the Super-Mid-size Longitude, extending the Citation family (already the world’s largest fleet) and Textron Aviation’s top-line revenues upwards. And Gulfstream’s innovative G500 and G600 Large-Cabin jets are expected to certify in 2018, bringing new levels of performance, technology, quality, comfort and style to the market.
Bombardier’s much-anticipated Global 7000 is the company’s crown jewel investment. It’s an essentially all-new design that has already raised the bar in defining what a business jet can be. With the company seizing a four-zone cabin ‘high ground’ of cabin interiors, a wide-ranging group of stakeholders (customers, investors and the Bombardier leadership team) have high expectations for this jet.
Favourable macroeconomic fundamentals; tightened used jet markets; new products coming on-stream; triggered trade-ins and replenished, more attractive and gently-used inventory: Change – like Spring in the northern latitudes – is in the air.
Aircraft buyers may not know it, but they can read it here – these are good times, and possibly the best of times, to be in the market.
Flight Activity – North America
According to ARGUS TRAQPak, January 2018 posted a Year-over-Year (YoY) increase over January 2017. Month-over-Month (MoM), activity finished modestly up over December 2017…
Results by operational category were all positive with Part 135 activity producing the largest yearly gain, while Fractional and Part 91 activity both also recorded a rise. The aircraft categories were positive, too, with Turboprops posting the largest gain from January 2017.
January Business Aviation flight activity posted a modest increase over December 2017, though results by operational category were mostly red for the month, with Part 91 posting the only monthly increase.
Aircraft categories were somewhat mixed for the month, with Large jets posting the largest monthly increase over December, but Light and Mid-size jets recording decreases.
Next Month’s Forecast…
TRAQPak analysts estimate a 3.8% YoY increase in overall flight activity in February 2018.
Record Year-End Flight Activity
Jet Support Services, Inc. (JSSI) released its Business Aviation Index for Q4 2017, tracking and reporting on the global flight activity and utilization of business jets, turboprops and helicopters worldwide, noting record year-end flight activity…
The report calculates the average flight hours flown per aircraft on a monthly basis and organizes this data by region, industry and cabin type. This ultimately provides useful insights into the state of global economic conditions.
Key findings in the Q4 data include:
2017 European BizAv Traffic Growth
BizAv traffic in Europe grew 6% in 2017, with Eurocontrol reporting more than 700k departures, arrivals, internals (domestic European flights) and overflights, including an average of 100 additional daily departures, versus 2016. Here are the main influencers…
“The reality is seeping in that Business Aviation is an integral part of the overall mobility mix,” said Brandon Mitchener, CEO of the European Business Aviation Association (EBAA).
New forms of service which increase access to Business Aviation, and interest from the younger generation have led to a steady increase in traffic since November 2016, he added.
Year-over-year (YoY) growth was strongest in March (+9%), July (+8.9%) and October 2017 (+8.9%). The Central Europe Functional Airspace Block enjoyed 12.2% growth in average daily flights, bolstered by Slovakia (+30.9%), Bosnia-Herzegovina (+25.7%) and the Czech Republic (+13.8%).
Business Aviation traffic in the EU is now on a par with 2006 levels, but has not yet returned to the historic peak level of 2007 and 2008. To help the growth continue, EBAA says it will focus on creating higher Business Aviation productivity by addressing issues such as access to airports and flight-time limitations during 2018.
…“Keep Status Quo” for UK BizAv, Says EBAA
EBAA has also released a Brexit analysis report calling for negotiators in Brussels and London to preserve the current aviation relationship. Key topics of interest for the BizAv industry highlighted in the report include traffic rights, ownership and control, VAT/customs duty, and the future relationship with EASA.
The report concludes that maintaining the existing relationship as far as possible is key to avoiding detrimental effects on the Business Aviation community.
Recent Uptick in Business Aircraft Values
According to AMSTAT’s new Aircraft Valuation Tool (AVT), the average estimated values for most business aircraft segments have risen since the start of Q4 2017…
According to the AVT, three market segments have seen their average estimated values tick upwards since the start of Q4 2017. These included:
The Light Jet segment, meanwhile, has been more consistent with the average estimated value - up +8.2% in the last 12 months from $2.2m to $2.4m.
“The increase in estimated values reflects recent increases in market demand and a tightening market with fewer options for buyers,” said Andrew Young, AMSTAT General Manager. “Changing market conditions further emphasise the need to access the realâtime aircraft estimated values provided by the AMSTAT Aircraft Valuation Tool.”
The new AMSTAT Aircraft Valuation Tool (AVT) calculates objective realâtime estimated values for business aircraft. The AVT Quarterly Aircraft Values Report provides the market with the normalized average estimated value for business aircraft by segment over the last 12 months.
Used Jet, Turboprop and Helicopter Market Update
JETNET released its December 2017 and 2017 Year-End results for the used business jet, turboprop, helicopter and commercial airliner markets. Most market sectors are showing lower inventory ‘For Sale’, with more full-sale transactions in 2017 compared to 2016.
The Fleet ‘For Sale’ percentages for all used aircraft market sectors (with the exception of Piston Helicopters), were lower in the December comparisons. Business Jets and Commercial Turboprops were down the most.
Across all market sectors, JETNET reported 9,071 full retail sale transactions for 2017, an increase of 334 (+3.8% more transactions) than the 8,737 reported in 2016.
All aircraft segments were taking more time to sell (34 days) in 2017 compared to 2016, except for business jets, which sold after an average of 310 days on the market, the same as recorded in 2016.
‘For Sale’ Inventory
The ‘For Sale’ inventory of business jets has decreased steadily from a high point in July 2009 (2,938) to 2,143 jets in December 2017. That’s a reduction from 17.7% of the in-service fleet ‘For Sale’ in July 2009 to 9.9% now. (The percentage has dropped from 11% in January 2017).
As the market has finally broken below the 10% threshold of inventory ‘For Sale’, a period of transition is now in play, wherein the pendulum swings in favor of seller. Today the market of available aircraft continues to shrink, and still many models exhibit the soft pricing brought on by the decline in residual values that have dominated the post-recession years.
Continued reduction of the ‘For Sale’ inventory in 2018 could lead to prices firming. The sage advice for buyers is to act now. The counsel of “just wait a few months—the price will come down” may not present itself as we break into the seller’s market environment.
Business Jet Sales Equilibrium
Worldwide, new business jet deliveries have remained remarkably flat since 2011, notes aviation analyst Brian Foley. Averaging 692 units per year, there has been a standard deviation of just 25 units…
“Statistically there’s a pretty good chance that 2017 new jet results will also fall within that same narrow band, as will 2018”, Foley predicts. “This trend has not been random but rather a symphony of equal and opposite market forces holding deliveries in tight equilibrium.
“Many believe that the market won’t have fully recovered from the financial crisis until deliveries return back to lofty 2008 levels. That peak should be considered an anomaly and not some recovery benchmark. Today’s market is in fact normalized and sustainable with supply equalling demand, meaning it’s technically been recovered for some time now.”
Overseas the falling US Dollar has made business jets a better deal in local currency, and in Europe the stock markets have largely recovered to their pre-recession highs. Business jet utilization has also risen.
Offsetting the positive forces in an equal and opposite direction has been weakness in emerging markets that were particularly hard-hit by falling commodity prices and in the case of China, austerity measures. These trends seem to have stabilized, and China’s mainland fleet began growing again last year according to AMSTAT.
Foley believes the market will continue to be relatively flat for the next couple of years. After that, new airplane models come online that will stimulate the market.
Aircraft Finance to Increase?
New Global Jet Capital research, sourced from 144 Business Aviation professionals reveals 75 anticipate demand for private aviation finance will increase in 2018, and 56% think the volume of funding will also rise.
Global Jet Capital also revealed that over 150 new business aircraft worth more than US$5bn could be delivered to Europe this year. Over 13% of those deliveries (equating to 21 aircraft) could go to the UK…
When asked how attractive they think the European private aircraft market currently is to finance companies, 34% described it as ‘very attractive’ and a further 43% as ‘attractive’. Only 21% think it is ‘unattractive’.
Shawn Vick, CEO at Global Jet Capital, said “We expect to see the Business Aviation sector expand over the next few years. Factors behind this include economic growth in most of the major economies, a significant amount of investment and strong corporate earnings.”
Honeywell Sees Strengthening Bizjet Sales
Honeywell projects an increase in new business jet sales in Q1 2018, with “acceleration as we get deeper into the year”, according to Thomas Szlosek, Sr. Vice President & CFO.
Szlosek noted during a recent earnings call, “We expect organic sales to improve as production rates increase across most of our OEM customers”.
The company's aerospace segment saw Q4 revenues increase 6% YoY (5% organically) to $3.9bn, despite “slow demand in business jets, as expected,” Szlosek noted. Honeywell's aftermarket business was “stronger than anticipated”, bolstered by higher-than-expected business aircraft spares sales, he added.
Looking ahead, demand for long-term service agreements from Business Aviation customers is expected to help drive another strong year in commercial aftermarket sales. Honeywell's market commentary builds on recent sentiments that the business jet segment might finally be gaining momentum.
Colibri: Record Year for Jet Sales
Colibri Aircraft reported a record year for the company in 2017, and saw the number of used aircraft it sold and bought in 2017 double compared to 2016…
Looking ahead, the company predicts the Business Aviation sector will expand further in 2018 and expects to see more private jet owners sell their aircraft and upgrade to new models that have launched in the past few months. It also notes a growing pool of potential buyers as the number of High-Net-Worth-Individuals grows along with an increase in the finance available to help potential buyers.
Anticipating an even better 2018, Oliver Stone, Managing Director, Colibri Aircraft revealed, “The business we have done in January 2018 is already higher than what we did in January 2017.”
BizAv on The Rise in Asia
The consensus in the industry is that China’s Business Aviation market is starting to take off again, and that Southeast Asia is experiencing some good growth too, Asian Sky Group notes…
“We are well past the austerity measures,” said Jeff Lowe, Managing Director, Asian Sky Group. “China was recovering in 2016 and I certainly expect that the annual figures for 2017, once released, will show healthy fleet growth for business jets in China.”
Buyers in China still prefer the larger business jets, but they are becoming more astute, Lowe observes. “We’ve seen a shift in the buyers and their requirements. More and more of the requirements are driven by the corporate need versus (maybe if you go back five years) where it was more driven by personal needs.”
Civil Helicopters in Asia-Pacific
Meanwhile, the civil helicopter market in Southeast Asia has been flat in recent years, due to the fallout from the depressed oil and gas industry, but helicopter makers can take solace in the relatively resilient China and Australasian markets.
The civil helicopter market in China is less skewed toward the oil and gas sector than Southeast Asia’s helicopter market, and last year posted the strongest fleet growth in the region, Asian Sky Research said in a preview of its 2017 Year-End Civil Helicopter survey.
Mr. Lowe noted China’s civil helicopter market had a net gain last year of 79 helicopters, making it the fastest-growing sizable helicopter market in Asia-Pacific. Its fleet growth was 15%, he said. (Asian Sky calculates the number of turbine-powered helicopters and subtracts those that have left the fleet to determine the net gain).
The next-fastest-growing markets were Australia and New Zealand, which added 24 and 16 helicopters last year, respectively. The fleet growth was small single digits but is still substantial considering Australia and New Zealand already have large installed fleets.
Southeast Asia experienced very little growth last year, reflecting a lack of growth in the oil and gas industries. While everyone is still trying to determine whether the oil and gas segment is still comatose, it is clear there are good sales opportunities in the multi-mission and emergency medical services segment, the report indicates.
In-Service Aircraft Values and Maintenance Condition
Asset Insight’s market analysis of January 30, 2018 covering 92 fixed-wing models and 1,699 aircraft listed ‘For Sale’ revealed some mixed, but generally favorable messages…
While the total number of listed aircraft decreased, inventory figures for Medium Jets and Turboprops increased through units of above average asset quality. Furthermore, even though Quality Rating and Maintenance Exposure improved, Ask Prices for all but Large Jets decreased.
Overall Ask Price for tracked models improved 0.5% in January, thanks to a 1.8% improvement by Large Jets. Medium Jets lost 0.7% to post a new record low, while Small Jets and Turboprops recorded 12-month low figures, falling 2% and 1%, respectively.
Inventory Fleet Maintenance Condition
The number of inventory units continued to decrease, with January’s aircraft mix pointing to higher quality assets joining the ‘For Sale’ fleet.
The tracked inventory fleet maintained its ‘Very Good’ Quality Rating, posting an improvement to 5.238 from December’s 5.169, on Asset Insight’s scale of -2.5 to 10. January’s Rating represented the highest asset quality figure since August, potentially creating good value for buyers based on current pricing.
The tracked fleet’s average Maintenance Exposure (an aircraft’s accumulated/embedded maintenance expense) improved 0.7% to $1.457m, representing the best (lowest) figure since last August.
TABLE D: Business Aircraft Fleet Maintenance Condition
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.
During Q4, the average Days on Market were 42% greater for aircraft whose ETP Ratio exceeded 40% (199 versus 284 days).
The tracked inventory fleet’s ETP Ratio improved to 64% from December’s 12-month peak figure of 65%. Turboprops once again registered the lowest (best) ETP Ratio, 47.3%; Large jets followed at 57.2%, a slight degradation over last month; Medium jets worsened slightly, increasing to 65.4%; and Small jets improved to 79.2%, after posting 80% in December, the group’s worst 12-month figure.
CHART B: Maintenance Exposure to Price Ratios for January 2018
Asset Insight’s tracked inventory decreased by 11 units this month boosting the inventory fleet’s Quality Rating and lowering Maintenance Exposure. However, over half of all tracked models continued to post an ETP Ratio above 40%, highlighting how far Ask Prices have dropped.
Large Jets: Asset Insight believes the Large Jet market is beginning to stabilize, although it is presently occupying a lower pricing level than sellers might like. The tracked fleet decreased by 2.1% (eight units), while transacting aircraft were of mixed asset quality, and the current inventory pool maintained last month’s ‘Excellent’ Quality Rating at 5.297.
Ask Price increased for the second consecutive month, this time by 1.8%, but it was insufficient to cover the Maintenance Exposure degradation of 0.4%, which slightly worsened the group’s ETP Ratio.
Medium Jets:The group maintained its ‘Very Good’ Quality Rating by posting a 5.127 figure, a 0.8% improvement over December complements of a 2.2% increase (12 units) in the ‘For Sale’ fleet. Maintenance Exposure also improved slightly, but Ask Price decreased 0.7% to post a new record low, negatively impacting the group’s ETP Ratio. Asset Insight believes competition in this space will continue to decrease values in the near term.
Small Jets:The tracked fleet decreased 5.2% (25 aircraft), with transactions involving primarily below-average quality aircraft. This improved the inventory’s Quality Rating by 1.4%, pushing it further into the ‘Excellent’ range at 5.363 and posting this group’s best figure since last February. Additionally, Maintenance Exposure improved 1.1% to the best figure since September.
Although Ask Price fell 2% to a 12-month low, the group still managed an ETP Ratio improvement. Quality Rating and Maintenance Exposure have been moving within a narrow, above average band for the past four months, and Asset Insight believes Ask Prices will soon begin to strengthen.
Turboprops:We cannot point to more positive quantitative figures demonstrating the value available to buyers than those posted by this group. Inventory increased by 3.3% with 10, mostly above average asset quality aircraft, joining the fleet. This led to a Quality Rating increase of 3.9%, boosting the group’s figure into the ‘Very Good’ range at 5.184 (a 12-month high).
Ask Price fell to a 12-month low, but Maintenance Exposure posted the group’s best 12-month figure by improving 4.6% and decreasing the average ETP Ratio to 47.3% – within striking distance of the 40% figure Asset Insight views as the ‘excessive’ demarcation point. In a nutshell, if you are a serious buyer, it’s hard to envisage a better time to secure good value in a Turboprop.
Aircraft Ask Price versus Maintenance Exposure ($m), left, and Asset Quality Rating (scale -2.500 to 10.000), right