- 03 Feb 2021
- Brian Foley
- Market Insight
Brian Foley, Editor, Market Indicators, examines pre-owned aircraft sales in 2020 discovering that the highly active market was not just US tax-induced, but also buoyed by lower price points and ‘fundamentals’…Back to Articles
The number of used business jet transactions in 2020 handily beat 2019 by 18%, with more still being tallied each day, according to AMSTAT...
Some may attribute this great accomplishment principally to US buyers flooding the market to lock in favorable tax benefits, on the assumption that they could soon disappear under the newly elected administration. Indeed, there was even some trepidation that the 2020 pre-owned buying frenzy would immediately die after January 1, 2021, once this stampede was over.
Fear no more. Worldwide pre-owned transactions in January, 2021 numbered 139 units at the time of writing (a tiny bit more than in January, 2020). As there is an inherent time-lag with registration paperwork getting filed (particularly international), one can safely assume that this margin will grow even larger.
This objective data attests to the fact that buyers are still willing to purchase pre-owned jets for sale, even if the continuation of US tax benefits are questionable going forward. This suggests that the continued strong sales activity is from organic growth in the market and is not just a one-night-stand, based on taxes.
This Market has Legs – Here’s Why…
Aside from those who actually did want to guarantee their tax write-offs by locking in a 2020 purchase, there are several other plausible explanations for the outstanding sales volume last year. These same factors are expected to provide continued sales momentum well into 2021.
First, the industry has incredibly adept participants who know how to find, facilitate, close and support sales. Without this experience and infrastructure, the pre-owned buying process would be far less efficient, resulting in fewer transactions.
Another reason, believed not to have been proposed yet, is the result of pre-owned aircraft pricing being in a relative freefall over the past decade. It’s possible that prices may have fallen to a point that meaningfully expands the addressable pool of buyers, resulting in an increase in the number of pre-owned sales.
This can be compared to new aircraft prices which have remained in a narrow band, and thus did not expand the pool of capable buyers, to the obvious detriment of sales for manufacturers.
Covid-19 also played its part. In an attempt to avoid the germy environment of the airport terminal, those with the means have explored ways to fly privately. While most have gravitated towards charter and other non-ownership models, a few have taken the leap into full aircraft ownership, providing a nice adjunct to traditional preowned sales.
Even though unemployment is at multi-year highs, GDP fell over 30% during Q2 2020, and there’s still a lot of future uncertainty, but the stock market, earnings and personal portfolios have ballooned with the help of government stimulus.
This has provided buyers with the necessary financial resources and confidence to execute their deals.
The activity that this generated was further fueled by interest rates which have fallen to practically zero. This in turn qualifies more buyers who require financing to afford an airplane. Lower interest rates, coupled with lower prices, made business aircraft ownership a reality for those who were previously less qualified.
It is believed that 2021 will shape up to be another respectable year for pre-owned aircraft sales. Many of the fundamentals that drove spectacular 2020 sales are still intact. Even if the accelerated depreciation tax benefit were to go away in the US, we know from the early January 2021 sales results that it was not the only market driver.
There may even be new drivers that appear in 2021 that were not present in 2020 – such as an economic resurgence in emerging markets, and higher oil prices. This is a great time to be in the business of Business Aviation.
Flight Activity – Global
According to WingX’s Global Market Tracker, just under 50,000 fixed-wing aircraft were active in January 2021, with 23,000 business jets in operation, flying 322,000 sectors. That represented 18% of the total traffic, and was down by only 9% compared to January 2020.
January’s Business Aviation trend was far stronger than for the scheduled airlines, where passenger sectors were down by 50% for January. Ad hoc and scheduled cargo operations continued to exceed pre-pandemic levels, with an increase of 16% in flight hours for January.
The resilience of Business Aviation began to erode towards the end of January, however, as travel restrictions bit. For the week leading up to February 2nd, activity was down 16% YoY.
The North America market stood up well in January 2021. The US was the key market, just 7% down in terms of flight activity compared to January 2020. The Year-on-Year (YoY) trend for the full month was flattered by the New Year holidays, with early January seeing more than 8,000 departures a day – a high point which has occurred only four times since the pandemic.
The Branded Charter operators did the best, operating within 3% of normality in terms of sectors, and 3% more than normal for flight hours. The market deteriorated in the second half of January.
Florida remained the busiest hub for Business Aviation globally, with 30% more departures than Texas in January. The busiest pairs are intra-State, but the fastest growing connections are with New York, Georgia, Texas and Illinois.
In Europe, the proliferation of border restrictions was reflected in fast-tapering flight activity, down by 25% for January. The UK continued to be the dead-weight, with flight activity down by 55%.
Not all of Europe saw declines, however, with flight activity from (and within) Russia and Turkey still higher than it was a year ago. Scandinavian and Eastern European countries were also seeing fairly robust activity, with more activity than ever through Latvia, Hungary, and Iceland.
The growing complexities imposed on UK registered aircraft may have been reflected in flight activity growth out of Malta, up by 25% in the last week.
In Europe, the Light and Mid-Size Jet categories continued to see more robust activity in Europe, while Heavy and Long-Range Jets were idle. Turboprop operations were resilient.
Rest of the World
The markets outside Europe and the United States/North America were relatively robust in January. Flights were down only 4% compared to January 2020.
“January got weaker as the month went on, with the last week seeing demand lurch towards declines from early summer last year,” Richard Koe, Managing Director, WingX summarized. “Evidently demand was being suppressed by travel restrictions, with the relatively unfettered US market seeing most resilient demand, and Florida continuing to see record activity.
“The last few months’ busy preowned business jet transactions market suggests that once lockdowns are lifted more widely, there could be pent-up demand from lots of new aircraft owners.”
Avionics Sales Down, But Rallied in H2 2020
The Aircraft Electronics Association released its 2020 Year-End Avionics Market Report, and total worldwide Business and General Aviation avionics sales for the year amounted to just over $2.2bn, as reported by the participating companies.
The dollar amount represented a 26% decrease in total avionics sales, compared to 2019; a year that set a record-high total that topped $3bn. The 2020 Year-End total also marked the lowest amount of sales in the report’s nine-year history.
During Q4 2020 (October, November and December), sales decreased 28.1% compared to the same time-frame one year ago. However, since COVID-19 began to negatively impact industry-wide sales near the end of Q1 2020, the industry experienced healthy sales growth during the last six months of the year.
For example, after total sales bottomed out in Q2 2020, Q3 sales increased 5.9% — with retrofit sales up 10.8% compared to Q2 sales. That upward trend continued with Q4 sales increasing another 8.5%, with retrofit sales up 15.3% compared to Q3.
The dollar amount reported (using net sales price) includes: all Business and General Aviation aircraft electronic sales — including all component and accessories in cockpit, cabin, software upgrades, portables, certified and non-certified aircraft electronics; all hardware (tip to tail); batteries; and chargeable product upgrades from the participating manufacturers. The amount does not include repairs and overhauls, extended warranty or subscription services.
Retrofit versus Forward-Fit
Of the more than $2.2bn in sales in 2020, 55.9% came from the retrofit market (avionics equipment installed after original production), while forward-fit sales (avionics equipment installed by airframe manufacturers during original production) amounted to 44.1% of sales.
Moreover, according to the companies that separated their total sales figures between North America (US and Canada) and other international markets, 73.8% of the 2020 sales volume occurred in North America, while 26.2% took place in other international markets.
“The last half of 2020 provided a softer landing, as yearly sales totals slid back to roughly the same numbers in 2016-17,” said AEA President and CEO Mike Adamson. “Despite the health crisis and its economic impact, I am encouraged that the industry experienced steady growth during H2 2020.
“Although 2020 year-end sales are significantly down from last year’s all-time high, we see positive signs in the retrofit market, which means our members are keeping busy with avionics upgrades.
“We are hopeful the combination of innovative new products, the resilience of consumers who continue to focus on upgrades, and an uptick in aircraft production can fuel more sales growth in 2021.”
In-Service Aircraft Values & Maintenance Condition
The New Year began where 2020 left off. Asset Insight’s January 29, 2021 market analysis revealed strong sales that led to another substantial pre-owned aircraft inventory decrease.
Covering 134 fixed-wing models, and 1,146 aircraft listed ‘for sale’, Asset Insight’s tracked fleet decreased 8.7% in January, with all aircraft groups contributing.
The tracked fleet’s average Ask Price decreased 2.1% in January to post a 12-month low figure, with all four groups losing ground.
Inventory Fleet Maintenance Condition
The high level of transactions resulted in a significant change to the inventory mix, but the Quality Rating and Maintenance Exposure figures experienced only minor changes. Specifically, the available aircraft recorded the following:
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’ (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 2020, assets whose ETP Ratio was 40% or higher were listed for sale 64% longer (on average) than aircraft whose Ratio was below 40% (277 versus 454 Days on Market). Asset Insight’s January market review revealed that over 49% of the tracked models, and more than 55% of the tracked fleet, posted an ETP Ratio greater than 40%.
January’s fleet ETP Ratio fell/improved to 71.6% from December’s 72.8%, a figure that was slightly worse than the 12-month average for the fourth consecutive month.
As January ended, the number of aircraft listed for sale stood at 8.3% of the active fleet. Turboprop selection fell from 6.9% to 6.3%, Large Jet availability decreased to 6.9%, Light Jets followed at 8.9% (somewhat surprising considering the group’s exorbitant ETP Ratio), while Mid-Size Jet availability was 10.1% of the active fleet.
Clearly, these statistics are beginning to favor sellers, and that could result in higher Ask Prices as we move deeper into Q1 2021.
Large Jets: The group continued to post strong sales figures as the New Year rolled in, with buyers favoring higher quality assets. That lowered the Quality Rating by 0.7% to below the group’s 12-month average, but, at 5.642, the figure remained well within the ‘Outstanding’ range.
Not surprisingly, buyer preference negatively impacted Maintenance Exposure as well, worsening the figure by 1.6% above – worse than – the 12-month average. By decreasing an additional 35 units, the group’s inventory started 2021 with 39 fewer listings year-over-year.
While the slide in Ask Price might concern some, it is important to keep in mind that buyer preference for higher quality assets also removes higher value aircraft from the inventory.
Mid-Size Jets: Considering the group’s high ETP Ratio, buyer selection of higher-quality aircraft did not come as a surprise. What did surprise us was the Quality Rating decreasing from December’s 12-month best figure of 5.360 to only 5.357 (thereby remaining within the ‘Excellent’ range), after an inventory decrease of 48 units.
Maintenance Exposure also worsened/rose by 0.2%. However, here, too, the exposure value virtually equated to the group’s 12-month average.
After hitting a 12-month low in December, the average Ask Price set a new 12-month low in January, falling another 2.0%. Again, that’s unsurprising, based on buyer preference for higher-quality, and higher-priced, assets.
Light Jets: With inventory decreasing by 48 (primarily lower quality) units, the new fleet mix generated a 1.3% Quality Rating improvement, along with a 3.9% Maintenance Exposure decrease/improvement. The rating placed the group within the ‘Very Good’ range, while the latest Maintenance Exposure figure rested between the group’s average and 12-month high levels.
With the ETP Ratio, at 104.3%, only marginally better than last month’s record high/worst figure for any group, it was not surprising to see buyers acquire assets with more (and more expensive) upcoming maintenance events ahead.
Since Ask Price decreased 2.0% through higher-priced (and lower-quality) assets departing inventory, Asset Insight fears that many transactions involved an acquisition not offering good value.
Turboprops: The year opened with the Quality Rating decreasing to 5.218, dropping Turboprops from the ‘Excellent’ range into ‘Very Good’ territory, although the latest rating is only marginally lower than December’s 12-month high (best) of 5.251.
On the brighter side, Maintenance Exposure decreased 0.7% to post a 12-month best value, concurrently signifying those upcoming maintenance events will cost less to complete.
Average Ask Price fell 1.1% to a value just below the 12-month average, and all these changes resulted from a fleet mix that decreased by 38 units. With an ETP Ratio of 39.8%, and availability at 6.3% of the active fleet, we continue to believe sellers should have little problem negotiating acceptable prices for their aircraft.