The only way to describe the combination of factors impacting Business Aviation is ‘interesting’, notes Rolland Vincent, Editor, Market Indicators. What are those factors, and how are they contributing to buyer and manufacturer uncertainty?
The recent news of the decision to delay the UK’s exit from the EU until Halloween on October 31, 2019 is more likely to spook investors and increase uncertainty than soothe their concerns and ease tensions in the interim.
In what is likely to be one of the most bizarre elections in recent memory, the UK will now be required to hold European Parliamentary elections on May 23, while still being led by UK Prime Minister Theresa May, who may or may not be PM for long, depending upon whether her deal – or maybe a compromise deal – can be reached with Jeremy Corbyn’s Labour Party. This even though Members of Parliament are currently on recess.
The unintended consequences of what has become a chaotic political divorce are reverberating throughout the British and European economies, and are clearly impacting Commercial, Business, and General Aviation.
Meanwhile (and providing further evidence that we are living in interesting times), the US Administration has threatened it may – or may not – impose $11bn of tariffs per year on EU exports, which the Trump administration claims may be justified by alleged subsidies for Airbus SE.
In response, the EU may impose its own similarly-valued volley of tariffs against US imports, this time in retaliation for alleged subsidies to Boeing Co., in what may only be described as tit-for-tat.
EU tariffs on a wide range of US goods have been proposed, covering the spectrum from tobacco to frozen lobster and from soups to nuts. Observers of this mounting food fight can be excused for screaming “Mayday, Mayday, Mayday!” before promptly ejecting from their flaming aircraft.
The Looming Threat of Recession
In the different regions of the world important to Business Aviation, economic recoveries were never supposed to look like the one we have experienced since the 2008/2009 financial crisis. Europe is now teetering on a ‘triple dip’ economic recession, as EU-wide GDP growth slips to 1% or even below in 2019.
With weak domestic demand, Italy slipped into recession in H2 2018, and was almost followed by Germany as demand for its exports slipped in key markets, including China and the US.
The German Government recently revised its GDP growth forecast for 2019 to just 0.5%, half of the previous estimates, with trade disputes and the overhanging uncertainty of Brexit looming large on the near-term horizon and dragging down exports and investment spending.
A contraction in Germany’s manufacturing sector, partly due to a recent switchover to stricter vehicle pollution standards, is putting pressure on the European Central Bank to become more active in policies to stimulate the economy.
Business aircraft flight operations (as measured by departures) in Europe continue to expand at a very tepid pace, up less than 1% Year-over-Year (YoY) in March 2019. The sentiment of European-based owners/operators of fixed-wing turbine business aircraft slipped in both Q3 and Q4 2018 and has yet to recover, according to JETNET iQ Surveys.
Lower New & Used Jet Sales in 2019?
With forecasts for lower GDP growth in 2019 YoY in most key markets for Business Aviation – including North America, Europe and much of Asia-Pacific – and limited used inventory, we expect sales of both new and used business aircraft to be lower this year than last.
With deliveries of new business jets likely to be up in 2019 (by about 5% in units and perhaps 10% in value YoY), we expect OEM order backlogs will continue their multi-year decline, while book-to-bill performance will slide back below 1-0 for the current year.
While it is still too early to know many of the implications of the Boeing 737 MAX accident investigations that are underway after what appear to be linked crashes in Indonesia and Ethiopia, it is quite plausible to assume that additional layers of FAA regulatory oversight of OEMs could lead to delays in new product certifications as both parties figure out how to work together in the future.
As industry leaders gather in Geneva at EBACE2019 on May 21-23, the state of the market, the dynamic regulatory environment, and ongoing pilot/maintenance technician shortages will no doubt be front-and-center amongst the hot topics for debate, as OEMs vie to outdo each other in the competition for customer and media attention.
Underlying it all is the fact that these are indeed interesting times.
Flight Activity – North America
TRAQPak’s review of Year-over-Year (YoY) North American flight activity (March 2019 vs. March 2018) indicates that March 2019 recorded a decrease of 0.6%. Month-over-Month (March 2019 vs February 2019), activity was up 13.3%...
Year-over-Year, results by operational category were mixed with Fractional activity posting a substantial increase. Part 91 activity was basically flat, while Part 135 activity declined for the tenth straight month.
The aircraft categories were mostly negative with Mid-size Jets posting the only increase from 2018. Light Jets dropped the most.
Month over Month
Month-over-Month, results by operational category were all positive, with Part 91 activity posting the largest monthly increase and Fractional flight activity not far behind.
By aircraft category, all of the results were in the black for March, with Turboprops posting the largest increase.
For April 2019 TRAQPak analysts estimate there will be a 0.2% increase in overall flight activity Year-over-Year.
Flight Activity - Europe
There were 66,736 Business Aviation departures in Europe during March according to WingX’s latest monthly Business Aviation Monitor. That’s a strong increase compared to February, but just a 0.7% growth in YoY flights…
During March, a large increase in piston traffic offset declines in business jet and turboprop traffic. Overall, Q1 2019’s total activity is up by 0.6% versus Q1 2018.
March saw some minor growth in the top market (France), but slight declines in activity in Switzerland and the UK. A larger decline was recorded for Germany, which came in the Small and Mid-size Jet categories. Q1 2019 growth is strongest in Spain with total Business Aviation activity up 9% over Q1 2018.
Large Jet activity was up 2% during March, with strong gains in Italy where departures were up by 12% YoY. Mid-Size and Small Jet flights fell 2% YoY. Overall trends in flights within Europe were slightly up, but down on the last 12-months trend.
European departures to North America and Africa were up, but flights to the Asia-Pacific region fell by 12%. Arrivals into Europe from CIS were up by 3%, but well down for Q1 as a whole.
Charter/AOC activity dropped 1% in March, reinforcing a much weaker trend so far this year compared to last. Conversely, private flight activity increased 3%, extending a stronger trend compared to the last two years.
“Total Business Aviation activity continues to eke out some growth this year, but business jet activity is clearly slowing, as evidenced in the charter market,” summarized Richard Koe, managing director, WingX.
“This is coming from a big drop off in peripheral markets such as Russia and Turkey, and a slowdown in key city hubs, notably London, which is a direct consequence of business uncertainty and falling consumer confidence as Brexit drags on.”
Mixed Signals in Used Gulfstream Markets
Hagerty Jet Group previously predicted a choppy 2019 for business jet transactions, and entering Q2 2019 it continues to sense mixed market signals, with some buyers pursuing off-market transactions…
A steady transaction volume is noted, but with increasing supply and notably decreasing ask prices, transaction volume in Q1 2019 was stronger than Hagerty Jet Group was anticipating. “Most used Gulfstream markets we track had stronger transaction volume in the past quarter than the prior 12 months,” Hagerty Jet Group reveals.
Most notably, there were 16 G550 sales in Q1 2019, almost double the average of the previous three years. “We tracked a spike in off-market aircraft transactions that were not publicly advertised or were unknown by market participants,” the company adds.
As many as six of the 16 G550 transactions for the quarter were considered off-market, and Hagerty Jet Group considers this as an indication that many buyers are frustrated by the lack of good inventory and are seeking direct opportunities with unlisted aircraft.
Although average values remain flat across most makes and models, Hagerty Jet Group expects prices to soften in Q2. In the G550 market alone there were 14 price reductions in Q1 with an average decrease of 9%, suggesting sellers are lowering price expectations to compete for buyers who are otherwise considering off-market alternatives.
“Although the G550 market had a bump in value of nearly 10% in 2018, we believe demand will wane with fewer transactions in Q2 than Q1 and at lower prices,” Hagerty Jet Group predicts. “General sentiment from our peers in the broker community signals a decrease in overall demand as global economic uncertainty continues to loom.”
eVTOL Aircraft Market: Global Forecast to 2030
The demand for increased efficiency in commercial operations is the key factor influencing the growth of the eVTOL aircraft market, according to a recent report from Netherlands-based ASDMedia BV.
According to the report, the eVTOL aircraft market is estimated to be US$162m in 2025 and is projected to reach $411m by 2030, at a CAGR of 20.42% during the forecast period.
The demand for enhanced efficiency and human safety and increasing investment activities are expected to drive the market. However, the limited reliability of eVTOLs during transportation and the inability to predict the external environment are expected to hinder the market.
According to the report, Asia-Pacific is estimated to lead the eVTOL aircraft market in 2025 and is projected to grow at the highest rate during the forecast period.
The study segments the eVTOL aircraft market on the basis of Lift Technology (Vectored Thrust, Multirotor, Lift Plus Cruise), Application (Commercial, Military, Cargo), Type of Propulsion (Electric/Battery, Electric/Hybrid, Electric/Hydrogen), MTOW (1,500 Kilograms), Mode of Operation (Optionally Piloted, Piloted), and Range (0–200 Kilometers, 200–500 Kilometers).
It then maps these segments and subsegments across the major regions of the world, namely, North America, Europe, Asia Pacific, the Middle East and Latin America.
Is Winter Coming to the Asian Market?
Asian Sky Group’s Jeffrey Lowe reflects on the market in China and throughout Asia-Pacific in 2018, and the prospects for the year ahead.
The US has its “Sage of Omaha” in Warren Buffet. Here in Asia we have Superman – Li Ka Shing. And he’s “super” because he started work at the tender age of 15 in a plastics trading company and when he retired in 2018 he was worth US$38bn and held the title of the “Richest Man in Asia”. So, when Mr. Li speaks, people listen.
Recently, looking ahead at the economy in 2019, he said “it will probably be very complicated – everyone should be cautious”. You could literally hear the wallets being put back into pockets.
Other industry giants in China have joined in. Baidu CEO and the Chairman of Cheung Kei Group have warned “winter is coming” and that this winter will be “colder and longer than expected”. Then on the heels of these dire proclamations, the Chinese Government announced the economy grew at its lowest rate in 10 years – a mere 6.6% - with expectations that it will worsen through the year.
Not a surprise then that people are buying fewer mobile phones, cars… and aircraft – and selling more of them too.
Chinese Fleet Exodus?
Through 2018, ASG’s transactional consulting business advised on mostly an outflow of aircraft from Greater China into the US and Canada. Sellers could be categorized as a mixture of ‘replacement’ (with a new aircraft either delivered or on order); ‘hard to still justify’ (by owners who only used the aircraft for 100 hours a year anyway); and ‘motivated’ (i.e. those with the bank knocking on the door). This latter category were not quite repossessions but were certainly controlled resales by the lender.
A knock-on effect of this fleet upheaval has certainly been hard times experienced by the management companies, and making a buck is becoming harder and harder.
2018: A Year in Review
2018 had everything: Management companies going bankrupt and putting their AOCs up for sale; whole fleets of aircraft being put on the market to downsize and survive; senior management changes; and business model adjustments.
Asian Sky Group expect more of the same in 2019 with management companies right-sizing, consolidating and seeking other sources of revenue. Every management company (it seems) is an aircraft broker now. Some are developing their MRO business or opening FBOs. All are making efforts to generate more revenue and grow.
So, what actually happened and how did 2018 end? Did the Asia-Pacific fleet expand or contract? China has always been the growth leader in the region; how did it fair in 2018? Find out in the Asian Sky Group’s Year-End 2018 Asia-Pacific Business Jet Fleet Report.
In-Service Aircraft Values & Maintenance Condition
Asset Insight’s market analysis on March 31, 2019 covering 96 fixed-wing models and 1,656 aircraft listed for sale revealed an additional 2% inventory increase to the tracked fleet. Following are the details…
Of the fleet categories, Small Jets experienced the largest inventory rise with a 3.2% increase. Medium Jet inventory increased 1.6% while Large Jets increased 1.5% and Turboprop inventory rose by 1.1%.
Average aircraft value for the tracked fleet dropped 4.4% to post a figure just $20k higher than the record low value. While Large Jet values were the only ones to lose ground, it was sufficient to overcome the gain recorded by each of the other three groups.
Inventory Fleet Maintenance Condition
Fleet asset quality dropped 0.5% in March to record a 12-month low figure. The change in fleet mix resulted in higher quality Large Jets remaining in the inventory fleet.
Medium Jet buyers focused on higher quality assets, resulting in the group’s 12-month worst Quality Rating and Maintenance Exposure figures. The Small Jet inventory, meanwhile, ended the month with a nominal drop in asset quality, but a hefty 14.9% improvement in Maintenance Exposure, nearly equalling the group’s 12-month average.
Finally, Turboprop Quality Rating and Maintenance Exposure figures were relatively unchanged. Overall, our tracked inventory posted the following figures:
- The Quality Rating receded for the third consecutive month to post a 12-month low figure, but remained in the ‘Very Good’ range, dropping from 5.219 to 5.191 on Asset Insight’s scale of -2.5 to 10.
- While the current inventory fleet is anticipated to experience more near-term maintenance events, these will be somewhat less expensive, and Maintenance Exposure (an aircraft’s accumulated/embedded maintenance expense) improved/fell 3% to $1.42m, virtually tying the fleet’s 12-month average.
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 Q1 2019, assets whose ETP Ratio was 40% or more were listed for sale over 62% longer (on average) than aircraft whose Ratio was below 40% (237 versus 384 Days on Market).
Asset Insight’s March analysis also noted that nearly 52% of all tracked models, and over 62% of the tracked fleet posted an ETP Ratio above 40%. Overall, the tracked fleet’s ETP Ratio decreased (improved) during March to 66% from February’s 70.2%. Specifically:
- Large Jets worsened from 59.4% to 62.2%;
- Medium Jets improved slightly, from 79.7% to 79.5%;
- Small Jets posted the largest improvement, decreasing from 76.8% to 62%;
- Turboprops remained unchanged at 52.9%.
If you’ve been reading these reports you may notice that our tracked fleet increased by two models in March, which impacted the number of units analysed within the Large and Medium Jet groups. Even without these additions, however, both fleets would have posted an inventory increase.
Large Jets: Inventory increased by five units, and March’s transactions were marginally focused toward higher quality assets. Changes to the inventory mix increased the number of upcoming maintenance events slightly, but the cost for those events is expected to be somewhat lower.
Unfortunately for sellers, Ask Prices decreased 6.2% to post the lowest figure since May 2018. That was the main cause of the group’s ETP Ratio increase (degradation). But the greatest hurdle to completing transactions continues to be the large number of older aircraft and the scarcity of young, low time assets.
Medium Jets: Inventory for the tracked fleet increased by eight units in March, but the group’s average Ask Price improved another 0.8%. Surprisingly, higher quality assets were the ones primarily transacting, resulting in the remaining inventory posting the group’s worst 12-month Asset Quality and Maintenance Exposure figures.
While the ETP Ratio is just below the group’s 12-month worst figure, sellers continue to test the Ask Price boundary and, so far, it does not appear to have dampened buyer interest or the level of transactions.
Small Jets: Inventory increased by 16 units and, with sales focusing heavily on higher quality assets, the new fleet mix helped improve (lower) Maintenance Exposure by nearly 15%, while Asset Quality remained relatively steady.
The greatest effect of all this was the 19% decrease in the ETP Ratio, which posted the group’s 12-month best (lowest) figure. With Maintenance Exposure decreasing and the ETP Ratio improving, Ask Price not surprisingly posted an increase (2.4%) with sellers pushing the figure above the group’s 12-month average.
Last month, Asset Insight stated that buyers could probably justify some very attractive offers, and they apparently did.
Turboprops: While inventory increased by another three aircraft, the resulting fleet mix had minimal effect on the overall Quality Rating and Maintenance Exposure figures.
At $1.49m, Ask Price for the tracked fleet remained on the low end of the narrow band maintained during the past twelve months (between $1.48m and $1.53m). There’s comfort in this stability for buyers and sellers, and it is leading to healthy transactions for both sides.