- 06 Apr 2018
- Rolland Vincent
- Market Insight
What are the latest trends in the Business Aviation market? Are average flying hours up? Which aircraft values are trending up sharply? What are the analysts and forecasters saying right now? Rollie Vincent presents an overview...Back to Articles
With ‘For Sale’ inventory levels across all business jet categories continuing to slide lower, the used business aircraft marketplace is shifting from what has been an extended buyer’s market into a more balanced situation. Rollie Vincent elaborates…
Inventory levels for aircraft that are less than ten years old have been combed thin by savvy buyers seeking what have been historically attractive values. With the US economy now expected to expand at a rate of 2.8% in 2018 (fueled in part by business- and wealth-friendly tax reforms) conditions are improving, and should favor additional business aircraft sales this year.
Meanwhile, the Euro Area continues to rebound at a steady, albeit more modest pace, with the latest economic forecast indicating a 2.4% GDP growth rate for 2018.
As has been the pattern for much of the period since the 2008 financial crisis, just a handful of countries where the highest concentration of business jets can be found have economies that are growing at 3% or more per year.
Collectively, India, China, Turkey and Malta represent just 4% of the world’s bizjet fleet. Encouragingly, the US is inching towards an annual growth rate of 3%, although current forecasts are that both the US and Euro Area economies will slow from their 2018 pace next year.
With the unemployment rate in the US hovering near 4.1%, businesses across the country are under increasing stress to find and nurture the talent they need.
Within the Business Aviation community, more than half the aircraft owners and operators who responded to the recently published JETNET iQ Q4 2017 Survey indicated that they are having difficulty recruiting and retaining pilots with the desired credentials. The long-awaited talent shortage in aviation (certainly in Business Aviation) appears to be finally upon us relating to pilots, technicians and other professionals.
As in other industries vying for the best and brightest talent, the competitive pressures will ultimately drive up wages on a real (after-inflation) basis, a welcome development for many.
Business jet flight operations continue their slow and steady climb-out from a 2009 post-crisis trench. Bizjet cycles (one aircraft and one landing) in FAA-controlled airspace reached 4.5 million on a trailing twelve months (TTM) basis at the end of February 2018, up 3.3% year-over-year (YoY).
Cycle activity was led by US domestic flying, which was up 3.6% YoY.
On an encouraging and steadily upward trend, US business jet flight cycles have yet to recover to the levels achieved in 2004, despite an almost 50% increase in the US-based fleet.
This is a reflection both of just how much flying was being done in the “good ‘ol days” prior to 2008, and the sharp reaction to the 2008 financial crisis, with cycles dropping almost 30% from the 2007 peak to the 2009 trough.
In Europe, business jet flight cycles were up 3.5% through the end of March 2018 on a similar TTM YoY basis to 529,000, based on the latest available Eurocontrol data. European turboprop flight cycles were also up by 3.0%, TTM YoY, representing more than 165,000 flights.
Used Aircraft Prices Firming…
Mostly anecdotal evidence to date points to a firming-up of aircraft transaction prices in the used market, something that is to be expected given the limited availability of young, always-hangared, ‘only-flown-on-Sundays’ assets.
With a flock of new aircraft expected to certify this year and next, additional trade-in inventory will begin to trickle into the market, providing additional product variety and choice for used jet buyers to choose from.
Of course, looming on the horizon is a compliance deadline for ADS-B Out that looks to be about as soft as granite bedrock.
With a paucity of available slots at already-busy MROs around the industry, the time was probably yesterday to get in line for the necessary upgrades to keep aircraft compliant with new regulatory requirements.
Based on a recent JETNET iQ survey of more than 500 owners/operators, only 40% indicated that their fleets are fully compliant today, while almost a third said that none of their aircraft are compliant. As regards plans for non-compliant aircraft, only 31% of those surveyed said that they have even scheduled a shop visit. Discover more about the remainder below…
So, what’s our prognosis? Unless some very low-cost solutions along with MRO capacity spring up quickly like weeds in a May garden, this is not going to end well for a swath of aircraft owners left with unsellable, immovable assets. It’s a sad way for an old, but capable airplane to die.
Flight Activity – North America
TRAQPak’s review of Year-over-Year (YoY) flight activity indicates that March 2018 recorded an increase over March 2017. March Business Aviation flight activity posted an expected Month-over-Month increase to finish up over February…
YoY, the results by operational category were mixed with Part 135 activity, once again, producing the largest yearly gain. Fractional activity recorded a slight rise while Part 91 activity dipped into the red.
The aircraft categories were all positive with Large jets posting the largest gain over March 2017. Mid-size jets followed, while both Light jets and Turboprops posted increases.
Results by operational category were all positive for the month, with the Fractional segment posting the largest monthly increase.
Aircraft categories were positive, with Light jets leading the way. All other categories posted increases over the previous month.
April Activity Forecast
Looking ahead to April’s activity, TRAQPak analysts estimate there will be a 2.8% increase in overall flight activity YoY.
Flight Activity - Europe
WingX noted a decline in YoY Business Aviation flights from Europe in March 2018, with 3.6% fewer departures than in March 2017. AOC/Charter saw gains of 6%, offsetting a 10% drop in Private flights.
Compared to March 2017, most of the biggest markets were down in March, with Germany, Italy and the UK seeing the largest falls. Spain was an exception with 2.6% YoY growth. Apart from the UK, all the top European markets are still up YTD in 2018.
In the smaller markets, activity dropped off by 11% in Belgium and 18% in Turkey and Ireland. Russia’s outbound activity was flat, and there was >10% growth from Greece and Poland.
International activity was also largely down this month, with flights from Europe to North America falling 7%, and down 5% for departures to Asia-Pacific.
Flights from Europe to the Middle East were up by 2% YoY, and up by 4% to Africa.
At the aggregate level, declines this month came from Private flights, down by 10% YoY (the biggest monthly drop since 2016). This heavy decline in owner-flying was reflected across Italy, Germany, Spain, Switzerland, France and the UK.
AOC/Charter activity was up by 2% YoY, a slowdown in the recent growth trend, but maintaining monthly increases since 2016. Growth in these flights exceeded 5% in France, Switzerland and Spain, although some decline was found in Germany and UK.
“The fall-off in activity this month bucks the recent growth trend,” Richard Koe, Managing Director of WingX Advance, summarized. “This may reflect some wavering in the economic outlook, especially in the UK, but it may also be a specific effect such as the earlier Easter holiday this year.”
ADS-B Will Bring Used Jet ‘Reckoning’
At the recent NBAA Business Aircraft Finance, Registration, and Legal Conference, co-presenter and JETNET iQ managing director Rolland Vincent noted that one-third of the in-service business jet fleet currently have no ADS-B upgrade plan in place. So what’s the impact…?
Vincent estimates that 25-30% of these jets are in line for retirement when the January 1, 2020 ADS-B compliance date rolls around. Of those operators with no plans yet in place, per JETNET iQ data:
As many as 46% of the business jets on the used market are now more than 20 years old, Vincent noted, adding that the cost to install ADS-B equipment on aging aircraft is likely to be prohibitive, accelerating their obsolescence. “After about year 25, the inventory will get cleaned-up,” he projects.
MIwww.navigating360.com or www.nbaa.org
ADS-B Compliance Not up to Speed
At the recent GAMA State of the Industry conference, it was noted that the owners and operators of about 100,000 of the 160,000 General and Business Aviation aircraft in the US are still expected to upgrade with ADS-B equipment.
Wipaire President Chuck Wiplinger noted during the event that owners have been hesitating and shop availability is tightening. About half of the piston and turboprop aircraft have been equipped, but only about 20% of the business jets have been.
“People are waiting too long, for whatever reason, to equip their aircraft,” Pete Bunce, GAMA president, warned after the event.
NARA Links Market Rebound With Tax Law
The recently enacted bonus depreciation tax treatment in the US for new and used aircraft will help the Business Aviation industry turn the corner in 2018, according to the National Aircraft Resale Association (NARA)…
NARA Chairman, Brian Proctor
“Business aircraft sales have been down so long it will take us a while to relearn how to navigate an up-market,” said NARA Chairman Brian Proctor. “But this should be a better ride than we have had in a long time.”
NARA credits the potential turnaround to the 2017 Tax Cuts and Jobs Act, which provides for 100% bonus depreciation, allowing taxpayers immediate deduction of the cost of a new or used business aircraft acquired and placed in service by January 1, 2027. Tax reform is driving aircraft values used for business, with lower corporate and effective rate pass-through rates combined with 100% depreciation.
"While political and economic developments around the world can influence the market, now is a great time to buy an aircraft before prices increase," Proctor said. He notes that used aircraft in excellent condition are selling at a faster pace than in years past.
FAA Forecasts Mixed Performance for US Business and GA Fleets
A recent report in Flight International, highlights that business jets are set to outperform all other certificated General Aviation (GA) types in the US over the next 20 years, according to a Federal Aviation Administration forecast...
The forecast predicts that although the average annual growth rate for the whole GA sector (including traditional business jets, turboprops, fixed-wing piston aircraft and helicopters) will remain flat in the period to 2038, the business jet fleet will grow at an average rate of 2.2%.
The overall fleet and business jet totals are forecast to reach 214,100 and 22,200, respectively. Turbine aircraft as a whole will also perform better than piston types with the US inventory expected to climb from 23,600 units in 2018 to more than 35,000 in 20 years (an average annual increase of 2%).
Turboprops will grow by a more modest 1.7% per year, with the fleet forecast to total 12,600 in 2038.
The FAA's upbeat prediction is based on anticipated growth in the US economy, and expanding corporate profits – key ingredients for a thriving business aircraft market.
By contrast, the US’s fleet of fixed-wing, certificated piston-singles is expected to shrink over the forecast period by 23,750 aircraft – an average annual decline of 0.9% – to around 119,650 in 2038. The agency attributes this gloomy outlook to “pilot demographics, overall increasing costs of aircraft ownership, and new aircraft deliveries not keeping pace with retirements of the ageing fleet”.
The outlook for flying hours across the sectors is expected to stay in step with the change in fleet size.
AMSTAT Reveals Uptick in Aircraft Values
According to the AMSTAT Aircraft Valuation Tool (AVT), the average estimated values for four of the five major business aircraft segments have risen since the start of Q4 2017…
The latest AVT Aircraft Value Report notes:
“By looking at normalized data we can do a proper comparison of values over time,” said Andrew Young, AMSTAT General Manager. “The increase in estimated values reflects recent increases in market demand and a tightening market with fewer options for buyers”.
Asia-Pacific: Seller’s Market Gets a Grip
Asian Sky Group (ASG) released its Q1 2018 Asian Sky Quarterly, complete with an updated forecast on the business jet and civil helicopter markets throughout the Asia-Pacific region…
“For this quarter’s edition of Asian Sky Quarterly, there seems to be two stories unfolding.
From our ‘Market Dynamics’ section, we are seeing the market cheer as we move further and further into a seller’s territory with the percent of the fleet ‘For Sale’ decreasing and prices rising,” says ASG Managing Director Jeffrey Lowe.
“But our ‘Mood & Intentions’ survey highlights optimism flattening out and purchase intention subsequently diminishing, although it frankly couldn’t climb much higher after being on the rise since Q2/Q3 2016, and purchase intentions are changing only minimally.”
“The oversupply that existed in the market is getting burned down further now – good aircraft at good prices are selling – and with less supply, asking prices are firming up and even increasing,” Lowe adds.
“Consequently, we are moving deeper into seller’s territory, as seen from our ‘Market Trend’ lines, and sellers are hanging on to their aircraft longer, waiting for that better deal (i.e. days on market are rising).”
Chinese Tariffs Threat
As reported in The Weekly of Business Aviation, a proposed Chinese import tariff on US-built, Large-Cabin business jets is hitting the industry just as it emerges from extended economic doldrums, Sen. Jerry Moran (R-Kan.) said early last month…
The industry has seen difficult times and was on a better path, Moran said, however, “That can disappear pretty quickly with the loss of the opportunity to export and sell around the globe.”
GAMA President Pete Bunce said his organization is assessing the situation to understand all its nuances and resulting impact before it takes a stance.
China’s proposed imposition of an additional 25% tariff on aircraft takes in larger business jets, including bizliners and large-cabin aircraft.
The announcement of retaliatory tariffs from China was not unexpected, but the scope was surprising, said Fairmont Consulting Group officials. Included on the list of 106 products were aircraft with operating empty weights between 15,000kg and 45,000kg.
None of the proposed tariffs take effect immediately, allowing the countries as many as six months to hammer out some kind of an agreement, which US Commerce Secretary Wilbur Ross indicated was the goal.
In-Service Aircraft Values & Maintenance Condition
Asset Insight’s market analysis of March 29, 2018 covering 92 fixed-wing models and 1,657 aircraft listed ‘For Sale’ revealed a thirty unit reduction to its tracked fleet, with inventory decreases in all four aircraft groups…
Large Jets led the way with a 4.1% decrease, Medium Jets were next (-1.3%), Small Jets were close behind (-1.2%), and Turboprop inventory decreased 0.7%.
The tracked fleet’s average Ask Price decreased 0.7% in March to register a second consecutive record low monthly figure, and a total decrease of 1.5% during Q1. A detailed examination of the data reveals that prices are stabilizing, though, and are even increasing among preferred, higher quality assets.
Large jet prices posted a 1.8% increase in March (2.8% during Q1); Medium jets rose 1.6% during Q1; Small jets dropped -0.9% (5.1% during Q1); and Turboprops remained virtually unchanged, posting a 2.3% reduction during Q1.
Inventory Fleet Maintenance Condition
Large and Medium jet asset quality improved each month during Q1, while Small jet and Turboprop asset quality decreased from the figures these two groups posted in January.
The tracked fleet maintained its ‘Very Good’ Quality Rating, remaining virtually unchanged at 5.219 versus February’s 5.220, on Asset Insight’s scale of -2.5 to 10.
The tracked inventory’s average Maintenance Exposure (an aircraft’s accumulated/embedded maintenance expense) decreased 5.3% from February’s 12-month high (worst) figure, to $1.391m.
Maintenance Exposure to Ask Price (ETP) Ratio - Chart B
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. As Q1 closed, over 51% of all models and 62% of all units posted an ETP Ratio above 40%, and the average Days on Market were 61% greater for aircraft whose ETP Ratio exceeded 40% (189 versus 303 days).
The tracked fleet’s ETP Ratio fell to 63% in March, not an impressive showing by any means, but better than February’s twelve-month high/worst figure of 66.9%. Turboprops once again posted the lowest (best) ETP Ratio at 52.2%, although the figure was a twelve month high.
Large jets followed at 56.3%, their best (lowest) figure since October, while the 63.3% posted by Medium jets virtually matched the group’s twelve month average. Small jets registered 73.8%, their best ETP Ratio since last September 2017.
Large Jets:Units of mixed asset quality traded during the first two months of Q1, while mostly lower asset quality aircraft transacted in March, thereby lowering the group’s Maintenance Exposure figure. The tracked fleet decreased by 15 units, while the inventory maintained its ‘Excellent’ Quality Rating for the tenth consecutive month by increasing to 5.358.
March’s Ask Price increase worked in concert with a 2.6% Maintenance Exposure decrease and improved the group’s ETP Ratio to 56.3%, the lowest figure posted during the past four months. Asset Insight advised in February’s report this market sector is stabilizing, but with pricing still at the lower end of its historical range good values are still available.
Medium Jets:Ask Price remained virtually unchanged during the last two months of Q1, but Medium jet Maintenance Exposure dropped a walloping 6.3% in March to improve the ETP Ratio to 63.3% from February’s record high (worst) figure, and bring it more in line with the 12 month average.
The Quality Rating has risen during each of the past four months, maintaining a ‘Very Good’ figure for the past eleven months, and finishing Q1 with the best figure since August, at 5.212. What might be this group’s weakness is that 10.5% of the tracked fleet (31 models) is listed ‘For Sale’. However, March showed some improvement as inventory decreased by seven units.
Small Jets:Inventory decreased by six units during March, although 10.1% of the active fleet is still listed. Buyers focused their attention on aircraft with fewer upcoming maintenance events, dropping March’s Quality Rating to ‘Very Good’ but, in view of the 8.0% drop in Maintenance Exposure, they acquired aircraft harboring higher-cost individual events.
We can hope that they accounted for this expense through their purchase price, but that may not have been the case for many transactions, since Ask Price posted a new record low figure, as higher priced aircraft were primarily the ones that traded. What does this mean? Good values are definitely available.
Turboprops:The group narrowly maintained its ‘Very Good’ Quality Rating at 5.025. At the same time, Maintenance Exposure worsened by 5.5%, while Ask Price remained relatively unchanged at a twelve-month low figure, and their combined impact worsened the ETP Ratio by 6.1%.
This group’s dynamics are those of a stable environment, with inventory decreasing by only two units and with the percentage of the fleet listed ‘For Sale’ at 8.1%. The one issue probably haunting sellers is that Turboprops continue to record the highest Days on Market, which is surprising given the group’s other statistics.