- 02 Oct 2020
- Rolland Vincent
- Market Insight
Leading the November overview of Business Aviation market activity, Brian Foley notes that pre-owned business jet sales are carrying the torch during the aviation industry slump (no, really!). Here’s why…Back to Articles
Being an independent Business Aviation strategist has its perks. Instead of being forced to toe the company line, I have the latitude to call things as I see them. Take, for example, business jet utilization, which is often quoted as having recovered much faster than the airlines...
Thankfully that’s true, but what’s not always revealed is that it’s still well below last year’s levels, by a double-digit percentage, which is a challenge to FBOs, MROs, charter and other traffic-dependent entities.
Or take charter activity. Press reports typically describe the sector as exploding with inquiries from flyers new to private aviation who are avoiding the airlines. There’s a difference between an inquiry and a sale, though, and some well-known providers would blush were it ever revealed that their activity was down over 50% during H1 2020.
Year-over-year activity continues to be down by double-digit percentages for September, which – incidentally – is still much better than the airlines. Earlier this year I was admittedly guarded on reports from the pre-owned aircraft sales field that activity was seemingly holding its own, knowing that the industry tends to be naturally enthusiastic.
Lockdown in the spring made aircraft viewing, pre-buy inspections and deliveries tedious at best, which would normally suggest that used aircraft activity could potentially take a transaction hit of upwards of 25% for the year (the same as new aircraft deliveries, predicted by business jet manufacturers).
However, pre-owned market and fleet data provider AMSTAT has moved these initial suspicions aside, and I now feel that the pre-owned aircraft market is poised to hold up better than most other segments of the industry.
Specifically, the number of pre-owned transactions through Q3 2020, also known as “Resale Retail” in AMSTAT speak, is just 4% below last year’s level – 1,284 units versus 1,336. I would argue that the real figure is at least on a par with 2019 since there’s always a bit of lag-time for all of the transactions to get registered, particularly internationally.
The number of Light and Mid-sized Jet transactions is nearly identical to last year, whereas Heavy/Large Jets is off 10%. This is not so surprising given that long-range international travel, best served by Large Cabin Jets, has been hit hard with travel restrictions for much of the year.
As one who connects the dots, I would surmise that this means it has been an okay year for the aircraft leasing and finance sector on the pre-owned side, but this has probably been more than offset by weakness in the new aircraft market, all classes of which have been hard hit.
Turboprops have seen slightly weaker pre-owned demand than business jets, with transactions falling 10% over the first three quarters compared to the same period in 2019. Turbine helicopters, meanwhile, got spanked by 20%.
Enough of the 20-20 Hindsight: Where’s This Going?
Let’s start by being thankful that Business Aviation is separate from the commercial airline industry. I’m convinced the latter still hasn’t found the bottom with further challenges to come for manufacturers, suppliers, airlines, leasing companies, MRO and other support services.
Over on our side of the fence, business could be off an average of one-quarter this year for many segments, with the exception of pre-owned aircraft sales, which seems to have bucked the trend. I’m then predicting continued improvement in the Business Aviation industry in 2021 and maybe even in 2022.
After that, one could expect an economic slowdown that will affect all industries, our own included. With that said, it has been proven that the players in this business know how to play the ups and downs of any market and will continue to contribute for the foreseeable future.
Flight Activity – Recovery Trends Stabilizing at ~85%
The recovery in business jet traffic at the start of October 2020 appeared to be hitting a ceiling of around 85% of comparable 2019 activity, according to WingX Advance Global Market Tracker - a deficit of ~50,000 fewer business jet sectors since the start of September...
Including Turboprops, just over 550,000 hours had been operated in that period, 18% fewer YoY. Around 80% of the active fleet had been operational, and Business Aviation continued to be more resilient than the scheduled airlines, for which activity dropped below 50% of normal with more to come after various carriers announced cutbacks in activity.
The two key business jet markets in terms of activity were North America and Europe, generating 90% of all sectors during September/start of October. However, both were trending 20% down, YoY, in terms of flight hours. Factoring turboprop activity in, too, Europe did better with flights down by 11%, versus a 19% decline in North America.
Trends for the Rest-of-the-World
Business jet activity was above 90% of normal in Asia for the period, although flight hours were down 28%, which underlined the loss of inter-regional connections.
Flight hours also trended down slightly in South America and Oceania, and by almost 20% in Africa. Nevertheless, sectors were actually up YoY in all three regions.
US Flight Activity
Within the United States, flight activity was increasing, as it usually does coming into October. There are some US States which had increased flight activity since August:
However, demand in the big markets of Texas, California, New York, appeared to be stuck at between 15% and 20% below normal, and flight activity in New Jersey continued to stagnate at 50% below normal. Throughout the US, demand favored smaller jets, with the Very Light Jet and Light Jet segments at 90% of normal.
In Europe, as mentioned, the overall recovery in terms of all business jet and turboprop activity was healthier than in the United States, and had been at 11% below normal since August. However, trends were clearly weakening moving into the first week of October.
The biggest deterioration was seen in France, which was up YoY in August, but then saw activity trend down by almost 30%. Meanwhile, a much weaker recovery in the UK relapsed to 30% below normal, and in Spain, where activity was briefly back up in early July, activity was just 70% of normal in early October.
Domestic travel demand was much stronger than for international trips in Europe for obvious reasons. Germany is the stalwart in this regard, with traffic holding up at slightly higher than YoY levels since August. Flights within Italy and Sweden are also up.
“It’s encouraging that the recovery has not significantly relapsed as we move from Summer to Autumn, despite much less support from leisure travellers,” notes Richard Koe, Managing Director, WingX Advance.
“The US market is behind the European curve on the pandemic, with opening-up in Florida now releasing pent-up demand, whereas the Northeast region is still restricted, and with activity well below normal.
“European activity is showing more signs of wilting now we´re out of the summer season, but as in the US, the charter market continues to be relatively resilient.”
Hagerty Jet Group ‘Bearish’ on New/Pre-Owned Gulfstream Values
With the exception to the G550, GV and G200 markets, supply of all the pre-owned Gulfstream markets are at, or near all-time highs, but what are the wider implications? Hagerty Jet Group explores…
There were some deals in the G550, GV and G200 markets that cleared out some inventory temporarily, but Hagerty Jet Group expects supply to continue to increase across all models in the next six months. Transactions were up or remained the same in Q3 2020 compared with the previous quarter.
Price reductions on existing preowned inventory were a continued theme in Q3. Depending on the model and age, published ask-price reductions ranged from 3.5% to 13%, and aircraft coming to market are typically setting prices in accordance with recent comparable trades.
“There is continued demand for business jets,” said James Hagerty, President & CEO, Hagerty Jet Group. “We have noticed an increase in ‘Wanted’ ads for aircraft priced competitively, and Buyers are finding resistance from Sellers who are often undecided about their future business jet needs.
“Some potential Sellers are hopeful that business jet values will increase after the pandemic. We disagree. In the past 10 years, we have only seen aircraft values go down except for in 2011 and again in 2018 with the ‘Trump Bump’,” he added.
“Unless we have some kind of broad global economic recovery in the next 12 months, we can expect values to remain flat or decrease.”
Meanwhile, Hagerty notes, OEMs are claiming to be active though it is difficult to believe they can compete on price effectively against the value of the preowned markets unless they discount heavily, “thereby pushing pre-owned values down even further, like we saw on the remaining G450 and G550 models.”
Fortunately for the OEMs, their backlogs were strong prior to the pandemic, and most plan to deliver about 80% of their anticipated order book in 2020.
“There are three pre-owned G500s currently available with an average of nearly 300 days on market,” Hagerty reveals. “This does not bode well for resale value on one of their newest models, which was frankly overpriced...”
Only one pre-owned G500 has sold since the model entered service in 2018. “We predict that many potential G500 buyers would prefer to buy a pre-owned G650 — which are now trading between $30m-$45m,” Hagerty suggests.
Meanwhile, the G700 test program is in full swing with a fourth test aircraft entering service this week. The G700 is a worthy competitor to the Global 7500, which now has approximately 30 aircraft in service since December, 2018.
Q3 Pre-owned Twin-Engine Heli Market Better Than Q2
Aero Asset reports that while the pre-owned twin-engine helicopter market rebounded markedly in Q3 from the pandemic and oil-crash induced deterioration of Q2, the overall market is down 17% from the 2019 quarterly average.
“Twin-engine pre-owned retail sales volume for Q3 2020 was up 40% from Q2, but down 17% from the 2019 quarterly average,” Aero Asset Sales Director Emmanuel Dupuy notes. “The Q3 supply for sale increased 8% from Q2, and 13% overall from the 2019 quarterly average.”
Dupuy adds the pipeline of twin-engine used helicopter deals pending in Q3 is a startling 60% lower than it was during the same period in 2019. Q3 represented the fourth consecutive quarter of decline in the size of the pipeline.
The Aero Asset report indicates the Q3 absorption rate was about the same as for Q2 2019, but remains at twice the 2019 low rate.
While there was a rebound in the light twin-engine market during Q3, the deterioration continued in the medium market, and there was positive stability in the heavy market. The most liquid pre-owned markets in Q3 were the Leonardo A109E Power and Bell 429. Overall, four of the 12 market segments didn't see any trades during the recent quarter. The least liquid market with trading activity was the Airbus H155.
Generally, retail unit sales were down 5%, and dollar volume was down 20%, to USD $95m. While there were more units on the market in Q3, the aggregate value of the supply declined over 20% to $970m.
In-Service Aircraft Values & Maintenance Condition
Aircraft transactions came roaring back during Q3, with Asset Insight’s September 30, 2020 market analysis of 134 fixed-wing models, and 2,247 aircraft listed for sale, posting the highest quarterly sales figure for the year…
Transactions in Q3 2020 exceeded Q1 levels by 16%, and Q2 by over 71%. The increase in sales figures were also evidenced by Asset Insight’s tracked inventory, which saw a fleet decreased of 1.5% during September (the third consecutive monthly decline).
The year-to-date (YTD) inventory increase is now down to 3%, with Medium Jets leading the decrease (4.2%) and Small Jets following (1.6%). Large Jet inventory, the only segment to increase in September, is now up 18.1%, while the YTD increase in Turboprop availability is down to 5.6%.
Following a decrease in July, average Ask Price has climbed during the past two months, increasing 1.5% in September to a figure approaching the 12-month high level, thereby lowering the YTD average pricing reduction to 1.6%.
Inventory Fleet Maintenance Condition
With aircraft transactions increasing, buyer preference for higher quality assets has decreased Asset Insight’s tracked fleet Quality Rating, while raising (worsening) the Maintenance Exposure figure to the fleet’s 12-month highest (worst) level. Tracked inventory recorded the following:
Quality Rating: September’s ‘for sale’ Quality Rating (5.293) was below August’s 5.329, but equal to July’s figure. It maintained the tracked fleet’s ‘Excellent’ range on Asset Insight’s scale of - 2.5 to 10.
Maintenance Exposure: Representing an aircraft accumulated/embedded maintenance expense, Maintenance Exposure worsened (rose) 3.3% to $1.464m, giving a clear signal to buyers that upcoming maintenance events for the now-available inventory mix will 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 an 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 Q3 2020, assets whose ETP Ratio was 40% or more were listed for sale 50% longer (on average) than aircraft whose Ratio was below 40% (269 versus 404 Days on Market).
September’s analytics also revealed that over 52% of Asset Insight’s tracked models, and nearly 58% of its tracked fleet, posted an ETP Ratio greater than 40%. August’s fleet ETP Ratio worsened (rose) to 73.7%, a record high (worst) figure.
In terms of tracked assets, 10.4% of the active fleet was listed for sale as September ended, compared to 10.5% in August, 10.7% (July), 10.9% (June), and 11.3% (May). Turboprops led the way at 8.2%, Large Jets were next, improving to 9.0%, while Small Jet inventory continued to hold third position at 10.8%. Medium Jets were the only category whose fleet for sale rose, from 11.9% to 12.2%.
Large Jets: Asset Insight’s tracked fleet Quality Rating worsened from August’s 5.741 to 5.678, a 1.1% decrease for the month and 1.9% during Q3, but a figure that still kept the group within ‘Outstanding’ Quality territory.
With the addition of 11 assets to our tracked fleet, the group’s inventory is now up 18.1% for the year. Sales of higher quality aircraft, and the latest fleet mix, increased (worsened) Maintenance Exposure by 3% leading to a record high (worst) ETP Ratio.
However, with Ask Prices about half-way between the group’s 12-month average and low figures, and availability of high-Quality inventory, the stage is set for a strong Q4 as it relates to sales.
Medium Jets: The statistics for Medium Jets continue to defy logic, based on the ETP Ratio (though September’s 70.9% did represent a 12-month best). The inventory fleet’s Quality Rating of 5.312 saw little change during September and Q3, and maintained a figure within the ‘Excellent’ range.
The average Ask Price increased 5.5% in September, a 12- month high figure, and 10.1% during Q3. However, Maintenance Exposure also increased (worsened) 1.2% in September and 1.3% during Q3.
Inventory did drop for the third consecutive month, and is now down 4.2% for the year, but 12.1% of Asset Insight’s tracked active fleet is listed for sale, theoretically giving buyers the upper hand. Apparently, many sellers disagree, believing their aircraft can justify higher ask prices.
Small Jets: The tracked Small Jet fleet decreased another 23 units in September, reducing Small Jet inventory by 10 aircraft YTD. As opposed to August’s transactions, buyers reverted to acquiring higher quality assets in September, lowering the group’s overall Quality Rating by 0.9% to 5.136, which remains within the ‘Very Good’ range.
Prospective Buyers face an inventory whose Maintenance Exposure was up 2.0% for the month, but 14.6% for the quarter, making high quality assets more challenging to locate. Meanwhile, the average Ask Price is just below the group’s 12-month high, having increased 2.2% in September while remaining unchanged for the quarter.
At 100.3%, the group’s ETP Ratio is at a 12-month high (worst) figure. While availability for the tracked fleet is down 1.6% YTD, 10.8% is listed for sale, giving a slight edge to buyers.
Turboprops: The tracked Turboprop fleet remains 5.6% above this year’s starting figure, and in September, a 13 unit reduction resulted in higher quality assets departing the inventory. This led to a 1% drop in the group’s Quality Rating as September closed. Still, the figure was up 4.1% for Q3 at 5.058 and Turboprops managed to remain in ‘Very Good’ territory.
Maintenance Exposure was likewise up in September, by 1.3%, but the figure for Q3 was down 3%. With Ask Prices remaining above average, the ETP Ratio posting a 12-month best (low) figure at 41.6%, and availability at 8.2% of the active fleet, leverage continues to side with sellers.
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