- 28 Jul 2017
- Rolland Vincent
- Market Insight
Discover the latest Business Aviation market trends. How is the used jet and turboprop sales market faring? What are the global markets doing? Find out here...Back to Articles
With NBAA-BACE around the corner, and as two of the most important jurisdictions for business aircraft begin the laborious task of clearing debris from back-to-back Hurricanes Harvey and Irma, Rollie Vincent, Editor, Market Indicators, considers the current aircraft sales markets...
The premier annual gathering of industry professionals, NBAA’s Business Aviation Convention and Exhibition provides aircraft buyers and sellers with unique opportunities to learn more about the latest products and services, and to build trusting relationships in what is by many measures a small, tightly knit, yet global industry.
The recent hurricanes laid bare the vulnerabilities of some of the world’s largest centers of Business and Commercial Aviation – most notably Houston and Miami – to flooding, especially with the combination of torrential rains and storm-enhanced tidal surges.
Business and General Aviation leaders were amongst the very first responders, maintaining vital supply lines of medicines, water, food and other essentials when other forms of transport seemed hobbled and ineffective.
While much of the world watched, private aircraft once again proved their worth, operating a form of essential air service for which no eligibility requirements existed, and for which no subsidy was expected.
Unlike the proverbial debates surrounding the US DOT’s sometimes contentious Essential Air Service program, the skies and runways will always be open for the likes of Business and General Aviation heroes who stepped up to help, especially in the Houston area, when the need was greatest.
While the industry nurtures itself back to health, exogenous calamities birthed in storm incubators as far away as the Republic of Cabo Verde are about as welcome right now as another North Korean missile over Japan.
Impact on Used Jet Sales?
With the US representing an estimated 70% of business aircraft sales activity, time will tell what impact these storms will have on what’s been a relatively good year for the industry, with overall aircraft utilization rates and used business jet sales up 6% or more Year-over-Year (YoY) through the first nine months of 2017.
In what we believe is an encouraging development, the amount of late-model, low-time, pristine pedigree used aircraft available ‘For Sale’ has dwindled, with smart money moving quickly to gobble up some of the most remarkable assets-for-the-dollar that we have ever witnessed.
We know of many situations where buyers who had previously only considered new aircraft have been happily surprised to find great values in late-model used aircraft.
The traditional lines between new versus used buyers and sellers/brokers and dealers have blurred - at least for the time being - providing new impetus for aircraft transaction specialists to extend their professional networks and trusted advisor relationships.
Used business jet inventory levels have been trending steadily downward with little interruption since their long-ago peak (near 18% of the fleet was reached in August 2009). As we were going to press, 2,200 business jets, or just 10.3% of the world fleet, was listed as being ‘For Sale’ (JETNET), compared with 1,100 business turboprops ‘For Sale’ (or 7.4%).
Meanwhile, market sentiment of business aircraft owners and operators is improving, according to respondents to the latest Q3 2017 JETNET iQ Survey. Led by Europe and North America, market ‘optimists’ outnumber ‘pessimists’ by more than 2-to-1, up sharply from one year ago.
Brave New World
Buyers and sellers of business aircraft are still adjusting to the brave new world of prices and residual values that have shaken the industry from top to bottom. The sharp drop in values after delivery seem more akin to the experience of new car buyers rather than buyers of longer-lived assets like business aircraft.
Remarkably, and based on our latest calculations, about 50% of business jets are still in operation more than 40 years after initial delivery, hardly the profile of an asset whose value drops 10% (or in some cases much more) per year, as is the current market experience.
With young used inventory now mostly absorbed, and OEM production rates throttled back to more prudent levels nearer the current levels of demand, we should expect residual values to begin to firm up.
This has already happened in the single-engine turboprop market, but is taking more time to play out in other segments. Most indications point to a continuation of aggressive OEM pricing, obviously to sell available production slots but also to combat and frustrate competitive inroads into market spaces ‘owned’ by incumbents.
In a marketplace with arguably too many manufacturers with too many models for sale for the current level of demand (about 1,000 new business aircraft and about 3,000 used aircraft a year), it remains a very good time to be on the buying side of the aircraft transaction.
Flight Activity – North America
Reviewing Year-over-Year (YoY) flight activity (August 2017 vs. August 2016), TRAQPak data indicate that August 2017 posted a significant increase, up 5.2%. August flight activity posted the expected Month-over-Month increase to finish up 5.8% from July...
The YoY results by operational category were all positive with Part 135 and Fractional activity recording substantial yearly changes, and Part 91 activity showing a nominal increase.
The aircraft categories were also all positive, with Large and Small jets posting the largest gains.
Results by operational category were all in the black for the month, with Part 91 posting the largest monthly increase. Aircraft categories were also positive with Large jets posting the largest monthly increase.
TRAQPak analysts estimate there will be a 3.2% increase in overall flight activity YoY in September 2017.
BizAv Activity - Europe
August proved to be the peak month so far in 2017, with 78,785 departures, up 5.5% YoY, according to WingX Advance. The latest numbers take the YTD trend to 3.3%, an additional 18,047 flights compared to 2016…
Overall, August 2017 was the busiest ever August for flight activity, exceeding August 2008 by 1.3%. Private flight activity saw 3% growth, the highest so far this year.
The four countries adding most growth were France, UK, Italy and Spain.
7% YoY growth in departures from France was reflected in a 9.5% jump in domestic flights. France is now trending at +1% YTD, up on average 147 flights per month.
In the UK, Italy, Spain and Switzerland AOC activity growth came in with double-digit increases. Private (Part 91) flight activity fell in the UK and Switzerland, however. Germany was Europe’s second busiest market in August, with the strongest growth coming in Private flights.
There was significant growth in south-eastern Europe during August, with flights from Turkey up by 14% and Greece by 19%. (YTD 2017, Business Aviation activity in Greece is up by 15%, and AOC activity was up by 25%.)
Whilst flights in Southern Europe grew more than 10% in August, activity in Eastern Europe was up by 6%, and flights into Europe from Russia increased by 5% YoY. So far this year, inbound flights from the CIS region are up by 0.1% compared to last year.
“Business Aviation activity in Europe is finally overhauling the pre-crisis levels, with flights for August 2017 exceeding August 2008 by 1.5%,” summarized Richard Koe, Managing Director, WingX. “The growth is clearly focused around flights into and out of Southern Europe. This activity is up by more than 10%. Heavy Jets such as the Legacy 600 and Light Jets such as Phenom 300 and Mustang are doing the hard work, with most of the growth coming in demand for Charter flights.”
Business Aviation Traffic Tracker Europe
Business Aviation traffic in August was up by 8.8% compared to the same month last year, according to EBAA, marking ten months of continuous growth (not seen since 2010)…
January-August 2017 period saw 6.0% growth (not seen since 2007). Up by 11.5% January-August, Spain and Portugal is amongst the healthiest region in this positive European overall trend. The French internal market is the biggest market in Europe in terms of movements, however, with an average 143 daily flights in August.
Meanwhile, the top cross-border BizAv market is between France and the UK.
Russian BizAv Traffic Declines
Data from the Russian United Business Aviation Association (RUBAA) indicate that business jet flights to, from and inside Russia dropped by 12% in 2016, while passenger counts fell 23% since 2014.
Statistics were gathered from Moscow, St. Petersburg, Rostov-upon-Don, Ekaterinburg, Samara, Nizhny Novgorod and Sochi since, according to industry professionals, these destinations together generate approximately 80% of all Russian Business Aviation traffic.
According to RUBAA, the number of business jet flights decreased from more than 50,000 in 2014 to 43,878 the following year, and 41,415 in 2016. The number of travelers on those flights also dropped, from more than 160,000 down to 141,000 in 2015 and nearly 130,000 in 2016. Over the first four months of this year, nearly 10,000 flights with 38,603 travelers were recorded.
Asia-Pacific BizAv Infrastructure Needs…
Asian Sky Group (ASG) has showcased Asia-Pacific’s need for more Business Aviation infrastructure...
According to Jeffrey Lowe, ASG Managing Director, “ASG’s Infrastructure Report highlights one of the industry’s greatest challenges. Within the next two years alone, Beijing, Manila and Singapore will reach runway capacity. Hong Kong is already over capacity.
Terminals are no better with eight of the top 11 airports in Asia already classified as ‘full’.
“An important element of a healthy, sustainable Business and General Aviation industry is the required infrastructure to support it. By clearly showing current numbers and capacity, the report defines the aviation industry’s most significant infrastructure issues, in hopes of tackling them.”
Highlights of the report include:
GAMA Q2 2017 Rotorcraft Shipment Data
The General Aviation Manufacturers Association published its Q2 rotorcraft shipment report, and the numbers were encouraging…
The industry delivered 465 aircraft in the first six months of 2017, an increase of 16.8% compared to the same period of last year. The value of the deliveries was $1.9bn compared to $1.5bn in 2016.
“The second quarter shipment and billing numbers provide a positive marker for the rotorcraft market stabilizing and are a solid bright spot for the general aviation industry in 2017,” noted GAMA President and CEO Pete Bunce.
Used Bizjet Market to Stabilize
According to Joe Carfagna, Jr., Leading Edge, and Mike Dwyer, Guardian Jet, the global Business Aviation marketplace has been dynamic, influenced by global economic factors, used aircraft inventory, asset values and demand…
Market prices of used business aircraft will continue to stabilize because of the buying off of oversupply of aircraft, according to Leading Edge president Joe Carfagna, Jr. and Guardian Jet co-founder Mike Dwyer, during a recent presentation at the NBAA Regional Forum at New Jersey's Morristown Municipal Airport.
Carfagna believes the market will see an uptick in prices very soon. “Currently, we are in a unique place where values are low and used airplanes are starting to dry-up.
"In my opinion, a five- or six-year-old airplane being 50% the value of a new one is uncharted territory for this industry. I don’t think it will remain that way over the long haul.”
However, used aircraft supply could rise again in the next few years. On this note, the executives focused on Gulfstream’s new G500 and G600 Large-Cabin jets as they add to the supply in the market. The G500 is expected to enter service by year-end, with the G600 to follow next year.
Last year, Business Aviation brokerage firm Hagerty Jet Group advised that the G650 market should be closely watched as inventory increased and prices decreased. Dwyer noted that the G650’s introduction was completely “off the rulebooks” from previous aircraft, but described the order books for the G500/G600 as “good, but not off the charts. It’s not a stratospheric launch like the G650.”
Carfagna agrees, saying that the new aircraft would not affect the market immediately as there would be a “lag effect” from order time to delivery.
MIwww.guardianjet.com or www.leas.com
Market’s Heavy North American Bias
Global business jet deliveries, excluding very light jets, slid 6% YoY in Q2 2017, despite increases of 18% and 14% in North America and China/India, respectively, according to data released today by UBS Global Research.
The global gains were ‘more than offset’ by a 60% erosion of business jet shipments in Latin America from a year ago and a 40% drop in emerging countries in Europe, Middle East and Asia (EMEA). Q2 deliveries were flat in Western Europe, meanwhile.
UBS noted that the overall business jet market is “heavily skewed” toward North America, which now accounts for 64% of total deliveries.
In fact, more than three-quarters of Light and Mid-size jets are going to customers in North America.
The market is more balanced on the Large Cabin jet side, with less than half—44%—of these aircraft being delivered in the US, Canada and Mexico.
By category, Mid-size jet shipments rose 13% in Q2 2017, while Light and Large Cabin jets fell 15% and 5%, respectively. Notably, UBS said that the latter segment appears to have stabilized following a more-than-30% decline thanks to Latin America, Western Europe and China/India. UBS said that, by model, the Large-Cabin decline has been driven by lower Bombardier Global 5000 and Gulfstream G450/550 deliveries. (Words courtesy of AIN)
Finance Sector to Swell?
More private equity firms and hedge funds are considering entering the Business Aviation finance sector, according to Global Jet Capital, to diversify their portfolios and reduce their exposure to equities and bonds and any potential market correction…
Dave Labrozzi, COO, Global Jet Capital explains, “Several key stock market commentators are predicting a stock market correction, and there is growing volatility in the markets."
“Private equity firms and asset managers are increasingly looking for ways to invest their funds in a way that offers low correlation with equities and bonds but which also provides a strong income," he adds. "Business Aviation finance offers exactly this, and you have the added security of having the loan secured against a valuable asset.”
The company also believes the price of Mid-Size to Heavy jets is beginning to stabilize following several years of falling valuations, which is also making Business Aviation finance more appealing to private equity firms and hedge funds.
Used Business Jet Sales Continue to Break Records
Following a record-breaking Q1 for used jet transactions, Q2 2017 followed suit with 573 used business jet retail sales, notes Jeff Dunn, Head of Aviation Asset Management, PNC Aviation Finance. That’s more than any other Q2 in history.
Q2 2017 used transactions were up 6.5% over Q2 2014, the previous Q2 benchmark for used transactions, and up 7.5% over Q2 2016.
Overall there were 1,104 used business jet transactions during the H1 2017, up 8.7% YoY from the H1 2016 (the previous high mark for any first half of the year).
Depending on how you spread and interpret the data and historical trends, the industry could see anywhere between 1,192 and 1,296 used transactions take place during the H2 2017 – and either would set an annual record for used transactions.
“The used market is as active as we’ve seen it in a long time,” notes Brian Proctor, President & CEO, Mente Group. “Aircraft that are priced correctly and have a reasonable pedigree are selling quickly – the strongest market being $20m and less.
“Due to the large amount of value that aircraft lose now, especially early in their life cycle, it really creates a value proposition for a buyer. Some buyers that have historically been new aircraft purchasers are considering the used market for the first time because of that value proposition. We are still seeing activity with the OEMs as well, especially among the fleet buyers, purchasing multiple units for a common fleet.”
When it comes to value depreciation, Mente Group has diligently analyzed trends and still believes there is room for improvement. “As robust as the used market is right now, we haven’t seen values fully rebound. I think that we are definitely past the bottom, but I don’t see the activity levels changing pricing levels proportionally.
"We have been using the term ‘priceless recovery’ for how the business jet market is performing right now.”
Jeff Dorrough, VP of Asset Management for Mente Group, said the best that can be hoped for currently is a flat depreciation curve. “If the aircraft has a bad pedigree, has not been maintained well, or if the owner hasn’t performed routine and basic asset management on the aircraft, then those aircraft struggle in the market. Otherwise, as long as an aircraft is priced accordingly, they are selling fast. We haven’t seen a shortage of buyers.”
Next Generation Compliance
When asked about how NextGen compliance is affecting used aircraft sales (specifically the 2020 mandate), Brian offered the following: “What we’re seeing a lot of right now are buyers who are making a value decision on an aircraft and purchasing it at a certain price knowing that they will be putting the airplane down post-close to get work done.
“We’ve seen a lot of aircraft go into maintenance after a sale with work packages totaling between $1m and $2m that include paint and interior soft goods refurbishment, avionics upgrades, Wi-Fi installation and ADS-B Out. When it comes out of maintenance, the owner has an aircraft that can be operated for the next several years without needing any major modifications.
“Our clients now are very educated on the purchasing process. They are buying aircraft more like they did 30 years ago and less like they have over the past 10 years," he continued.
"They are looking less at the purchase price of the aircraft and more at direct operating costs and residual value retention. Mente Group’s consulting business is as busy as it has ever been.”
Experts within the industry believe that the secondary market needs to recover in terms of inventory levels and value before new aircraft sales are able to get back to the levels they were prior to the recession. With used transactions occurring at record pace during the H1 2017 the stage is set for the H2 2017, which historically tends to be the stronger half of the year for used aircraft sales.
In-Service Aircraft Values & Maintenance Condition
An Asset Insight market analysis conducted on August 31, 2017 covering 92 fixed-wing models, and 1,814 aircraft listed ‘For Sale’ – a decrease of 45 tracked inventory assets since last month – evidenced that all four aircraft groups were actively trading…
While Ask Prices for tracked models registered a nominal 0.1% increase in July, August followed this year’s general trend with values falling 4.2% to a new record low figure and a total decrease of 17.9% over the past twelve months.
Large jets continued their monthly decline since December with values down another 2.6% resulting in a new record-low figure. Medium jet values saw a 0.5% value increase, Small jets lost 3.7% to post a 12-month low figure, and Turboprop values improved by 1.5% to record a 12-month high figure.
Inventory Fleet Maintenance Condition
The Quality Rating Trendline maintained its negative slope, but overall Asset Quality remained in the ‘Excellent’ range (Table A).
Maintenance Exposure to Ask Price (ETP) Ratio
Our tracked fleet’s ETP Ratio (an aircraft’s Maintenance Exposure divided by its Ask Price) increased to a 12-month worst figure – 55.3% versus July’s 52.5%. Asset Insight considers any ETP Ratio over 40% to represent excessive Exposure in relation to Ask Price, and the tracked fleet’s average has been above 40% since March 2014.
Turboprops exchanged positions with Large jets for the lowest/best Ratio at 48.0% and 49.6%, respectively, but that represented a 12-month worst figure for each group. Small jets remained unchanged at 57.3%, while Medium jets degraded a percentage point to trail all groups at 61.7%.
It is important to understand that Asset Quality is falling, and the ETP Ratio is rising, because higher quality assets are the ones primarily trading. Ask Prices are also falling, in part because higher quality assets are those seeking a higher valuation.
The inventory fleet’s quality and price are likely to worsen as sales increase. It is not surprising that while Asset Quality remained in the ‘Excellent’ range, its 1.1 AI2 basis point drop marked the inventory fleet’s 12-month low figure.
Large Jets: the inventory fleet’s Quality Rating remained ‘Excellent’ and virtually unchanged, although trading was quite active since last month’s report. Buyers focused on higher quality assets, which resulted in a dramatic 10.4% Maintenance Exposure increase from July’s 12-month low figure.
Ask Prices have fallen every month this year, and a 2.6% decrease at the end of August led to a new record low figure and a 17.1% average Ask Price reduction over the past 12 months. Not surprisingly, the two figures combined to worsen the group’s ETP Ratio to a 12-month high figure.
Medium Jets:Quality Rating remained unchanged and within the ‘Very Good’ range, Maintenance Exposure posted a slight increase, and the tracked inventory fleet decreased by only two units. Ask Price increased 0.5% over the past month, but has dropped 12.4% during the past 12 months.
This group’s inventory has demonstrated little change during the last three months, perhaps an indication that buyers are waiting for sellers to make the first move.
Small Jets:Quality Rating fell slightly since July’s market overview, but Small Jets maintained their ‘Excellent’ rating, bettered only by Large Jets. Maintenance Exposure degraded a nominal 1.2% but is still better than the 12-month average. The same cannot be said about Ask Price, whose most recent decrease has resulted in the group losing 14.6% over the past year.
Based on asset quality and pricing statistics, it would appear that an equal number of high and low quality assets were acquired during the past month. Presumably, the latter group of buyers took aircraft maintenance into account when making their offer – or some sellers structured great deals.
Turboprops:August ended with the Quality Rating below the group’s 12-month average, but remained in the ‘Good’ range. This was not the case for both the Maintenance Exposure figure and the ETP Ratio – both hitting their 12-month worst figures.
However, Turboprops represent the only group that has posted a price increase during the past 12 months. Even though 2.7% might be perceived as a relatively small increase it, along with a notable inventory fleet decrease, appears to indicate this group’s values have stabilized.