With the Northern Hemisphere scheduled to enter Spring on March 19 with the vernal equinox, the notion of balance seems like a good starting place for an assessment of the state of the business aircraft marketplace.
Let us begin with an acknowledgement: Business aircraft transaction professionals have their own, often unique set of indicators to assess the state of the market. Part ‘truth’, part ‘gut feeling’, these are sprinkled with a unique blend of savory spices they bring to the table. These signals and their interpretation are part of their core competency that helps bridge the gap between a prospective buyer’s wants/needs and the solution that is best (given the marketplace of the moment).
As with many things in life, finding a professional who is aligned with a customers’ requirements and expectations is vital to success, and is Step 1 in the business aircraft buying process. Prospective buyers are advised to engage a trusted advisor to navigate what can be a complex process, strewn with tripping hazards, inevitable ‘gotchas’, and the occasional dangerous reptile lurking in the leaves.
Our experience suggests that a healthy mix of hard indicators and good old-fashioned qualitative reasoning makes for the best results in a business aircraft evaluation.
Self-Evident Market Truths: New Jet Deliveries
First, let us examine what we believe to be self-evident truths. The 2019 GAMA shipments announced on February 19, 2020 confirmed all the details, but from what we know about the new business jet segment, 2019 was a good year for the manufacturers, with ~715 new units delivered by the seven primary business jet OEMs, which was up 13% YoY [Note: these numbers exclude the single-engine Cirrus Vision Jet].
- Textron Aviation’s Citation line was once again the most delivered product line, led by the popular Citation Latitude (which has already exceeded 230 aircraft in service and accounted for an impressive 29% of Textron’s jet shipments last year).
- Together, Textron, Gulfstream and Bombardier delivered 7-in-10 new jets last year, and account for almost 90% of the industry’s backlog (by value) at the end of the year.
- The ‘Big Five’ OEMs (Bombardier, Dassault, Embraer, Gulfstream and Textron) achieved a book-to-bill performance of 1-to-1 or greater in 2019, individually and collectively for the first time in the post-2008 crisis era. The combined backlog value rose by ~8% YoY to more than $US33bn by December 31, 2019.
New product announcements; certifications; production ramp-ups and acquisitions; and investments in Maintenance, Repair and Overhaul (MRO) capacity were a regular feature of what – for many of the OEMs – was a good year in 2019.
At the time of publication, we became aware of the signing of an MoU between Bombardier and French rail powerhouse Alstom for the latter to acquire Bombardier Transportation, the company’s sprawling, but troubled and heavily indebted rail business.
Assuming that the transaction receives anti-trust approval and is closed in H1 2021 as foreseen, the deal will allow a major business jet competitor to be unburdened of much of its longterm debt, opening up degrees of freedom to focus more fully on Business Aviation.
Early projections of proforma free cash flow and EBITDA suggest that Bombardier’s aviation business will have access to much more affordable capital to finance new product R&D activities (a new Challenger or two?) and (in our view) business development and acquisition opportunities. Watch this space.
Some New Aircraft Market Context
The positive results emanating from the OEMs should be considered side-by-side with the fact that new aircraft discounting is all the rage in many corners of the market. In our humble opinion, there is far too much discounting to be able to claim that the new aircraft markets are as healthy as they may seem.
We would argue that conditions remain firmly in favor of the buyer, whether they are shopping for one of the almost 40 business jet models on offer, or one that’s available in the preowned market.
We believe that some of the best deals to be negotiated are with lightly used off-market aircraft that – as you may have guessed – are best sourced quickly, quietly, and before the next guy even knows what happened.
Our Suggestion: You will find best value with a trusted, market-savvy and seasoned aircraft transaction professional and organization who intimately knows this space and believes that ultimate value does not equate to the lowest price.
Self-Evident Market Truths: Used Jet Market
Pre-owned jet transactions were down about 14% YoY in 2019 as inventory increased by about 10% overall. Prices have naturally softened, which is no surprise given how tentative the customer community feels about the state of the economy, geo-political uncertainty, and the absolute unknowns about coronavirus, Brexit, and another contentious US Presidential election in 2020.
For the undecided, there is always the philosophy of one of America’s finest poets to ponder as you consider your options. In a poem written more than 100 years ago and apparently in jest to a friend, Robert Frost opined:
Two roads diverged in a wood, and I –
I took the one less travelled by,
And that has made all the difference.
Whichever airplane you buy, be open to the possibilities – the aircraft models, manufacturers and brands that are available to you. There is a wide variety of choice available in today’s market – which is broader and deeper than ever before.
Flight Activity - North America
TRAQPak’s review of Year-over-Year (YoY) North America flight activity (January 2020 vs. January 2019) indicates a decrease of 0.5% in January 2020. Activity also posted a month over month decrease to finish down 5.6% compared to December 2019.
The YoY results by operational category were mixed, with Fractional activity posting the only yearly increase over January 2019 marking the 17th straight YoY increase for the Fractional market. The largest decline came in Part 135 flight activity.
The aircraft categories were mostly positive for the month, with Mid-size, Large Cabin and Light Jets all enjoying marginal increases, while the turboprop segment posted the only yearly decline.
Results by operational category were all negative for the month, with Part 135 flight activity posting the largest monthly decrease, closely followed by Fractional activity. The aircraft categories were also red for the month, with Light Jets posting the largest monthly decrease.
TRAQPak analysts estimate there will be a 3.1% increase in overall flight activity year over year in February 2020.
Flight Activity – Europe
According to WingX there were 56,571 Business Aviation departures in January 2020, a 4.5% increase compared to January 2019…
Compared to the post-recession low point in 2016, January’s flight activity was up 14%, but is still down 7% versus the prerecession high (recorded in January 2008). The big increases in activity came from France and Germany, but these were offset by a large drop in flights from the UK. Other substantial flight activity increases were recorded in Switzerland, Spain and Italy.
French growth in flight activity emanated from increased Large Jet activity (up 8% YoY), while the growth in Germany was fuelled more by Small and Mid-size Jet activity. Most of the UK’s flight activity decline came in the Turboprop sector.
Meanwhile, Austria, Poland and the Czech Republic saw the biggest increases in charter activity, although the UK charter market declined by almost 10% YoY. Flights within Europe were well up, and flights from Europe to North America recorded an increase of around 10%. Flights to Africa were also up while flights to Asia-Pacific decreased in January 2020.
“January’s relatively strong growth YoY clearly owes to more Large Jet activity – particularly Ultra-Long-Range and Super Mid-size Jet activity,” argues Richard Koe, managing director, WingX.
“This was most apparent in activity in Germany, Italy, Spain and France, but much less so in the UK where overall activity continues to decline.
“The growth trends this month correlate to an increase in the size of active business jet fleets in Europe, and point to recent fleet renewals amongst the largest international operators. The growth emphasis is in the charter market, with business jet owners flying less.”
Mente Group: 2020 Used Market to be Price Driven
Generally, the business jet industry moved from a seller's market early in 2019 to a more balanced market at midyear while the year ended as a predominantly buyer's market, notes Mente Group President and CEO Brian Proctor...
"We expect that trend to carry over into 2020 with perhaps fewer transactions and heightened price sensitivity for used business aircraft," he adds.
Reflecting on 2019 generally, Proctor says, "The preowned market had a decent year overall,” revealing that “it was our highest transaction dollar volume in the past 10 years, and I expect that could be true for the industry in general.”
2020 Will Be Price-Driven
Proctor expects the 2020 pre-owned market to be price driven. "Strategically, we are planning for a reasonably active Q1. Q2 will slow down a little bit with an even slower Q3. Then, after the election, Q4 will be very active," he predicts.
Mente Group expects buyers in this market to be opportunistic throughout 2020.
"Buyers are seeking value where they can find it,” Proctor continues. “A lot of wealth has been created in the last couple of years and those buyers will continue to buy if and when they see good deals in the marketplace.”
However, he anticipates pricing pressures will affect both new and pre-owned business aircraft. "Sellers and new aircraft manufacturers are going to have to be very, very responsive to what's going on in the marketplace in 2020," Proctor says.
January Boost for Pre-Owned BizJets
The available business jet fleet for sale in January totalled 1,746 units (7.4% of the active fleet) according to Jefferies Equity Research. That compares to 1,825 aircraft for sale in December, and 1,667 a year ago…
When looking at aircraft currently in production or fewer than seven years out of production, 6% of the fleet was for sale in January. Heavy Jet inventories rose 7% compared to a year ago, while Medium Jet inventories rose 10% in January.
- The number of Bombardier business jets for sale in January rose 42% to 169 units compared to a year ago, while pricing declined 11%.
- Cessna Citation business jets for sale totalled 226 units in January, up 14% from a year ago, while average list prices rose 3%.
- The number of Dassault business jets for sale rose 19% compared to a year ago (to 63 aircraft), while pricing fell 5%.
- Embraer business jet inventories rose 36% to 76 aircraft for sale, while pricing declined 3%.
- Gulfstream business jet inventories grew 18% compared to a year ago with 87 units for sale, while pricing contracted 11%.
JETNET Q4 2019 Used Aircraft Market Update
The for-sale aircraft inventory grew by 2% across all seven market sectors in a comparison of 2019 to 2018. In December 2019, the inventory stood at 6,324 aircraft, compared with 6,201 in December 2018. Here are the details…
Business jets and fixed wing piston aircraft accounted for most of the inventory increase in 2019. Notably, there were also nearly 1,200 (11.8%) fewer full-sale transactions in 2019 compared to 2018, and most of the sectors were down by double digit percentages.
The ‘Fleet For-Sale’ percentages for business jets and piston aircraft increased 0.7% each, and specifically, the business jet fleet for sale stands at 9.7% increased from 9% percent in December 2018.
Overall, aircraft took more time to sell, but only by 2 days. The picture was mixed, however, and business jets (13 days) and turboprops (1 day) were taking less time to sell in December 2019 than a year ago.
How Would a Bombardier-Textron Tie-Up Affect BizAv?
Troubled Bombardier has been in talks to sell its business jet division to Textron, according to The Wall Street Journal. Were this to come to fruition, it would have several implications for the business jet industry, as Brian Foley explores…
Five primary manufacturers produce 40 different models vying for just 700 worldwide sales a year. The business jet market is overcrowded. A Textron purchase of Bombardier would help alleviate the overcapacity — somewhat.
Bombardier’s Learjet division would squarely overlap with the Citation jets made by Textron’s Cessna unit. Learjet sales have slowed significantly and the Learjet 70 and Learjet 75 models face a very uncertain future, whether under Textron or Bombardier.
Further up the Bombardier model food chain is the midsize Challenger line. The long successful Challenger 350 sits almost exactly on top of Cessna’s brand-new Citation Longitude.
While the CL350 has a nice following and has earned respect, it’s been six years since it debuted and is arguably in need of a makeover.
The same goes for the next larger Challenger 650, which also had its last upgrade at around the same time as the CL350. The CL650 differs in that it is a much older design. It has undergone so many upgrades over time with engines, avionics and other improvements that there’s nowhere left for it to go.
It’s likely that Cessna has a product path for its new Longitude (call it the Longitude+) that could conceivably position itself squarely between the CL350 and CL650, essentially eliminating both models.
That leaves the most lucrative and largest Bombardier jets, the Global line, ripe for Textron to plug into its current line-up of Small and Medium Jets, giving it the long-missing Large products to compete with the likes of Gulfstream and Dassault.
Overcrowding Would Still Continue…
Using the above assumptions, should the deal close, a maximum of just four models would come off the market, leaving 36, which wouldn’t go far toward solving the industry’s oversupply problem.
Textron is the only business jet OEM that makes sense as a new owner. Embraer is busy with Boeing while Gulfstream and Dassault have competing Large Cabin products to Bombardier’s. However, there are other potential bidders.
- Airbus could always enter the picture since they already have a relationship with Bombardier through the A220 airliner and may wish to further expand their product offerings.
- Mitsubishi, which once played in the business jet market, bought the regional jet division from Bombardier last year, the airframe bones of which match the CL650.
- Lockheed Martin has also been postulated as a potential acquirer having seen the success General Dynamics had in buying the Gulfstream program.
- Lastly, private equity has played in the business jet game before, having previously owned Gulfstream, the former Hawker Beechcraft and others.
How Serious Could Textron Be?
There’s also a good chance that a Textron deal will never come to fruition. Textron’s financial performance has been stressed lately, and the outlook going forward isn’t looking much better.
It would thus seem a stretch for Textron to pay what would likely be in the billions of dollars for Bombardier business jets. Furthermore, they will certainly try to carve the Learjet and Challenger lines out of the deal. It’s more likely that Textron waits it out until Bombardier feels more heat from its debt load, or in a worst-case scenario enters bankruptcy and jettisons much of its debt.
MI www.brifo.com or www.avstrategies.com
Increased New Civil Helicopter Deliveries Forecast
Honeywell forecasts 4,100 new civilian-use helicopters will be delivered from 2020 to 2024, marginally higher than the five-year forecast from 2019…
“This year, we anticipate higher deliveries due to entry into service of new helicopter platforms,” notes Heath Patrick, president, Americas Aftermarket, Honeywell Aerospace. While deliveries are expected to be higher than 2019, purchase plans are lower, but only by less than a percentage point. “Despite the slight dip in purchase plans, we see several bright spots, including higher utilization rates.
“This means operators plan to use their aircraft more frequently over the next 12 months.” Among the key survey findings were the following:
- Purchase plans are significantly stronger from the corporate/VIP segment this year, but lower from law enforcement and oil and gas operators.
- A greater proportion of planned new helicopter purchases is for light twin-engine models, compared with 2019’s survey findings.
- The proportion is lower for light single-engine models. Overall, 56% of planned purchases are for twin-engine models, 8% higher than last year.
- When choosing their make and model for a new rotorcraft, the top three factors operators consider are brand experience, aircraft performance and cabin size.
- In North America, average utilization was higher by about 12% in 2019 compared with 2018.
- About 19% of survey respondents said their helicopter fleet utilization is expected to increase over the next 12 months.
Air Taxi Market to Reach $6.63bn…
Allied Market Research has recently published a report projecting the global air taxi market will reach $817.5m by 2021 and $6.63bn by 2030, a CAGR (Compound Annual Growth Rate) of 26.2% from 2021 to 2030…
Requirements for alternative modes of transportation and surge in road traffic congestion are expected to drive the growth of the global air taxi market, according to the report. However, high fare differentials and stringent regulations related to aviation licensing may hinder market growth. On the other hand, supportive government initiatives could create new opportunities in the market.
The report, titled ‘Air Taxi Market by Propulsion Type (Parallel Hybrid, Electric, Turboshaft, and Turboelectric), Aircraft Type (Multicopter, Quadcopter, and Others), and Passenger Capacity (One, Two, Four, and More than six): Global Opportunity Analysis and Industry Forecast, 2021–2030’, also analyzes Europe, Asia-Pacific, and LAMEA.
Brexit Advice from the UK CAA
Following the UK’s exit from the EU, the UK is entering a transition period. EU law will continue to apply and the UK and its aviation sector will continue to participate in the EASA system while the future UK-EU relationship with respect to aviation is determined.
According to the UK CAA, “During the transition period the UK continues to be party to the EU Air Services Regulation and mutual recognition provisions established under the EASA Basic Regulation.
“Existing agreements between the EU and third countries, such as those relating to air connectivity and aviation safety, will continue to include the UK. As a result, businesses and individuals operating in the UK should see no change to existing conditions during the transition period, which is due to end on 31 December 2020.”
In-Service Aircraft Values & Maintenance Condition
Asset Insight’s tracked fleet increased to 134 fixed-wing models starting with this market report. The 2,147 aircraft listed ‘for sale’ on January 31, 2020 represented an inventory fleet decrease of 1.6% over December’s figure…
Medium Jets led the way with a 7% inventory decrease in January, followed by Turboprops (6.9% decrease). Meanwhile Large Jet inventory increased 0.9% and Small Jet availability rose 5.9%. The average Ask Price for aircraft in Asset Insight’s revised (and substantially expanded) tracked fleet increased 16.8% with all four groups contributing.
- Medium Jets led the way through an increase of 22.7%
- Large Jets were a close second, rising 22.4%
- Turboprop ask prices increased 10.2%
- Small Jets increased 1.6%.
Inventory Fleet Maintenance Condition
The revised model mix improved the quality of assets for sale during January 2020, while reducing availability of aircraft harboring higher near-term maintenance costs for the third consecutive month. Asset Insight’s tracked inventory registered the following figures:
- The for-sale fleet’s Quality Rating rose (improved) 1.3% in January, from December’s 5.206 to 5.272. That’s a 12-month best figure that moved the Quality Rating into the ‘Excellent’ range on our scale of -2.5 to 10.
- At $1.332m, Maintenance Exposure (an aircraft’s accumulated/embedded maintenance expense) posted the lowest (best) monthly figure for the second consecutive month.
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 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 Market). January’s analytics also revealed that over 48% of the tracked models, and nearly 45% of the tracked fleet, posted an ETP Ratio greater than 40%.
January’s fleet ETP Ratio worsened (increased) to 72% from December’s 64.8%, representing a 12-month high (worst) figure:
- Turboprops posted the lowest ETP Ratio at 42.6% (also representing the group’s lowest (best) 12-month figure).
- Large Jets were a distant second at 70.7%, the group’s highest (worst) figure.
- Small Jets saw a worsening to 76.8%.
- Medium Jets posted the group’s record high (worst) figure of 87.4%.
While all four groups in Asset Insight’s expanded, tracked fleet posted a price increase, the effect on price due to lack of ADS-B equipage, especially on older models, remains blurry. Asset Insight continues to believe that non-equipped turbine asset values will be negatively impacted, and that figure is likely to be the cost of ADS-B compliance, along with a penalty for ‘buyer inconvenience’.
Large Jets: The tracked Large Jet fleet inventory increased by four units in January. The group’s Quality Rating improved less than 1% and remained in the ‘Outstanding’ range for the ninth consecutive month, while Maintenance Exposure degraded (increased) 2% in January, following December’s 12-month best (low) figure.
While Ask Price is at a 12-month high, due to revised fleet composition, it is still well below the group’s record high figure allowing buyers to create value and sellers to close transactions during what is often a light selling period.
Medium Jets: Tracked Medium Jet inventory decreased 46 units in January, a clear indication that many transactions did not close before year-end. The Quality Rating remained within the ‘Very Good’ range and, at 5.218, represented the group’s 12-month best figure.
Ask Price strength continues to surprise us, and the newly comprised fleet’s figure increased 22.7% in January, a 12-month high number. While this may be good news for sellers, buyers are encouraged to run detailed analytics so as not to confuse a low-priced asset with an aircraft offering good value.
Small Jets: The Small Jet category’s venture into the ‘Excellent’ Quality Rating range was short-lived, as Small Jets bounced back into ‘Very Good’ territory after losing 1.4% in January, dropping from December’s 5.270 to 5.195.
Already sporting a high inventory level for many models, availability increased by 38 units during January. Pricing did post a 1.6% increase, but transaction values averaged 10.5% below the group’s Ask Prices during Q4. Clearly, buyers hold the edge here, but that should not be a surprise given the high inventory and age for a large portion of the fleet.
Turboprops: Finally, the Turboprop category experienced a substantial improvement from virtually every angle thanks to the addition of more models to the tracked fleet, posting a 12-month best Quality Rating, Maintenance Exposure, ETP Ratio, and average Ask Price. In fact, the last time Turboprop Quality was in the ‘Very Good’ range was in January 2019.
Add to that an inventory fleet decrease of 35 units for the month, and the group continues to offer great opportunities for buyers and sellers to structure transactions benefiting both parties. Asset Insight doesn’t expect higher quality assets to last long, so encourages serious buyers to act.