- 30 Nov 2017
- Rolland Vincent
- Market Insight
Despite the cold winds of February, the market environment for Business Aviation continues to heat up. Rollie Vincent explores the reasons behind this…Back to Articles
Despite the cold winds of February in the northern latitudes, the market environment for Business Aviation continues to heat up, as Rollie Vincent explores here…
New tax laws in the US and generally stronger GDP growth in North America and Europe are providing some warmth and welcome tailwinds. With the much-anticipated GAMA Year-End Shipment Report due on February 21, most industry followers are expecting a better year for the industry after several years in the doldrums.
Aircraft utilization continues to climb and buyer confidence is building, setting the stage for higher aircraft sales activity after a busy end to 2017.
With more than 60% of the business jet fleet based in the US, many eyes are naturally on the US market for signs of strength. That is fueled by an influx of cash on the back of lower corporate tax rates and a hoped-for wave of repatriated profits held outside the US by corporations who see the logic in taking advantage of the one-time tax reprieve. In the meantime, OEMs remain in collective hyperactive mode, investing in new products and production processes.
New Airplane Vibrancy
At the end of 2017, Pilatus Aircraft successfully certified the PC-24 ‘Super Versatile Jet’, carving a niche for itself in the competitive Light jet segment. Entry into service with Portsmouth, New Hampshire-based PlaneSense was imminent as we went to press, and provides a stamp of approval from Pilatus’ largest customer and high-utilization Fractional Ownership program specialist.
Close on its heels are the Citation Longitude and Gulfstream G500, both in the final stages of certification flight testing. Bombardier, meanwhile, is expected to fly the fifth flight test vehicle in the Global 7000 program incorporating a newly designed, lighter-weight wing, and the entire organization is focused on achieving type certification before year-end.
Darkening the skies above Savannah, Georgia (even more than the uncharacteristically harsh weather) Gulfstream has an unprecedented 10 flight test vehicles in the air, with concurrent certification programs of the G500 and G600 large cabin aircraft.
Used Market Impacts
With numerous new models initiating customer deliveries, we expect a fresh release of used aircraft inventory ‘For Sale’ into the market over the next months and quarters. Although this would normally trigger an increase in the overall supply of ‘For Sale’ aircraft, we think that increased sales – spurred along by the new US tax laws and buyer confidence – should keep this trend in check.
At the macro level, ‘For Sale’ inventory levels (which slipped below 10% of the in-service fleet of business jets at the end on 2017) are likely approaching their low point in the existing business cycle.
Specific used market segments have already tightened. With almost 550 G550 aircraft in operation, just 3% of the fleet is currently ‘For Sale’.
Is 2018 the Year?
Soft pricing and steadily declining residual values have been the order of the day in the used business jet market for several years, and 2017 was another disappointing year for aircraft owners and asset managers anxiously awaiting more stable valuations.
With tremendous pressures to deliver higher sales and generate faster returns on investment, C-Suite executives across the business aircraft manufacturing industry will be faced with making the tough calls about setting production rates to capture their fair share of what is expected to be a rising tide.
With pressure from Pilatus and Honda in the Light jet segment, and new models about to enter service in the Super Mid-size and Large jet segments, competition for buyers is already fierce, with more to come as 2018 unfolds. The world turns, and the business aircraft buyers’ market continues!
Flight Activity – North America
According to ARGUS TRAQPak, December’s North American flight activity results by operational category were mostly positive Year-over-Year (YoY) while Month-over-Month (MoM) activity was down against November 2017. Specifically:
YoY, Part 135 and Fractional activity produced modest gains, while Part 91 activity slipped compared with December 2016.
The aircraft categories were mostly positive as well with Large and Mid-Size jets posting the largest gains. Turboprops were flat for the period while Light jets declined marginally.
December’s MoM Business Aviation flight activity posted the expected decrease versus November 2017. Results by operational category were all in the red for the month, with Part 91 posting the largest monthly decrease.
Aircraft categories were all negative for the month, too, with Turboprops posting the largest monthly decrease.
Next Month’s Forecast
TRAQPak analysts estimate there will be a 3.3% increase in overall YoY flight activity in January 2018.
Flight Activity– Europe
Business Aviation traffic rose 1.5% in December versus December 2016, according to WingX Advance. In 2017, there were an average 100 additional daily BizAv departures compared with 2016.
There was a 1% decline in YoY Business Aviation activity in December 2017, with a big dip in owner flights (mainly in Piston and Turboprop aircraft). In contrast, Jet activity was up 6% and 2017 ended with 4% growth in Business Aviation flights compared to 2016.
The slowdown in activity in December was centered in Western Europe, with fewer YoY departures from France, Switzerland, Germany and Italy.
Flight activity was ahead in the UK and Spain, whilst Germany contributed the largest growth to flight activity during 2017.
Poland contributed the largest YoY growth with departures up by 25%. Sweden was also well ahead in December 2017. Flights from both Russia and Turkey were down in December 2017, although up for the full year. Greece had the largest relative gains in 2017, up 14% versus 2016.
Although flight activity was down 2% in Western Europe in December, it was up 3% for the year. Southern Europe was up 7% in 2017 compared to 2016. Meanwhile, annual arrivals from North America were up 4%.
“December’s flight activity was slightly down but that appears to have been weather-related, mainly affecting owner-piloted turboprop and piston aircraft activity,” offered Richard Koe, Managing Director, WingX Advance.
“…Overall, 2017 was clearly a strong recovery year for business jet demand in Europe, and we expect to see more of the same in 2018 as long as the underlying operating models can sustain high availability of aircraft at competitive prices.”
Greater Charter Sales Ahead in 2018?
Last year (2017) saw more growth in Business Aviation activity than at any other time since the financial crisis a decade ago, summarized PrivateFly, which expects this upward trajectory to continue…
PrivateFly saw Charter sales increase by 51% Year-over-Year (YoY) along with the average spend per flight up by 19.7%. It also noted customers are getting younger - the average age was 40 throughout 2017, compared to 41 in 2016, but fell to 38 in the second half of the year.
PrivateFly founder and CEO Adam Twidell expects further market growth this year, “driven by on-demand business jet charter, as opposed to outright or fractional ownership”.
Consolidation of businesses has been a key theme over the past few years, and Twidell expects “we’ll see more mergers and acquisitions with charter brokers” this year. He believes both the customer and the industry would “benefit from less fragmentation in this segment”.
2018:‘Reset Year’ for BizAv Market?
Business Aviation industry watchers expect 2018 to be a “reset year,” with business aircraft deliveries generally expected to be flat compared with 2017’s and an upward growth track projected to begin in 2019, AIN reports…
According to JETNET iQ, business jet deliveries were expected to land at 653 units in 2017, rising to 662 in 2018. However, these numbers include 10 Cirrus SF50 Vision personal jets for 2017, and 41 for 2018, meaning traditional business jet deliveries will be down by 22 in 2018.
On the Turboprop side, JETNET calls for 337 shipments this year, down from the projected 361 last year.
Beyond the delivery numbers, optimism continues to rise in the industry. The latest UBS business jet market index was 53, 10% higher than its prior survey and back to its post-US election high. (An index ranked at over 50 denotes an improving market.)
Tax Reform Makes Used Aircraft Attractive
“[The U.S.] government loves using the tax code to shape business’s economic activity” said Jonathan Levy, Partner, Advocate Consulting Legal Group. While boosting manufacturers is a noble goal, the recent tax reform is more broad-based…
The 2017 Tax Cuts and Jobs Act changes the bonus depreciation rule in two key ways: (1) it is no longer restricted to new equipment, thus placing used aircraft on equal footing with factory new; and (2) it elevates the write-off from 50% to 100%.
In other words, for the first time in almost a decade, the U.S. tax code is no longer biased to favor new over used. In order to understand why this is a game-changer for the aircraft buyer, consider how used vs. new aircraft values have diverged in the decade of new-equipment tax incentives—a distortion that is unprecedented, unlikely to repeat and in some measure likely temporary.
BizAv Industry Ready to Launch in 2018
Last year was a success for the used business jet industry, notes Hagerty Jet Group. There was an uptick in transactions, inventory declined and prices in many of the Gulfstream markets are stabilizing…
In their Q4 editions, both Vref and BlueBook published values that were mostly flat for the models covered by Hagerty. For the first time in three years, the G550 values remained unchanged. Previously, they had been losing around 18-20% per year over the preceding 36 months.
There has been a shift in the market. As Hagerty previously noted, buyers entering the market are frustrated because inventory levels are lower with fewer choices and prices are firming.
For example, three in-production Gulfstream models (the G650, G550 and G280) have very low inventory levels with 4% or less of each fleet ‘For Sale’. The lack of late-model aircraft ‘For Sale’ should help Gulfstream sell new positions.
Although depreciation has slowed down for most Gulfstream models, supply remains high in older models like the G200, GIV-SP and GV (between 10-12%, which is more in-line with the current industry average).
Inevitably, owners are trying to sell something that’s less desirable than what they want to buy.
The OEMs struggled to compete with the used jet markets in 2017. Business jet backlogs have suffered at all of the manufacturers. The recent news of the cancellation of Falcon 5X model in December due to engine issues is a blow to Dassault, while Gulfstream expects to bring its new product, the G500 to market in Q1 2018.
Welcome Tax Bill
In addition, the new Tax Bill will allow for 100% bonus depreciation on new and used business jets. The last-minute inclusion of used business jets is unexpectedly welcome for our industry and will incentivize buyers currently sitting on the sidelines to finally make a purchase and reduce supply further.
Hagerty Jet Group is hopeful the new Tax Bill will incentivize large US Corporations to order new airplanes, which will bring more used product into the market in 2019 and 2020.
To Charter or Not to Charter, That is The Owner’s Question
Executives from National Aircraft Resale Association (NARA) companies sat down to examine whether aircraft owners are better off chartering their airplanes when they are not using them. Well, it depends. Here are highlights from their discussion:
Owners who are thinking about making their airplanes available for charter flights should be realistic. The goal is offsetting operating costs, not turning a profit.
“They’re never going to make money in charter – we’ve tried it; it doesn’t work,” says David Deitch, Vice President of Sales for Jet Aviation, an aviation services company that helps owners put out airplanes for commercial charter use around the world.
David Deitch, Jet Aviation
An owner spending $5m a year on a Large-Cabin jet might recoup $600,000 to $700,000 through chartering it out, Deitch says. However, adding 200 hours charter use on top of the owner’s 200 hours in the air increases wear and tear on the airplane, with a larger maintenance bill to match.
Owners should make sure that whatever management company they’re working with presents them with a variety of financial scenarios before purchasing a new airplane or utilizing an existing one for part-time chartering.
The amount of time the owner uses the airplane is the biggest consideration.
Anything above 300 to 400 hours total use requires the additional expense of hiring another pilot certified for commercial charter flying, plus triggers the added maintenance mentioned earlier.
On the other hand, some owners may fly their airplanes 40 hours or less a year, while paying for service programs priced for 200 to 300 hours of use. “So they’re going to have a cost without the benefit of use,” says Matt Bosco of West Coast-based Axis Jet, an aircraft sales, management and charter operator - unless they recoup it through chartering the airplane.
Matt Bosco, Axis Jet
Bosco points out that most aircraft benefit from, or may even carry a manufacturer’s mandate for regular “exercise” (e.g., being flown at least once a week). “If you don’t fly it, you’re going to end up with mechanical issues,” he says. “You’re going to have dispatch reliability issues.” A crew that only flies 40 hours a year isn’t really proficient either, he adds.
It really boils down to “asset preservation,” Bosco says. “We tend to keep the aircraft under 300 hours for (owner) and (charter) use. But everybody has a different scenario.”
Selecting a Charter Company
Deitch and Bosco, who are both NARA members, say owners should look beyond a glossy brochure or the first page of a website in choosing an aircraft charter company.
Deitch notes that there are third-party safety auditors such as ARGUS and Wyvern that can give owners a good idea of a company’s performance. “You really have to critique the company,” Deitch says.
A charter company’s insurance and financial stability are other things for an owner to evaluate.
Bosco says there are companies with a “very, very minimal amount” of insurance. Other companies have extended credit to charter clients “and they were never able to recover the cost”.
(Axis Jet requires payment in advance for trips. Jet Aviation guarantees owners it will pay them within 30 days of a trip.)
Working with a reputable charter company can also ease other owner concerns, such as worrying about who gets to charter the aircraft, what happens in the case of damage to it and will the owner have access to the airplane when needed?
The bottom line is that aircraft owners shouldn’t go into chartering lightly or with unrealistic expectations, but rather with all the right information they can gather.
In-Service Aircraft Values and Maintenance Condition
Asset Insight’s year-end market analysis covering 92 fixed-wing models and 1,710 aircraft listed ‘For Sale’ was conducted on December 29, 2017. The research once again revealed that higher quality assets were the units actively selling.
Ask Prices for tracked models improved a nominal 0.2% during December, which was unexpected considering the competitive nature of year-end transaction dynamics. Since December 30, 2016 Ask Price for tracked models experienced a cumulative decrease of 22.6%, however, including:
Inventory Fleet Maintenance Condition
The decreasing Quality Rating Trendline graphically displays that higher quality assets are the units actively trading. Not surprisingly, December’s recorded transactions pushed the inventory rating down to just above the annual low point posted in October. Specifically:
The Asset Insight tracked inventory fleet ended 2017 with a ‘Very Good’ Quality Rating of 5.159, falling from November’s 5.230 ‘Excellent’ figure, on our scale of -2.5 to 10. A drop was predicted last month, so the figure came as no surprise.
With higher quality aircraft trading, the tracked fleet’s average Maintenance Exposure (an aircraft’s accumulated/embedded maintenance expense) degraded (increased) 0.4% to $1.458m from last month’s $1.452m. Maintenance Exposure worsened 0.5% during the past quarter, but improved 1.6% from December 2016’s figure.
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 the ETP Ratio is greater than 40%, a listed aircraft’s time on the market increases. During Q4, the average Days on Market were 42% greater for aircraft whose ETP Ratio exceeded 40% (199 versus 284 days).
The tracked inventory fleet’s ETP Ratio worsened to 65% in December, a 12-month high (worst) figure, while degrading (increasing) 8.9% during Q4, and 24% since December 2016. At 50.6% Turboprops once again had the best (lowest) ETP Ratio; Large Jets (the only group to improve) followed at 56.7%; Medium Jets degraded to 65.1%; and Small Jets hit another 12-month high (worst) figure at 80%.
Our tracked inventory decreased by 33 units this month (more sales may have occurred that were not registered before the data collection cut-off date). Fifty four percent of tracked models and 62% of inventory aircraft posting an ETP Ratio above 40% collectively indicate the industry’s preference for higher quality aircraft.
Large Jets: The tracked inventory fleet decreased by 1.8% (seven units). Primarily trading were higher quality assets resulting in the group posting a 12-month low, albeit ‘Excellent’, Quality Rating of 5.280. Maintenance Exposure worsened (increased) 1.1% during the month and 0.5% during Q4. Ask Price, quite surprisingly, increased 0.8% improving the ETP Ratio.
Medium Jets: Sales activity decreased inventory by only four units and the group maintained its ‘Very Good’ Quality Rating at 5.087. Maintenance Exposure worsened 1.1% for the month, but improved nominally during Q4. Ask Price posted a record low figure, increasing the ETP Ratio to 65.1% and negatively impacting Asset Insight’s optimistic prediction for strong sales during Q4.
Small Jets: Asset Insight tracked fleet decreased 2.8% (14 aircraft) while maintaining an ‘Excellent’ Quality Rating at 5.287. Maintenance Exposure worsened nominally, retaining a 12-month high figure, and Ask Price decreased 1.8% to a 12-month low, pushing the ETP Ratio up to 80% – the group’s highest (worst) 2017 figure.
Turboprops: As predicted last month, the Quality Rating increase did not last long, with higher quality assets trading and reducing the figure to ‘Good’ at 4.99. The 2.6% inventory fleet decrease (eight units) raised Maintenance Exposure by 3%, and reduced the average ask price enough to degrade (increase) the ETP Ratio, ending 2017 at 50.6%. The year’s narrow Ask Price band (a low of $1.5m and a high of $1.59m) confirms the belief that values within this market sector have stabilized.