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Business Aviation Market Summary - December 2016

With 2016 all-but over, where are we at, and what’s ahead for BizAv in 2017?

Rolland Vincent   |   2nd December 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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Many observers are no doubt saying, ‘We’re glad that’s over,’ notes Rollie Vincent, Editor, Market Indicators, as he reflects on the US Presidential election. With this and Brexit having a big impact on world politics, what’s the Business Aviation picture looking like for 2017…?

The 2016 US Presidential election was a hard-fought battle that intrigued much of the planet. Pollsters who got it wrong were in abundance, and a wave of populist sentiment currently sweeps across the geo-political landscape.

For Business Aviation, many industry proponents will delight in the fact that the new US President-elect is already an enthusiastic private aviation customer, with a fleet of owned aircraft that covers the spectrum from Sikorsky S-76 helicopters to a Citation X and Boeing B757.

From a regulatory perspective, this should bode well for an industry that has been buffeted over the last several years by negative rhetoric from the Oval Office, an unwelcome headwind that did nothing to help the industry recover from the aftermath of the 2008 financial crisis.

With many voters in the US (and in the UK with the surprising Brexit vote) seeking “change”, however defined, we expect 2017 will be witness to some very substantial transitions that will challenge the status quo in Washington, Brussels, London and other world centers of government and business.

The Impact on BizAv?

So, what do these geo-political transitions portend for Business Aviation, particularly in the New Year? With aircraft sales, prices, and utilization on the decline throughout 2016, will Brexit and a new US Administration provide any much-needed lift for the Business Aviation industry?

Although we can no doubt be criticized at this time for even mentioning the word ‘survey’, the Q3 2016 JETNET iQ Survey of business aircraft owners and operators included specific questions on the expected impact of both Brexit and the US Presidential election on the industry.

A random sample of more than 500 fixed-wing owners/operators in 61 countries (65% of whom made or influenced their organization’s last aircraft purchase) found that Brexit and the US election were in fact important issues facing the industry. About 25% of worldwide respondents (and 37% of those based in Europe) disagreed with the statement that the uncertainty following the Brexit referendum will have little of no impact on Business Aviation (Chart A).

Brexit Business Jet Buyer Confidence

Worldwide, 41% of respondents believed that the uncertainty related to the [upcoming at the time] US Presidential election would have little or no impact on Business Aviation. Within respondents based in North America (US & Canada), this proportion increased to 52% (Chart B).

US Election Business Jet Buyer Conficence

Conventional wisdom suggests that most people abhor uncertainty, and this seems to be especially the case in Business Aviation. Tumbling residual values, soft prices and lower aircraft utilization levels are the result of an oversupplied business aircraft market that has clearly stopped recovering for the time being.

Economic and regulatory uncertainty, a near-constant concern with aircraft owners and operators, is likely to increase in 2017 as negotiations get underway in earnest on the future of UK–Europe relations, and as decisions are made and positions are clarified in what looks to be a raucous debate amongst various factions of the US Government. Entertaining?

Perhaps to some, but probably disconcerting to many, as the potential exists for a reset of the US’ trade and even security relationships with long-established trading partners and military allies.

Will there be even more (unwelcome) uncertainty in 2017? Our vote is, sadly, “Yes”.

Used Jet Market

The pre-owned business jet market continues to be quite active, although the volume of whole retail business jet transactions has been trending slowly downwards in H2 2016. In the ‘Good News’ column is the fact that we have been seeing a firming-up of prices in the lower-end of the market, led initially by the turboprop and now the light jet segments. This is a welcome sign, especially for the hard-hit light jet segment, after a prolonged and stubbornly shallow recovery that has been quietly underway for the past few years.

Large cabin business jet values remain under tremendous downward pressure, as ‘For Sale’ inventory increases and the market adjusts to the fact that well-regarded aircraft such as the Gulfstream G450 and G550 will soon be out of production. These aircraft are already joining a crowded stable of models whose values have declined much faster than expectated.

Although it may be tempting to think that, once sold, an aircraft’s value is primarily the concern of the new owner, this can easily become a self-defeating spiral.

Left unchecked, rapidly declining values will almost inevitably lead to buyer’s/lender’s/lessor’s remorse, and ultimately a flight of customers and capital to more lucrative investments.

The radical restructuring of the business aircraft lending/leasing industry is one of the most significant consequences of the rapid decline in residual values which has been the industry “news story” of the past two years.

Political leaders in Washington, Brussels, London and elsewhere will have far more pressing issues to address in the coming year than the Business Aviation industry’s supply/demand imbalances. A key question for policy makers: ‘How to stimulate economic growth in the face of seething nationalistic demands for trade, travel and migration restrictions?’

These external forces could easily become the industry “news story” of 2017.

MI www.rollandvincent.com

BizAv Activity – North America

October flight activity was up Year-over-Year (YoY) in North America, with Fractional and Large Cabin flight activity leading the way. Month-over-Month (MoM) October posted its expected increase over September...

Reviewing YoY flight activity (October 2016 vs. October 2015), Argus TRAQPak data indicate that October 2016 posted an increase of 3.3%. Results by operational category showed significant gains across the board with Fractional activity rising 5.7%. Part 135 activity followed with a gain of 5.2% and Part 91 rose a modest 1.5%.

The aircraft categories were all positive and were led, again, by a 10.3% boost for large cabin jets.

Month-Over-Month

October Business Aviation flight activity posted the expected MoM increase from September, finishing up 3.4%. Results by operational category were all positive, with Fractional up 4.6%, Part 135 up 3.3% and Part 91 activity up 3.2%.

The aircraft categories were, again, all positive with the largest MoM increase coming in the large cabin sector, up 6.7% from September.

US Business Aircraft Flying Hours

MI www.argus.aero

BizAv Activity - Europe

There were 66,921 Business Aviation departures in Europe in October 2016 according to WingX’s latest monthly Business Aviation Monitor, representing a -2.8% Year-over-Year (YoY) decline in activity.

The slowdown came in turboprop activity, with business jet flights flat YoY. The overall Year-To-Date (YTD) 2016 trend in Business Aviation activity is now -0.3% compared to 2015. In particular, faltering demand in France and Germany weighed the market down. From these two countries there were 1,600 fewer flight departures YoY in October. Business Aviation flights within Germany slumped -10%. Charter activity in France fell -7% YoY.

Bombardier Business Jet

Other large markets, including UK and Switzerland were also weaker on a YoY basis. The UK still has growth YTD, averaging >100 more flights each month compared to last year. But flights from the UK to Europe were down by -4% in October. The one region of Europe that maintained summer growth trends was the Mediterranean, with flight activity in Italy up 2%, and in Spain 7%. The growth in Spain came from Private business jet flights, in Italy, from growth in AOC sectors.

Flight activity in Eastern Europe was flat YoY. From Russia, activity subsided by -7%, although flights from Europe to Russia were flat YoY. Transatlantic activity was also flat, while inbound flights from Africa were well up this month.

Overall AOC activity was very slightly down this month, but business jet AOC flights grew 2% YoY. AOC activity is getting a considerable boost this year from the larger operators expanding their fleets, especially in ULR, SMJ and LJ segments.

“October was down YoY and posted the lowest October monthly activity for several years,” noted Richard Koe, Managing Director of WingX. “But the declining trend was exaggerated by the significant fall in turboprop and piston activity. The underlying business jet activity was flat, and business jet charters continued to grow.”

MI www.wingx.com

JETNET Q3 2016 Used Aircraft Market Review

JETNET released the September 2016 and the first nine months (YTD) results for the pre-owned business jet, business turboprop, helicopter and commercial airliner markets in 2016…

Comparing September 2016 with September 2015, business jets and turbine helicopters showed the largest increases in fleet percentage ‘For Sale’ compared to the other markets. Generally, inventories of pre-owned business jets ‘For Sale’ have increased and are now above the 2,400 mark.

Aircraft for Sale ComparisonsBusiness jets are showing a decline (-2.2%) in pre-owned sale transactions in the first nine months of 2016 compared to the same period in 2015. Q1 and Q2 were up 4.4% and 1.9%, respectively. Furthermore, business jets are taking less time to sell (11 fewer days) than last year. However, there was a 5.6% decrease in average asking price.

Business turboprops, by comparison, increased 5.4% in sale transactions, with no change in asking price. Piston helicopters saw a double-digit decline in sale transactions YTD, at 19.6%, while turbine helicopters recorded a 7.0% decline in sale transactions. Both turbine (up 9.9%) and piston (up 2.9%) helicopter segments showed increasing asking prices compared to last year.

Commercial jet YTD sale transactions, at 1,393, are trailing business jets, at almost 1,800 sale transactions. In all, for the first nine months of 2016 there were 6,147 pre-owned commercial and business jets, turboprops and helicopters sold. This is an increase of 99 (or 2%) more sale transactions compared to 2015.

MI www.jetnet.com

Q3 2016 Avionics Sales Report

In the first nine months of 2016, total worldwide Business & General Aviation avionics sales amounted to more than $1.6bn, notes AEA. That’s a 6.2% decrease in YoY sales compared to the first nine months of 2015...

Avionics sales during Q3 2016 came to almost $549m, a 5.7% decrease compared to Q3 2015 (almost $582m).

Avionics Sales ReportOf the more than $1.6bn in sales during the first nine months of 2016, 53.2% ($884m) came from forward-fit (avionics equipment installed by airframe manufacturers during original production) sales. By contrast, the retrofit (avionics equipment installed after original production) market amounted to 46.8% (over $779m) of sales during the first nine months of the current year.

According to the companies that separated their total sales figures between North America (US & Canada) and other international markets, 66.6% of sales in the first nine months occurred in North America, while 33.4% took place in other international markets.

Avionics Sales Report - Region

“It is disappointing that total worldwide sales have decreased in each of the first three quarters of the current year compared to those same time frames one year ago,” said AEA President Paula Derks.

“Although the US market has seen the equipage pace pick up slightly for avionics installations to meet the FAA's ADS-B Out mandate that has not translated into an uptick in overall avionics sales. Last year, the strongest period for sales was Q4, so it will be interesting to note whether that late-year surge continues again this year.”

MI www.aea.net/marketreport

Pre-Owned Bizjet Market Weakens in 2016

The pre-owned business jet market is showing signs of malaise in 2016 with the number of transactions slowing overall, prices dipping and inventories increasing, according to industry analyst Amstat.

The turboprop market appears only marginally better than the business jet market, with relatively flat transactions, Amstat reported in its latest Business Aircraft Resale Market Update Report.

The percentage of business jets that have turned over declined from 7.4% of the fleet in the first three quarters of 2015 to 7.1% in the same period this year. Inventories for all business jet segments climbed in the first nine months, with more of the available aircraft representing newer jets.

According to the Amstat report, 10.8% of the heavy jet fleet is available ‘For Sale’, compared with 10.4% at the beginning of the year. Available inventory for medium jets also is up by 0.4% since the beginning of the year, with more newer models available. At 11.8%, the light jet inventory also is up from the beginning of this year, but is the same as this time last year.

Average asking price, meanwhile, is down 6.6% for heavy jets, to $13.9m, and 7.8% for medium jets, to $3.4m. Light jet prices, however, have climbed 6.7%, to an average of $1.7m.

MI www.amstatcorp.com

In-Service Aircraft Values & Maintenance Condition

An Asset Insight market analysis conducted on October 31st, 2016 covering 91 fixed-wing models, and 1,976 aircraft listed ‘For Sale’, revealed the following…

Values for tracked aircraft models improved 1.6% since last month, but they are still 7.6% lower than twelve months ago. Only Medium Jets lost ground, as Ask Prices fell -3.8% over the past 30 days (and -15.9% during the past 12 months).

Large Jets gained 2.8%, Small Jets 0.8% and Turboprops 1.0%. Over the past twelve months, Large Jet Ask Prices have fallen -6.1% while Small Jets have enjoyed a 21.3% increase. Turboprops have seen a -2.2% reduction.

Jet Maintenance ExposureInventory Fleet Maintenance Condition

Overall Asset Quality remained ‘Excellent’, with Maintenance Exposure remaining just below the 12-month high figure. Specifically:

  • The Asset Insight Quality Rating improved, for the third consecutive month, to a record high 5.401 from last month’s 5.361, on our scale of -2.5 to 10.
  • The tracked fleet’s average Maintenance Exposure (an aircraft’s accumulated/embedded maintenance expense) improved/decreased to $1.473m (incrementally better than September’s 12-month high/worst figure of $1.475m).

Maintenance Exposure to Ask Price (ETP) Ratio

Our tracked fleet’s ETP Ratio (an aircraft’s Maintenance Exposure divided by its Ask Price) posted a slight improvement at 54.2% versus last month’s 54.9%. We consider any ETP Ratio over 40% to represent excessive Exposure in relation to Ask Price, and the tracked fleet’s figure has been above 40% for the past 22 months.

Jet ETP Ratio

Large Jets posted the best/lowest figure at 41.1% (the group’s worst figure during the past twelve months), followed by Turboprops at 44.2%, Small Jets at 62.6%, and Medium Jets at 62.8% (the group’s worst 12-month figure).

Large Jets ETP RatioMedium Jets ETP RatioSmall Jets ETP RatioTurboprops ETP Ratio

Market Summary

Over the past twelve months, Small Jets is the only group to post an Ask Price increase as well as a 10.1% improvement in ETP Ratio. While the Ask Price increase might appear artificial, Buyers should keep in mind that Small Jets registered the least deterioration between Ask and final Transaction Value last quarter (8.2%). Additionally, at $716k, Maintenance Exposure has improved over the past three months from its 12-month worst figure of $781k posted in July, and is now only $60k above the group’s lowest 12-month figure.

We believe Sellers have an opportunity to monetize their aircraft’s Maintenance Equity during the last few weeks of this year, while Buyers can acquire “Outstanding” quality aircraft at prices that have remained within a narrow trading band.

On the other end of the spectrum, Medium Jets have lost nearly 16% of their value during the past twelve months, with Ask Price presently sitting at the group’s 12-month low point. Compounding the problem, Maintenance Exposure is currently near the worst figure for the past twelve months, leading to the group’s worst/highest ETP Ratio for the period.

Put succinctly, Buyers should be able to utilize these facts to structure advantageous transactions, but only if they do their homework sufficiently well to differentiate between “good value” and “low price”. Incorrectly accounting for future maintenance can lead to some rather unfortunate financial events.

MI www.assetinsightinc.com

 

Finance Enquiries Increase

Global Jet Capital reports a strong increase in enquiries to finance mid- to heavy private jets. Enquiries during Q3 2016 were 59% higher than Q2 2016, and 240% higher than the same period last year…

As much as $17.5bn of funding is estimated to be needed in 2017 for business jet deliveries, according to Global Jet Capital, which estimates that around 27% of this amount will be raised by high net worth individuals, and the rest evenly split between private and publicly listed companies.

Meanwhile, the number of business jets being delivered globally fell by -4.7% in Q1 2016, compared to the same period in 2015. Research from Global Jet Capital reveals that 16% of Business Aviation professionals believe a lack of finance has contributed significantly to the decline. Among that group, 41% believe this has had a slight negative impact on deliveries, while only 36% believe it has had no influence.

“A lack of available finance for those looking to buy mid- to heavy business jets was one of the main reasons we entered this market,” said Dave Labrozzi, COO, Global Jet Capital. “Some of the traditional lenders were not in a position to meet demand, despite many of the requests for finance being attractive for lenders.

“We have over $1 billion to lend and with a positive long term outlook for the Business Aviation market, we are optimistic for the future.”

MI www.globaljetcapital.com

Cessna Citation Jet

Jetcraft Sees Strengthening Market

Jetcraft sees aircraft manufacturers increasingly focusing their research and development budgets on higher-end products…

After a long stretch in the doldrums, the business jet market is beginning to see a return to normalcy in some sectors, according to the Jetcraft forecast, which dialed back its projection for the number of business jet deliveries in the next 10 years to 7,879, worth $248bn, from 8,755 in its inaugural forecast last year).

Historically, demand for new business jets outside North America has accounted for 30 percent of deliveries, but over the past decade that changed, with non-North American markets accounting for half of the deliveries with demand fuelled by high oil and gas prices and favorable exchange rates against the US dollar.

Jetcraft’s forecast sees a continuing return to the historical model as those conditions have reversed. Through 2025, the company sees North America accounting for 60 percent of new bizjet deliveries (4,727 aircraft), up 6% from last year’s forecast. Europe’s share of the delivery forecast grew by 1% YoY.

The report notes that short-term deliveries will be hampered as the contribution of the emerging market economies wanes in response to lower oil and gas prices and less favourable US dollar exchange rates, indicating that gains worldwide will come at the expense of Latin America, Asia-Pacific and Russia/CIS, which see a decline of 7% in this year’s forecast. Projected demand in the Middle East and Africa remains stable at three percent each for the next 10 years, according to Jetcraft.

“When other markets are down and North America is up, it balances our market overall,” noted Jetcraft president Chad Anderson, highlighting the good news in the report.

“Emerging markets are extremely important, but we see North America continuing to lead the pack in terms of demand over the 10-year period.”

Jetcraft’s forecast calls for delivery of 688 business jets this year, rising steadily to a peak of 932 in 2021, before the next trough of 693 deliveries in 2024.

Jetcraft sees aircraft manufacturers increasingly focusing their research and development budgets on higher-end products. “This is the OEMs that do a good job of listening to their installed base of clients, telling us that the world is still favoring larger-cabin aircraft in general terms, so you are seeing that segment grow in activity and deliveries over the life of the forecast,” said Anderson. “As businesses get more global, there’s more demand to go beyond North American shores. The OEMs are investing millions and millions of dollars in that larger class of aircraft for the foreseeable future.”

Jetcraft predicts the Bombardier Global 7000 will enter service in 2018, followed a year later by the Global 8000. It predicts a new Gulfstream flagship, the G750, will debut in 2020; Cessna’s Hemisphere will arrive on the market in 2022; and a Dassault Falcon 9X, Embraer Legacy 700, Bombardier Challenger 700 and Gulfstream G400 will be introduced in 2023.

Pre-Owned Market

While Jetcraft notes that the inventory of jets for sale remains below the 13% benchmark, there is little evidence that residual values for five-year-old aircraft are on the rise. According to Anderson, most new aircraft purchased in the last five years came at a discount, a practice he believes continues in some cases today.

MI www.jetcraft.com
Ten Year Business Aviation Forecast Summaries

NBAA-BACE 2016 heralded ten-year Business Aviation Forecasts from both Honeywell and JETNET, reflects Mike Potts. Honeywell predicts a market of 8,600 aircraft worth an anticipated $255bn, while JETNET forecasts 7,380 units worth $219bn. Where do the differences lie?

Honeywell’s prediction of 8,600 new aircraft deliveries worth $255bn represents a drop of about 6.52% from the 9,200 aircraft forecast a year ago, and a 5.5% drop in the $270bn in billings since Honeywell’s 2015 forecast.

This was the fourth year in a row that Honeywell has told us not to expect things to improve anytime soon. Indeed, it was five years ago in 2012 that Honeywell rather famously said “flat is the new normal” - a prediction that has proved to be stunningly accurate.

And while it didn’t use that term again, the latest Honeywell forecast says essentially that – a weak finish to this year, followed by another flat or slightly down year in 2017. Improvement is only expected in the 2018 timeframe.

Honeywell says in the recent forecast that we can expect to see sales of 9,200 aircraft worth $270bn over the next 10 years if we include Business Liners in the mix. That seems like a bit of a reach, however, as Business Liners only accounted for 16 units last year according to the General Aviation Manufacturers’ Association and would have to average 60 units per year for the next decade to make Honeywell’s numbers work.

Honeywell 10 Year Business Jet Forecast

JETNET iQ’s forecast, meantime, is based on a rolling quarterly sample that annually collects data from more than 2,000 business aircraft operators. (Honeywell’s forecast is based on an annual survey of 1,500 operators around the world.)

Unfortunately, JETNET’s forecast is less optimistic than Honeywell’s, and its total 7,380 projected units worth $219bn already includes airliner-based business jets.

Honeywell Specifics

Honeywell says its data reflect a strong upturn from last year when 22% of the operators surveyed said they were contemplating replacement or expansion of their fleets. This year 27% reported they were anticipating replacement or additions, but those additions were likely to come later in the survey period. Nonetheless, this represents the first increase-over-prior-year in Honeywell’s data since 2006.

(The replacement/expansion total peaked at 40% in 2009, just after the strongest year in business jet sales history when 1,317 jets were delivered and the market was in a state of high exuberance. More typically these numbers are in the mid-20% to low-30% range, so this year’s 27% bodes well for improvement in the years ahead.)

So how could purchase plans be up yet the current forecast be reduced from last year? Several countries that have been good business jet markets are currently suffering with depreciated currencies as well as social and political issues. Additionally, some development programs have been delayed. Operator purchase plans are more heavily weighted to the latter part of the five-year period than Honeywell has seen previously.

Finally, increased inventory in the late model used market could prompt some potential new aircraft buyers to opt for late-model used units instead.

Forecast By Region

Distribution of business aircraft sales will favor the North American market over the next five years. North American deliveries will account for 65% of the world’s total (up from 61% last year). Europe will account for 14% (unchanged), while Latin America will be at 12 percent (up 6%). Asia-Pacific will be at 6% (up 3%) and Africa 3% (unchanged).

Forecast by Aircraft Class

While JETNET’s forecast does not list deliveries by region, both theirs and Honeywell’s focus on aircraft classes, and while they see the market somewhat differently, their conclusions are clearly in parallel.

Jetnet 10 Year Private Jet Forecast

Honeywell says new aircraft purchases over the next five years will comprise 57% ‘big-cabin’ jets (airliners to super-midsize), 21% ‘mid-size’ (light medium-medium) and 22% ‘small-cabin’ aircraft (personal jets to light). In terms of 2016 dollars, Honeywell thinks big cabin aircraft will account for 85% of expenditures, while midsize will claim 10% and small cabin aircraft 5%.

JETNET’s findings are essentially identical in the large cabin segment, with 56.7% of unit purchases expected to be in the large cabin class. Yet JETNET differs markedly in the lower section of the market where lighter airplanes account for 29.9%, and medium sized aircraft 13.4% of unit deliveries.

The differences in total unit expectations cause JETNET to expect the large cabin aircraft to account for 86.1% of revenues, while the midsize airplanes will be 6.9% and the small cabin aircraft 7%.

JETNET Specifics

Unlike Honeywell, JETNET publishes anticipated deliveries by manufacturer. In terms of unit deliveries JETNET expects Cessna and Embraer to each account for 20% of deliveries in the next five years, Gulfstream and Bombardier to each capture 17%, Dassault 10%, HondaJet 5% and other manufacturers 11%.

In revenues, that equates to: Gulfstream claiming 33%; Bombardier 25%; Dassault 15%; Cessna 10%; HondaJet 1% and other OEMs 10% (these could include Airbus, Boeing, Cirrus and ONE.

MI www.honeywell.com and www.jetnet.com

Read more about: Honeywell | JetNet | Aircraft Sales Trends | Used Aircraft Sales Trends | Jet Sales

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