As the industry prepares to head to Orlando for NBAA-BACE, what are the notable points about today’s new and used business aircraft sales market? Rolland Vincent reflects…
Many in the Business Aviation community will be traveling to Orlando, Florida in October to gather at the annual NBAA Business Aviation Convention and Exhibition, the largest gathering of its kind of leaders and decision-makers in the industry, and an ideal location for aircraft buyers and sellers to cross paths and (hopefully) close some year-end deals.
With optimism levels presently the highest recorded in almost eight years of conducting JETNET iQ Surveys, business aircraft owners/operators will be courted by aircraft sales and marketing folks who are mutually interested in agreeing to the details of new aircraft purchase contracts.
Fuelled in part by US tax and depreciation law changes that are widely seen as being business-friendly, the mood amongst aircraft owners/operators in the US is translating into higher orders for new aircraft.
Purchase interest in used aircraft is also very strong, but inventory availability of the most attractive models – especially those built within the last five years – is about as scarce as an available slot for a Cessna 172 VFR arrival at JFK or LHR.
Asset Insight’s analysis of the quality of the available inventory (see article below, and particularly the analysis of Maintenance Exposure to Asking Price) makes for some illuminating reading on this topic. Suffice it to say that, as a prospective buyer, the recent “good ol’ days” of plenty of available inventory at attractive and downwardly negotiable price points are already consigned to the history books.
New business jet orders in H1 2018 came in substantially ahead of the same period last year, according to various quarterly earnings filings. Evidence has been building over the past 12+ months that optimism has actually begun to transition into actual airplane sales – the Holy Grail of aircraft transactions professionals.
The market continues to be very US-centric, and we expect that this will continue to be the case for the time being, especially with mounting concerns about Brexit and the weakening of many currencies relative to the US Dollar.
Although there is much talk about the potential for other currencies (most notably the euro), to take on the role of the Dollar as the de facto international reserve, talk is always cheap and no serious challenge to the Dollar is apparent on the horizon (despite what Blockchain proponents might try to make you believe).
Most economists are predicting that GDP growth rates in 2019 will be lower than actual performance this year, especially in countries where the vast majority of business aircraft are based. We are expecting that deliveries of new business jets will be down somewhat in 2018 versus 2017, largely driven by the lull that occurs as manufacturers transition from older legacy models to newly certified designs.
Delays in achieving certification (often due to differing interpretations between the OEMs and the regulatory authorities on what constitutes various new certification requirements) are major contributors to the slower-than-expected production recoveries at several OEMs.
Projection Going Forwards
We are, however, expecting a relatively strong finish to the year for aircraft sales, and – barring any major market disruptions like an escalating international trade war – an even better 2019. With much of the reported order backlog for the industry at just a handful of manufacturers, we are expecting overall production rates to increase modestly in 2019 and again in 2020.
Pricing for new and used aircraft should continue to firm up, as the transition to a ‘seller’s market’ that has been occurring over the past 12 months becomes rooted in the minds of folks on both sides of the aircraft transaction table.
In Orlando during October, efforts will be focused on arriving at “the right price” for today’s marketplace; a price that has shifted upwards since the last time the industry gathered at NBAA-BACE in Las Vegas a year ago.
Flight Activity – North America
TRAQPak’s review of August 2018 vs. August 2017 Year-over-Year flight activity for North America indicates an increase of 2.1%. August 2018 was also up, as expected, over July 2018 activity…
Year-over-Year (YoY), the results by operational category were mixed with Part 91 activity providing the largest increase. Though Part 135 activity showed a nominal gain, Fractional finished flat for the period.
The aircraft categories were mostly positive with Mid-size jets posting the largest gain from 2017. Large jets and Turboprops posted increases while Light jets posted a YoY decrease.
Month-over-Month (MoM), results by operational category were all positive, with the Part 91 segment posting the largest monthly increase. Aircraft categories were all positive too, with Mid-size jets posting the largest increases.
Looking ahead, TRAQPak analysts estimate there will be a 1% increase in overall flight activity YoY in September 2018.
Flight Activity - Europe
August saw 83,230 Business Aviation departures in Europe, down -8% on July’s peak. Nevertheless, it was the busiest August in the last decade, and was up 2.4% over August 2017. Here’s what happened…
Most of the growth in August came from business jets (65% of all activity), which are up 4% YoY.
The busiest market, France, was down by 3% YoY, while Spain also saw a 4% decline. Offsetting growth came from Italy (4%), the UK (6%) and Germany (9%). Year to Date (YTD), all top six markets are up compared to 2017, France by the least and Germany by the most.
Among the smaller markets, there was double digit YoY growth in Netherlands, Portugal, Finland – and a 75% increase in Business Aviation flights from Montenegro. YTD, Greece has recorded the strongest rebound with flights up by 10% over the first eight months of 2017.
Business Aviation demand in France continued to decline for Large jets, and Spain saw a 12% decline in YoY flights in this Segment. The UK added the largest number of additional Large jet flights for August. Meanwhile, in Small and Midsize activity, Germany was up by 11%. Overall, two business jet segments stood out: Super-Mid-size jet activity was up by 22% YoY while the VLJ sector fell 15%.
Domestic European flights were up 2.5% for August, in line with the YTD trend of 3%, but with considerable regional variance.
“August showed a continuation of the now-familiar pattern for European Business Aviation activity: growing demand for Charter flights but a flat trend in Private activity,” summarized Richard Koe, Managing Director, WingX Advance.
UBS: Bombardier to Reclaim Large Jet Share
Bombardier is poised to claw back market share from Gulfstream in the Large-Cabin business jet market, thanks to new products that have numerous ties to Wichita, says UBS Global Research…
According to a report from AIN, analysts with UBS expect Bombardier’s share in that segment to grow from around 33% last year to potentially more than 40% by 2020 because of new and updated aircraft (including the all-new Global 7500).
UBS also projects growth on the back of the recently unveiled Global 5500 and 6500 programs, with those variants expected to hit the market in 2019.
Emerging Markets Weigh on Bizjet Sales
They were the heroes of the 2009 financial crisis, but a decade later the emerging markets are themselves struggling, notes Business Aviation analyst Brian Foley.
“Without them, the rout in worldwide business jet unit deliveries, which roughly halved between 2008 and 2012, would have been far worse, if that’s even imaginable” he adds. “Today however, these regions have their own set of challenges that will dampen business jet sales activity outside of the more mature economies.”
While initially off to a good start in 2018, emerging market stock market indices have since taken a turn for the worse. The MSCI Emerging Markets Index, which is designed to measure the combined stock performance of 24 emerging market countries, is currently flirting with a 20% loss since its January peak, a correction defined as a bear market.
Within this MSCI Index, key business jet markets such as China (-21%), Brazil (-25%) and Argentina (-48%) were already in bear territory in mid-August. Others like Russia (-15%) and Mexico (-6%) had not yet fallen as far.
When local stock markets decline, it’s typically accompanied by less buyer willingness to spend on a multimillion-dollar aircraft asset.
Another headwind for aircraft sales in emerging markets has been local currency devaluation. “Since business jets are priced in dollars, it now takes a lot more local currency to buy one which has a negative impact on sales,” Foley continues.
Moreover, heightened trade tensions, areas of political and economic turmoil, tepid commodities prices, debt coupled with the end of the cheap money era and a recession in South Africa have all added to the vulnerability of emerging markets.
Dwindling New Shipments
According to GAMA, 35.1% of total business jet deliveries back in 2010 went to emerging market stronghold regions of Asia-Pacific, Latin America, Middle East and Africa. In 2017, that percentage had dwindled to just 19.2% - nearly a halving of emerging market business jet uptake. “I would expect that percentage to go even lower in 2018 and not see a meaningful uptick for a few years,” Foley projects.
Fortunately for the industry the world’s largest market is North America, where 65% of the world’s business jet fleet is based, according to market data provider AMSTAT. Some business jet OEMs now report a positive book-to-bill ratio, which means that the sales in mature markets are offsetting the delivery drop off in emerging markets.
Today’s business jet market is now more globally diversified than ever. As worldwide economies are cyclical and not always synchronized, this allows pockets of strength to support the industry while giving areas of weakness time to regroup.
“While difficult to imagine now, it’s just a matter of time before emerging markets will again be a major contributor to private aircraft sales. With developed economies in an upswing, the industry has the luxury of waiting for at least a while.”
ADS-B Compliance Update
Duncan Aviation’s market research team has run the numbers and found that although the FAA’s deadline for upgrading Business Aviation aircraft to ADS-B is less than 16 months away, 52% of the aircraft in the industry have yet to comply.
Roughly 14,000 business jets still need the mandated upgrades. The Business Aviation industry is still predicting shortages of qualified technicians, hangar space, and equipment, and some of Duncan Aviation’s Satellite Avionics Shops are full through the rest of 2018 and into the Q1 2019.
If you haven’t yet upgraded but don’t want to be flying low or sitting on the ground come January 1, 2020, you’ll need to schedule your time to upgrade to ADS-B.
Moreover, aircraft buyers must be very clear on the status of a prospective purchase in relation to ADS-B at this time.
In-Service Aircraft Values & Maintenance Condition
Asset Insight’s market analysis on August 30, 2018, covering 93 fixed-wing models and 1,592 aircraft listed ‘For Sale’, revealed a 0.9% decrease (14 units) to the tracked fleet. Meanwhile, the fleet’s average Ask Price increased slightly in August.
Specifically, the tracked Medium jet inventory decreased -5.5%, while Large jets and Turboprops increased 3.0% and 1.8%, respectively. The Small jet inventory remained unchanged.
Traded jets and turboprops continued to represent aircraft carrying a higher ‘Quality Rating’. This was particularly evident with respect to Turboprop transactions in August, while new additions to the inventory fleet ‘For Sale’ were of lower asset quality.
By fleet average and individual group, values have changed as follows:
- Large jets were the only group to post both a Quality Rating and Maintenance Exposure improvement.
- Small jets posted a Quality Rating improvement for the first time in four months.
- Medium jets and Turboprops deteriorated.
- Small jets, Medium jets and Turboprops all experienced a Maintenance Exposure degradation.
The tracked fleet’s Quality Rating remained within the ‘Very Good’ range, according to Asset Insight, with the figure improving to 5.227, on its scale of -2.5 to 10, reflecting a reduction in the number of upcoming maintenance events for inventory aircraft.
At the same time, average Maintenance Exposure (an aircraft’s accumulated/embedded maintenance expense) worsened 2.3% to $1.454m, as the inventory fleet’s upcoming maintenance events are anticipated to be more expensive.
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 an aircraft’s ETP Ratio is greater than 40% its time on the market increases - usually by more than 30%. Asset Insight’s August analysis revealed that 54.2% of all tracked models and 66.8% of the fleet posted an ETP Ratio in excess of 40%.
The tracked fleet’s ETP Ratio has now worsened for five consecutive months, posting a record-high (worst) 72.3%, following July’s 67.4% (the previous record-high figure).
- Turboprops accounted for the lowest (best) ETP Ratio at 53.2%, albeit the group’s highest (worst) 12-month figure;
- Large jets followed at 60.4%, a slight improvement over last month’s 62.1%;
- Medium jets posted a record-high 80%, a substantive deterioration from last month’s 70.2%; and
- Small jets worsened for the fifth consecutive month to 84% from 76.5%.
Asset Insight August Market Summary
The current transaction environment seems to be segregating aircraft into three categories:
- Those under 10 or 12 years of age, assets that transact quickly and at good prices (from a seller’s perspective).
- Aircraft aged 15 years or more, whose future at any ‘reasonable’ pricing level is unlikely (from a seller’s perspective).
- Assets that are between ten and fifteen years old, whose ability to transact at a reasonable price depends heavily on the seller’s ability to demonstrate ‘good value’.
Following are some August observations on each category…
Inventory aircraft increased by 10 higher-quality units pushing the fleet’s Quality Rating well into the ‘Excellent’ range with a 12-month high rating of 5.470. The newest additions to inventory also helped lower the group’s Maintenance Exposure by 4.6%, improving overall value in the available asset pool, especially when considering that Ask Prices decreased slightly.
The inventory fleet decreased by 29 units with transactions favoring higher-quality aircraft. The group’s Quality Rating decreased a nominal 0.83%, but it was enough to push the group down into the ‘Very Good’ Quality Rating range from the ‘Excellent’ range it attained in July.
Maintenance Exposure followed suit, worsening 8.5%. Meanwhile, average Ask Price posted a record-low figure. Prospective buyers that were unable to close a deal this past month will have to work a bit harder to identify good values for the time being.
The number of Small jet inventory units remained unchanged in August. The ‘For Sale’ fleet’s Quality Rating improved 2.41% to enter the ‘Excellent’ range, but Maintenance Exposure increased (worsened) by 7.1%, a 12-month high figure.
Put succinctly, transacting aircraft and new additions have resulted in an inventory pool whose aircraft have fewer, but costlier upcoming events.
While this makes identifying good value more challenging for buyers, sellers can only hope that increasing Ask Prices will turn into higher transaction values.
Asset Insight’s tracked inventory fleet increased by five units in August, and buyers did their homework in identifying good values. As proof, the group’s inventory Quality Rating decreased 2.7%, while Maintenance Exposure increased 1.8% (both of which are 12-month worst figures).
Quality Rating remained in the ‘Good’ range and Ask Price reflected the group’s 12-month average figure, so finding a good value is still possible, although a bit more challenging than usual.