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Business Aviation Market Summary – January 2017

What does 2017 have in store for the industry?

Rolland Vincent   |   4th January 2017
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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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In a welcome bit of news for Business Aviation, the collective sentiment of business aircraft owners & operators improved considerably as the Year 2016 closed, based on results of the Q4 2016 JETNET iQ Survey, shares Rollie Vincent, Editor, Market Indicators…

Based on more than 500 respondents in 58 countries, the uptick in global sentiment reflects the first Quarter-over-Quarter (QoQ) improvement since Q4 2015.

With the notable exception of Latin America, respondents in all major world regions – led by Europe and the US - seem to be feeling better about the state of the Business Aviation industry in the current business cycle.

The mood amongst owners and operators in Mexico and Brazil – the #2 and #3 country markets for business jets worldwide – has unfortunately darkened, possibly reflecting concerns about the impact of the US Presidential election on international trade agreements such as NAFTA, and the on-going recession, currency depreciation, and never ending political scandals that continue to rock Brazil.

Business Jet Owner Market ConfidenceBetter Times Portended?

In a development that could portend better times for Large Cabin business jet and Medium-to-Heavy Rotorcraft sales in this New Year, oil prices had moved to US$53 per barrel (West Texas Intermediate and Brent crude oil) at press time, up sharply from a post-global recession nadir of US$26 in January 2016. With OPEC agreeing to a 2% supply reduction, and hopes that non-OPEC members will also limit their production, oil prices are set to increase as we move into 2017 and beyond.

The US economy looks quite robust, expanding by a respectable 3.2% on an annualized basis in Q3 2016 (the fastest growth measured in 8 Quarters), with leading indicators such as the US Purchasing Managers’ Index trending upwards for the last five Quarters.

The Dow Jones Industrial Average, an index of 30 of some of the largest US listed companies, was approaching a record high of 20,000 at press time, up almost 11% from early November in the days just before the US Presidential election. The US Federal Reserve, meanwhile, raised its range of federal funds rates by 0.25% to 0.50%-to-0.75%, and signalled the possibility of three more 0.25% rate hikes in 2017, citing a strengthening US economy.

Does it spread to BizAv?

In the business aircraft market, business jet inventory ‘For Sale’ settled at 11.3%, while whole retail transactions of used business jets totalled 2,231 aircraft for the 12 months ended November 2016, a respectable performance and relatively flat (down about -1%) Year-over-Year (YoY), according to JETNET databases.

Jets for Sale Transactions 2005-2016

Days-on-market for business jets that have sold in the last 12 months averaged 308 days, which is down (a good thing) about 2% YoY.

The big story in Business Aviation once again in 2016 was the sharp drop in aircraft pricing and valuations, which was particularly focused on the Large Cabin jet segment. Prices for soon-to-be out of production high-end models such as the G450 and G550 have fallen rapidly, with 2015-build aircraft dropping 30% or more in value in the latest Vref retail pricing guides.

For some value-oriented buyers, 4-5 year-old models that have already lost up to half or more of their original value, yet still retain that “fresh leather” aroma can be a vary attractive buy right now.

For buyers not intimidated by 5-10 year old assets, classic models like the Gulfstream G550, Bombardier Global XRS and Dassault Falcon 900EX offer many of the features and performance values of newer aircraft, with little annual depreciation in the ‘flat portion’ of their residual value curve. This can be a ‘big deal’ for buyers, who might otherwise be hit by a depreciation cost in the thousands of dollars per hour (in some cases, matching or even exceeding the cost of operating the airplane).

Used (or, in Embraer’s more elegant parlance, ‘pre-flown’) aircraft with are on cost-per-hour programs with clean pedigrees and an attractive ‘maintenance exposure to asking price ratio’ (see Asset Insight article below) offer very good buying opportunities today for the savvy purchaser.

2017: Where to From Here?

Well…, it’s complicated! The US looks like the place for aircraft salespeople to be in 2017. A more robust US economy (the US Federal Reserve has modestly increased its outlook for real GDP growth to 2.1% in 2017) – fueled by President-elect Trump’s promise of lower corporate tax rates, deregulation, and higher infrastructure spending – should drive unemployment even lower than today’s 4.6%, and drive inflation somewhat higher and closer to the US Federal Reserve’s 2% target.

This should drive higher capital spending by US corporations and High Net-Worth Individuals. A strong $US (which was at a 14-year peak against a basket of major world currencies at press time) will encourage higher imports of product and services, but will also increase the effective cost of US-dollar priced assets like business aircraft to prospective international buyers.

Other things being equal, we would expect a strong $US to drive higher spending on (now cheaper) international goods and services. This would further increase the US trade deficit, which is already at about $500bn per year, and a politically-charged sound bite in the current environment if ever there was one.

The good news: higher US trade deficits could put pressure on centrally-managed economies like China to purchase high-dollar assets like US-built commercial and business aircraft.

This would be good for Boeing, Gulfstream, and Textron in particular.

On the other hand, the potential for a trade war between the US and China could drive this same business towards Airbus, Dassault, Bombardier and Embraer.

Ah! The world turns, and it will be as important as ever in 2017 to be prepared to live in interesting times – ironically, just what an ancient Chinese curse warned us about.

MI www.rollandvincent.com

BizAv Activity – North America

Reviewing year-over-year (YoY) flight activity (November 2016 vs. November 2015), Argus TRAQPak data indicate that November 2016 posted an increase of 4.9%...

The results by operational category YoY showed significant gains across the board with Part 135 activity rising a substantial 7.6% over November 2015. Part 91 activity followed with a gain of 4.1%, and Fractional activity rose a modest 1.2%.

The aircraft categories were all positive and were led, again, by a 7.6% increase from Large Cabin jets.

US Business Aviation Activity - North AmericaMonth-over-Month

November Business Aviation flight activity posted a Month-over-Month (MoM) decrease, which is the normal historic trend, from October; November activity finished down -5.5%. Results by operational category were all red for the month, with Fractional down -5.5%, Part 135 down -3.7% and Part 91 activity down -6.6%.

The aircraft categories were all down, too, with the largest MoM decrease coming in the turboprop sector, down -6.6% from October.

MI www.argus.com

BizAv Activity - Europe

There were 58,111 Business Aviation departures in Europe in November 2016, according to WingX’s latest monthly Business Aviation Monitor, representing a 0.8% growth in YoY activity…

For six of 11 months recorded to date for 2016, there has been some YoY growth, although the YTD trend still trails 2015 activity by -0.2%.

November’s results were offset by declines in Turboprop and Piston activity. Business Jet flights were up 3% in November and now have a positive 12-month rolling average, with Small Jet activity providing most of the growth.

Business Aviation flights from Western Europe were up in November, bolstered by growth in UK, France and Italy, which outweighed declines in Germany, Switzerland and Spain.

Southern Europe was flat this month, and Eastern Europe slightly down.

YoY growth in AOC flights exceeded 10% in France and Italy and were up 4% in the UK, in contrast to flat or declining Private flights in all three markets. Germany had the largest overall decline, 297 fewer flights YoY, while Spain saw the biggest AOC decline at -8% YOY.

Elsewhere in Europe, the largest declines came in Poland and Belgium, while the declines in Turkey and Russia seem to have bottomed out, down -3% and -1% respectively this month. There was substantial growth this month in the Nordics, also in Portugal and Czech Republic.

“Business Aviation activity was only slightly up in November, not enough to change the YTD decline compared to last year,” noted Richard Koe, WingX Advance’s Managing Director. “However, a slowdown in Piston and Turboprop activity is weighing down the trend; underlying Business Jet activity was up this month; and the Business Jet charter market has been quite lively for a number of months, especially in the lighter jet segments.”

MI www.wingx-advance.com

Cessna Citation Jet

Safety Survey: Industry Best Practices

Most Business Aviation operators engage in annual risk assessment and profiling, according to the results of NBAA’s 2016 Business Aviation Safety Survey. Those results are now available to the Association’s members...

More than 800 industry professionals of all roles and specialties provided their company’s safety data for the survey, more than doubling the response rate from last year’s inaugural survey.

Key Findings:

• 60% of dual-pilot operators reported they go to recurrent training twice annually;

• Most single-pilot respondents (62%) indicated they train once annually, and 28% train twice per year;

• A significant majority of operations have some form of safety reporting process, with 73% of respondents saying they have comprehensive awareness of safety reports and issues across their organization;

• Distraction, fatigue, professionalism and time pressure continue to be the top potential triggers for mishaps.

“I was really impressed by the engagement in the survey,” said Paul Ratté, director of aviation safety programs for USAIG and team lead of the NBAA Safety Committee’s Risk Assessment Team. “There’s a passion in the community for safety.”

Ratté’s team prepared 30 questions on topics such as dual- and single-pilot best practices, formal training expectations and safety reporting policies. Most survey questions were intentionally close-ended for data collection purposes, but Ratté noted that 1,200 unique responses to an open-ended query about respondents’ top three perceived safety risks will help the Safety Committee direct its focus to the most pressing concerns of business aircraft operators.

“Anything the Safety Committee does can only really be enacted through the practitioners of Business Aviation,” concluded Ratté. “We felt like it was necessary to understand what was on their minds, what are they thinking.”

MI www.nbaa.org

Impressive Middle East Deliveries

New research from Global Jet Capital reveals that 293 Mid-Size to Large private jets were delivered to the Middle East between 2006 and 2015, with an estimated combined value of over $14.65 billion…

According to Global Jet Capital, Mid-Size to Large private jets delivered to the Middle East typically cost between $25-75m each, and up to 80% of the funding used to purchase these is sourced through external financing.

The largest number of deliveries were made to Turkey (77), followed by the United Arab Emirates (63) and Saudi Arabia (58).

Middle East Business Jet Deliveries

“Around 40% of the fleet of Mid-Size to Large private jets in the Middle East delivered between 2006 and 2015,” according to Simon Davies, sales director for the Middle East, Global Jet Capital.

MI www.globaljetcapital.com

Boeing Bounces Back

Boeing sees sales of its business jets rebounding over the next two years after a “tough” 2016, BBJ President David Longridge said at a press conference in Dubai last month.

Boeing Business Jet

Boeing Business Jets (BBJ) blames uncertainty created by Britain's Brexit vote and the US Presidential election for its significant decrease in 2016 sales compared with 2015. Boeing booked sales in 2016 for three business jets compared to 10 in 2015, and 14 in 2014.

“Now the elections are over and Brexit is decided we're starting to see things pick up,” Longridge said. “I think over the next two years we'll go back to the kind of six to eight airplanes that we saw more regularly in the past four years,” he said.

MI www.boeing.com

In-Service Aircraft Values & Maintenance Condition

An Asset Insight market analysis conducted on November 30, 2016, covering 91 fixed-wing models and 1,940 aircraft listed for sale, revealed a 3.1% increase in ask prices, among other things…

Ask Prices for tracked models increased 3.1% – the third consecutive monthly increase – but are still 6.2% lower than they were twelve months ago. Medium and Small Jets lost ground—2.1% and 2.3% respectively. However, while Medium Jet Ask Prices fell 14.4% (and posted a record low figure in November), Small Jet figures climbed 17.5% over the past twelve months.

Large Jets gained 5.9% since October, while Turboprop Ask Prices fell a nominal 0.2%. Over the past twelve months, Large Jet Ask Prices have fallen 3.2%, while Turboprops have experienced a 3.4% reduction.

Inventory Fleet Maintenance Condition

As represented in Table A, overall Asset Quality remained ‘Excellent’, but Maintenance Exposure set a 12-month high/worst figure. Specifically:

• After improving for three consecutive months, the Asset Insight Quality Rating fell 2.1 AI2 basis points (~4%), to 5.380 from last month’s 5.401, on our scale of -2.5 to 10.

• The tracked fleet’s average Maintenance Exposure (an aircraft’s accumulated/embedded maintenance expense) worsened/increased slightly to $1.476m from October’s $1.473m.

Business Aircraft Maintenance Exposure

Exposure to Ask Price (ETP) Ratio

Table B shows that the tracked fleet’s ETP Ratio (an aircraft’s Maintenance Exposure divided by its Ask Price) posted its third consecutive monthly improvement at 52.4%, versus last month’s 54.2%. We consider any ETP Ratio over 40% to represent excessive Exposure in relation to Ask Price, and the tracked fleet’s average has been above 40% for the past 23 months.

Business Aircraft Exposure to Price Ratio

Turboprops posted the best/lowest figure at 43.0%, followed closely by Large Jets at 43.7% (the group’s highest/worst figure for the past twelve months). Small Jets were at 53.9% (their 12-month best), while Medium Jets achieved their worst 12-month figure at 63.0%.

Market Summary

Small Jets continued to offer the best value given the group’s Excellent Quality Rating, 12-month low ETP Ratio, and above average Ask Price – and it appears to be eroding less than that for all other groups with respect to actual transaction pricing. Similarly, Turboprops are seeing less erosion between Ask and actual transaction value.

With the best ETP Ratio among the four groups, reasonable Asset Quality and Maintenance Exposure figures (along with below average Ask Prices), buyers and sellers should be able to find common ground.

The Large Jet Quality Rating once again reached the ‘Outstanding’ level, and the group did post a 5.9% increase in Ask Price. However, a 2.8% increase in Maintenance Exposure raised the ETP Ratio to a 12-month high/worst figure (a 27.8% increase over the past twelve months). Ask Price has decreased 3.3% during the past twelve months, and the Quality Rating trend line turned negative this month. This is unlikely to help the high erosion percentage between Ask and Transaction pricing.

Medium Jets posted a 12-month high/worst ETP Ratio, along with a record low Ask Price. With a 12-month high Maintenance Exposure figure, ongoing deterioration between Ask and Transaction Price was likely to result if owners were seeking to sell before year-end, 2016.

Business Aircraft Ask Price vs Maintenance Exposure

These insightful metrics can be challenging to derive without knowledgeable support. If you are contemplating an aircraft purchase, spend the nominal funds to run comprehensive, comparative analytics between all reasonable candidate assets. It only takes a small oversight to misread a low price as good value.

MI www.assetinsightinc.com

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

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