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Business Aviation Market Summary - August 2016

Thoughts on aircraft prices ahead of Q3 2016

Rolland Vincent   |   1st August 2016
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Rolland Vincent Rolland Vincent

With 35+ years in the aviation industry, Rolland Vincent, president, Rolland Vincent Associates...
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What’s up with business aircraft prices, asks Rollie Vincent, Editor, Market Indicators. Or perhaps more appropriately, “what’s down?”

Go into just about any business aircraft hangar or the office of an aircraft salesperson, financier, or appraiser these days and the hot topic near the top of everyone’s list is that of aircraft values. Prices for almost all new and used business jets for sale have continued to trend downwards as we pass the mid-point of the Northern Summer.

What a summer it is turning out to be, beginning with the remarkable vote in the UK to leave the EU (followed by a flurry of high-level resignations of political leaders on both sides of the aisle in the fractious debate). Brazil is scrambling to make final preparations before hosting the 2016 Summer Olympics (in their Winter, no less). Preparing for a sharp increase in business jet and visitor arrivals, it grapples with on-going political unrest and weak commodity prices.

Stateside, all eyes seem glued to the latest news on what looks to be an historic Presidential election in November, with unknown consequences for the Business Aviation industry, government policy priorities, and legislative direction. Meanwhile, outlooks for 2016 GDP growth in the five largest country markets for the world’s business jets (the US, Mexico, Brazil, Canada and the UK) have declined since the end of Q1 2016, with four of the five (Mexico being the exception) expected to grow by less than 2%.

Brazil’s economic outlook amongst this group is by far the weakest, with the economy expected to actually shrink by -3.5% in 2016, despite the massive infrastructure investment and inbound travel associated with Rio 2016.

Optimism Wanes

The recently-completed JETNET iQ Q2 2016 Survey of business aircraft owners and operators suggests that the overall levels of optimism have slipped somewhat from Q1, based on the opinions of more than 500 respondents in 64 countries. Optimists continue to outnumber pessimists, but the gap has been shrinking between those who think we are past the low point in the current business cycle (43.6%) and those who think we have not reached the low point (30.5%).

Regionally, respondents outside North America (USA and Canada) and Europe are the most pessimistic, although responses in Q2 2016 varied little by aircraft size category operated.

Business Jet Buyer ConfidenceIn the market for business aircraft products and services, the basic laws of supply and demand that drive pricing and residual values are hard at work, 24/7/365. ‘For Sale’ inventory levels – measured as a percentage of the in-service fleet – have been slowly increasing since 2014, and are now approaching 12% overall for the business jet fleet. The highest levels of aircraft availability continue to be in the traditional Mid-Size Jet segment, and the lowest in Business Turboprops for sale.

Some aircraft OEMs have their hand on the throttle lever and are poised to slow down or pause their rates of production for certain models that are no longer in demand. These are difficult but probably necessary decisions to reset the rules of engagement with customers who have had the upper hand in this high stakes poker game, where the costs of unsold inventory (the notorious ‘whitetails’) fall squarely on the OEMs.

As Hagerty Jet Group notes in a well-considered article that follows below, there can be tremendous value locked into pre-owned aircraft that are reliable, capable, and well supported by their manufacturer.

Although new models will always have their appeal, there is much to be said for the quality and selection of used aircraft that can be purchased today (see the excellent Asset Insight article to this effect, below). Like a company that buys back its stock when the market price doesn’t reflect its own perceptions of current and future values, many aircraft owners have elected to hold onto and upgrade their aircraft in this business cycle.

JETNET’s iQ Surveys suggest that about half of the owner/operator community has deferred a new aircraft purchase decision in the past two years because of low residual values. Declining prices have characterized the used business aircraft market for several years, and with US bizjet utilization still more than 11% below pre-2008 crisis levels despite almost 30% fleet growth, this looks set to continue through the long, hot days of the summer of 2016.

‘Main Street’ Confidence

Although US stock markets continue to impress – at our publication deadline, the Dow Jones Industrial Index was up 18% since its low point in February 2016 - US corporate profitability has stalled. The latest results from the US Bureau of Economic Analysis indicate that annualized after-tax profits slipped almost 6% and gross private investment by almost 13%, year-over-year in Q1 2016. Although this is the most recently available information, profits have flattened over the past few years, despite the fact that the US economy has been growing slowly but steadily.

The confidence level of corporate purchasing managers in the United States, a widely watched indicator of business health, was at 53.2 in June 2016, up from 48.2 in January but flat year-over-year. The University of Michigan’s US consumer sentiment index, another key indicator of Main Street confidence, was at 89.5 in July 2016, down from 92.0 in January and from 93.1 year-over-year.

In other words, the flat-as-Kansas market we discussed in last month’s column remains pretty flat.

Generally speaking, companies with the ability to purchase a business aircraft appear to be carefully considering their options. For those already operating an aircraft and needing another, the rationale for purchasing a new asset must be compelling – for example, if the new aircraft offers a level of performance or mission capability that cannot be achieved with a current aircraft. The decision to purchase or not can be difficult for even the most high-performing of today’s new aircraft offerings, especially given the fact that many companies and UHNWIs have opted to fly fewer long-range missions with the slowdown in emerging markets.

For companies that simply need more lift due to increased levels of business activity, we understand that many are (wisely) looking at used aircraft for sale as an interesting, yet highly capable alternative investment that is, in some cases, far less capital intensive.

As always, jet cards, fractional and charter lift solutions, especially from trusted players with a heritage of providing superior service levels, can be very attractive options to a purchase, enabling the customer to keep their powder keg of capital dry for other more fundamental battles.

Exceptionally High Value

In any event, used aircraft buyers will find much to drool over in the pages in this magazine (note, for those who prefer not to drool on their magazine, AvBuyer.com offers an excellent on-line version). Our view is that inventory quality, availability and value-for-the-dollar are at exceptionally high levels, and should remain so, at least for the time being.

Nevertheless, and over the next several quarters, we do expect these battle lines to begin shifting back towards the other side of the bargaining table, as OEMs make some hard calls about lowering production rates and exiting certain model lines.

Aircraft that are delivering at rates of 1.5 units per month or less are surely on their CFO’s high watch for cutbacks (and if they aren’t already, they probably should be). Although the production tools and R&D may have been written off long ago, enabling the product line to be profitable on paper at low output rates, there is a real cost – and if nothing else an opportunity cost - of consuming floor space, personnel and available resources for a low-volume model.

For an OEMs leadership team, these can be tough, but necessary, calls – ultimately reflecting the fact that there are simply too many models chasing too few customers across the industry, resulting in soft prices and declining residual values.

For those considering purchasing one of the many high-quality pre-owned aircraft that are available today, it would be wise to remember the famous words of American game show host and part-time philosopher Bob Barker: “Ladies and Gentlemen - what are you waiting for (if) The Price is Right?”

MI www.rollandvincent.com

Gulfstream Business Jet

BizAv Activity - Europe

There were 81,436 Business Aviation departures in Europe in June 2016, notes WingX, representing a -1% YOY decline in activity. The decline came from fewer Turboprop and Piston flights. Jet activity increased 1%, with a significant 4% increase in business jet AOC activity…

The main growth impetus this month came from France where activity was up 4% YOY. After six months of 2016, Business Aviation activity in France was up 1.3%, equivalent to 173 additional flights per month, compared to 2015. UK was also up 1.3% in 2016.

Growth in Spain included a gain of more than 5% in AOC activity, which was also slightly up in Italy and Switzerland but declined -11% in Germany.

Private flight activity (50% of all flights this month) was down -2.5%, and declined across all the main European markets except Sweden and Norway. Private flights have fallen in seven of the last 12 months, in contrast to AOC which has declined in just two months since July 2015.

Flight activity within Western Europe sustained slight growth, but continued to weaken in the South and East, and this month fell back heavily from North America, North Africa and Middle East. Arrivals in Europe from Russia were down -14% YOY.

Five out of nine business jet segments grew in activity this month, with the largest gains in the Super Mid-Size and VLJ segments. Both Light and Super Light segments were also ahead. Mid-Size and Heavy Jet activity continued to erode.

Private flights declined -3%, -8% and -25% respectively for Ultra-Long-Range, Heavy and Mid-Size jets. VLJ Private flights were up 6%, and VLJ Charter flights gained 20% YOY, with the Citation Mustang the strongest performer.

“At the halfway point this year, Business Aviation activity is slightly trailing last year’s trend, which is disappointing,” summarized WingX managing director Richard Koe. “However, this belies some solid recovery in business jet activity, particularly in AOC flights... We will have to see over the next few months whether the Brexit vote at the end of June sets back the UK’s contribution to the Eurozone’s recovery.”

MI www.wingx-advance.com

Used Inventory Continues To Grow

From a report in AIN Online the latest UBS Business Jet update indicates the inventory of used business jets on the market continues to creep up, with the number of available Small and Mid-Size jets beginning to close the gap with Large aircraft...

Cessna Citation X jet

UBS notes that the available inventory of business jets rose by a percentage point in May, approaching 11.5% of the installed base. However, it is still below the historical average of 13%. The inventory of young aircraft (those from zero to 10 years old) was up 2%, while ‘very young’ aircraft (age zero to five years old) grew by 4% in May.

Over the past year, the very young inventory has inched up 3% while the 6-10 year-old segment has jumped 21%. The 6-10 year-old category has logged upticks in nine of the last 11 months, “and on an absolute basis is at an all-time high,” UBS noted.

Inventories for Small and Mid-Size aircraft have swelled to 10% and 11% of the installed base from 8% and 9% a year ago. The number of large aircraft ‘For Sale’ has stabilized at 12%.

“We ultimately see the market improving on pent-up corporate replacement demand in North America,” UBS told investors.

MI www.ubs.com

A Gulfstream G550 Owner’s Replacement Dilemma

Prior to 2008, it was common for a Gulfstream to retain nearly 100% of its value or better, notes Hagerty Jet Group in its Q2 2016 Gulfstream Quarterly Market Update. Today, residual values are declining at historic rates and that situation is effecting how and when aircraft owners are replacing their business jets…

Gulfstream G550 jet

Global demand in 2008 was so strong that the backlog for a new G550 was greater than four-years. Therefore, owners became accustomed to replacing their aircraft every few years and actually making sizeable profits when selling their used ones. This made a compelling argument to always have the newest airplane ordered for purchase.

Ten years ago, a G550 buyer could sell a position for a 10% profit. Today, they’re losing 10% at delivery and arguably another 10% within the first year of ownership.

Back in 2008, Gulfstream was very successful securing orders for new Gulfstream G650s from G550 owners who saw the G650 as the ultimate business jet. But for those who did not take advantage of introductory pricing, it’s difficult to justify the additional investment when G550 residual values have been hit so hard.

Owners and operators love the G550. It’s a safe, reliable, efficient and proven aircraft with incredible range up to 6,750nm at Mach 0.80. Gulfstream has delivered over 540 units since 2003, and apart from the continually improving interiors and systems, the airplane is virtually the same product today as it was 13-years ago.

The True Cost to Upgrade

Assume a G550 owner bought his airplane new in 2010 for $50m. That same airplane is now worth around $30m (approximately 40% less than paid 6-years ago). The owner is happy with the G550, but they typically buy new airplanes every 5-7 years.

Gulfstream would happily sell a new G650ER that delivers in 2019 for around $70m (with options and escalation). By the time it delivers, the used G550 will be worth $25m or less. Therefore, the net replacement cost to upgrade to a new G650ER is nearly $45m. Many G550 owners struggle to justify how the improvements of a new G650ER can really be worth $45m to fly the same trips that their G550 already covers safely and reliably.

Moving forward, G550 owners will also consider the new G500/G600 models as viable choices. The technological improvements and design philosophy of the G500 and G600 are going to set new operating and performance standards in the industry.

However, when the next available G500 delivers in 2019, the cost of replacing a nine-year-old G550 with a new G500 will be at least $25m.

The G500 offers a slightly wider cabin than a G550 by adding seven inches, but is virtually the same overall cabin volume. The G500 flies faster at high-speed cruise, but offers significantly less range at 5,000nm. Buyers with longer range requirements may need to spend $10m more and get the 6,200nm range of the G600 (550nm less range than the G550).

This leaves G550 owners wondering why they should spend twice as much as their current airplane’s value to upgrade to a newer model that doesn’t fly as far as their G550, and offers only a marginally improved cabin experience. Is it worth doubling the price for a jet that flies at a higher speed simply because the new avionics make the pilot’s job easier? Yes, it’s nice to get there faster, but is the marginal time-saving worth $35m…?

What’s a Loyal Gulfstream Owner to Do?

The current G550 owner will either keep their existing G550 longer or turn to the pre-owned G650 market where prices have dropped by $10m in just the past few months.

Once the price for a pre-owned G650 drop to $50m and below, the delta between the G550 and G650 is closer to $20m making a compelling argument to choose a pre-owned G650 as an upgrade. With 180 G650 units now in service and 19 pre-owned airplanes currently ‘For Sale’, it’s time for G550 owners to start planning a G650 upgrade sooner than later.

MI www.hagertyjetgroup.com

Promising Prospects for Swiss BizAv

Switzerland’s Business Aviation industry is an important economic sector that seems set for further growth, so long as capacity and regulatory issues do not stifle its potential, according to industry players gathered for discussions in Bern…

Switzerland is the seat for many world-class multinationals and financial institutions. BizAv accounts for over 17,000 direct and indirect jobs in the country, translating into almost €1bn in labour compensation, some €1.3bn in GVA, and over €3.7bn in total output.

"Business Aviation has an image issue," commented Hans-Ueli Vogt, Member of the Swiss National Council and Chairman of the Parliamentary Group for Aviation. "It's perceived to be elitist and luxurious. The sector must fix this image and demonstrate that, in fact, it ultimately serves the public interest by increasing mobility, which consequently increases the competitiveness of a geographical area.”

MI www.ebaa.org

Summer Events Boost European Flying

New research from Avinode has revealed that sporting and cultural events taking place in Europe this summer are providing a welcome boost to Business Aviation figures, despite an overall -1% decline in flight activity compared with 2015.

Oliver King, MD, Avinode, commented, “This summer, Europe has plenty of draws for visitors, with France being one of the most popular destinations. Data from the Avinode Marketplace shows there were 10 times as many requests for flights to Nice at the end of May 2016 compared with the rest of the year, primarily driven by the F1 Monaco Grand Prix, the French Open and the Cannes Film Festival.

Cannes Private Jet Travel

“Business jet charter requests also surged on June 10-11, 2016 in the 10 French host cities of the UEFA Euro 2016 football games. There was a boom in Marseille with 2,600 requests for those two days – a 100-fold increase compared with the same period in 2015. Of those requests, approximately 40% were from Russia...”

King concluded, “Europe continues to be a leisure market driven by the preferences of high net worth individuals and a tradition of a long summer break. This is in contrast to the USA where corporate use of business jets lessens the impact of holiday peaks, and means the industry is shaped more by economic and political events, such as the 2016 Presidential Election.”

MI www.avinode.com

Increased Indian Demand for Business Aviation?

Global Jet Capital, a leading provider of financing solutions for Large-Cabin, Long-Range business jets, expects demand for Business Aviation in India to increase as a result of the country’s strong economic growth…

New research from Global Jet Capital reveals that over the last decade (2006-15), 70 Mid-Size to Heavy business jets were delivered to India, with a combined value of around $3.5bn. The company says these aircraft typically cost between $25m-$75m each. Up to 80% of the funding used to purchase these is sourced through external financing.

Consisting of a greater proportion of Mid-Sized to Heavy jets than the global average, 44% of the Indian fleet is classed as Mid-Sized to Heavy, indicating that demand for finance from Indian buyers is likely to be greater than from other regions.

Global Jet Capital, which recently completed the purchase of the aircraft lease and loan portfolio of GE Capital Corporate Aircraft in the Americas representing approximately $2.5bn of net assets, has around $1bn to lend to clients to purchase relevant business aircraft in India and elsewhere around the world.

Simon Davies, VP, Sales (India) at Global Jet Capital says, “For the fiscal year 2015-2016, India’s GDP growth was around 7.6%, and some market commentators are predicting that growth will gain momentum in 2016-2017…Demand for Business Aviation is closely correlated to economic growth so we believe long-term, India will see a significant increase in demand for business jets.

“This is already a very attractive market for us, and we expect it to become even more appealing in the coming years.”

MI www.globaljetcapital.com

Aircraft Values & Inventory Fleet Maintenance Condition

An Asset Insight market analysis conducted on June 30, 2016 covered 91 fixed-wing models, and 1,965 aircraft listed for sale, revealing the following…

Private Airplane Asset ExposureAfter a slight Q1 contraction, spreads between Ask Prices and Transaction Values widened again during Q2 due to sustained erosion in values. The number of Business Jet Aircraft transactions was sharply lower during the first half of 2016, compared to the same 2015 timeframe.

  • Large Jets: After evidencing some stability between Ask Price and actual Transaction Value during Q1, values are once again moving downward, pushing spreads sharply apart in Q2.
  • Medium Jets: Values posted a slight contraction between Ask and Transaction price spreads, as they did during Q1.
  • Small Jets: Values widened slightly between Ask and Transaction figures. However, demand is no longer outpacing supply within this sector, so Asset Insight anticipates this gap to narrow in the future.
  • Turboprops: Values remained consistent. Should inventory continue to build, a slight increase in the spread between Ask and Transaction pricing will be likely.

Inventory Fleet Maintenance Condition

Asset Quality reached an all-time high level, while the analysed fleet’s Maintenance Exposure value matched the tracked fleet’s historical average.

Quality Rating: The Asset Insight Quality Rating was virtually unchanged, rising to 5.377 from May’s 5.349, on Asset Insight’s scale of -2.5 to 10.

Maintenance Exposure: Maintenance Exposure (an aircraft’s accumulated maintenance financial exposure) worsened 1.3% over May, increasing $19k to $1.46m from $1.44m. By aircraft sector, the figures were as follows:

  • Large Jets: ‘Outstanding’ and record high asset quality (consistently the best among all groups) at 5.565, a 4.9 AI2 basis point improvement over last month; Maintenance Exposure worsened slightly, increasing from $3.061m to $3.096m.
  • Medium Jets: ‘Excellent’ asset quality at 5.358 (versus last month’s 5.389), earning the group third place among the four sectors; Maintenance Exposure worsened by $30k, increasing to $1.281m from $1.251m.
  • Small Jets: Retaining second place, this category had an ‘Excellent’ asset quality rating at 5.433, versus last month’s 5.393. Maintenance Exposure worsened by $48k, increasing to $769k versus last month’s $721k.
  • Turboprops: ‘Very Good’ asset quality at 5.074, versus May’s 5.016 rating; Maintenance Exposure also improved, falling $15k to $552k – a figure better than the group’s $561k 12-month average.

Exposure to Ask Price (ETP) Ratio

Our tracked fleet’s ETP Ratio (an aircraft’s Maintenance Exposure divided by its Ask Price) worsened last month, increasing to 54.0% (equalling the tracked fleet’s 12-month average) from 52.9%, with all but Turboprops contributing to the increase.

Private Airplane Exposure to Price Ratio

Higher Maintenance Exposure figures for all but the Turboprop sector, and a record low average Ask Price were the primary drivers. We consider any ETP Ratio over 40% to represent excessive Exposure in relation to Ask Price, and the Ratio has been above 50% for the past eighteen months.

  • Large Jets: ETP Ratio (the best among the four groups) has been steadily worsening since February, increasing this past month to 38.3% from 37.4%. Ask Price fell to $14.22m from $14.89m – a 4.5% reduction and another 12-month low figure. The sector continues to offer great value for Buyers, and they are likely to seize on this unusual mix of high quality and low values, leading to the best assets trading quickly – assuming that Sellers are willing to accept current/lower offer prices.

  • Medium Jets: ETP Ratio degraded, increasing to 57.7% from 55.2%, registering worse than the group’s 12-month 55.2% average. Ask Price decreased another 2.3% and, at $3.47m, is only $50k above the group’s 12-month low figure. Many quality assets are available and, by virtue of current prices, high quality assets should provide good value for Buyers.

  • Small Jets: ETP Ratio worsened for the fourth consecutive month, increasing to 69.3% from March’s 12-month low of 66.3%. Ask Price also receded, but at $2.19m are only slightly lower than the group’s 12-month peak number of $2.20m, and $2.21m record high. In a previous report Asset Insight advised that demand for a number of popular models might be abating, based on some widening between Ask and Transaction pricing. Asset Insight now believes demand is no longer outpacing supply within this sector, so anticipates this pricing gap will narrow.

  • Turboprops: Both the ETP Ratio and Ask Price improved 2.9% and 3.0%, respectively. The ETP Ratio – which continues to be second best among all sectors – improved to 46.1% from last month’s 47.5%, while Ask Price fell another 3.0% to another 12-month low of $1.53m. Turboprop values have remained within a narrow band during the past year and have regularly posted the second-best ETP Ratio among the four sectors. With prices at a 12-month low, values are about as good as one should expect, based on current market dynamics.

Market Summary

Some Sellers clearly have assets of exceptional quality listed for sale. Advantage however continues to be on the side of Buyers who, as Asset Insight has consistently stated, have an opportunity to acquire aircraft in exceptional maintenance condition for some of the lowest prices its research has recorded.

MI www.assetinsightinc.com

Read more about: JetNet | Buying Jets | Aircraft Maintenance | Aircraft Sales Trends | New Jets to Market

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