- 30 Nov 2017
- Rolland Vincent
- Market Insight
As 2018 begins, is it right to hold high expectations for the business aircraft marketplace? Rollie Vincent, Editor, Market Indicators assesses…Back to Articles
With many aircraft sales and marketing teams returning from a much-deserved holiday break, January sees the New Year begin with great expectations for the business aircraft marketplace. Rollie Vincent, Editor, Market Indicators assesses the scene…
For those industry professionals who have managed to survive and even thrive through the more-than nine-year period since the financial crisis of late 2008, this has been an exceedingly long recovery.
On the good news side, it is encouraging to note that aircraft utilization levels in the key US and European markets have been consistently trending upwards on a year-over-year basis.
Led by strong Charter/Part 135 activity levels, flight activity is supported by attractive pricing and competitive posturing that are enticing customers to consider all of their options, whether whole airplane ownership or not.
Used Aircraft Sales Prospects
The sentiment of business aircraft owners and operators continues to rebound from a recent low in Q3 2016, according to the latest Q4 2017 JETNET iQ Survey, a harbinger of better days ahead for Business Aviation.
Purchase prices for used business aircraft, especially in the Medium and Large jet segments, remain relatively soft, reflecting a classic case where there are more sellers than buyers.
Despite the fact that much of the most attractive inventory has been picked over, a wave of well-pedigreed trade-in aircraft will surely be coming into the market during 2018, with the entry into service of the Pilatus PC-24 (FAA- and EASA-certified in December 2017), and expected arrivals of Cessna’s Citation Longitude and Gulfstream G500.
Flight test teams at Gulfstream and Bombardier will be pushing the throttles forward throughout the year as the Gulfstream G600 and Bombardier Global 7000 Large-Cabin business jets try to beat the clock that will strike midnight on December 31, 2018.
On the Horizon
The December 31, 2019 deadline for ADS-B Out compliance for aircraft operating in most US airspace is fast approaching. Despite a long period of advance notification (some might say too long), an estimate from leading independent MRO provider Duncan Aviation is that a remarkable 40% of the US business aircraft fleet will not be equipped in time to meet the implementation deadline.
To put this into perspective, this represents about 8,800 business jet and turboprop aircraft, equivalent to the entire fleet of non-US based business turbines worldwide.
Perhaps reminiscent of the infamous ‘Y2K’ information technology challenge that faced many organizations at the turn of the century, ADS-B readiness (or, more correctly, the lack thereof) is looming large on the proverbial industry radar, no doubt representing a steady stream of MRO business as well as one more nail in the fuselage of the very aged fleet of early-generation models. Can it finally be time to put a few more of those old birds out to pasture?
On the macroeconomic and geo-political fronts, the economies of North America and Europe continue to expand at a relatively impressive pace. The US economy finished Q3 2017 up 2.3% Year-over-Year (YoY), its 31st consecutive quarterly expansion going back all the way to the beginning of 2010. The Euro Area economy closed out Q3 2017 up 2.5% YoY for Q3 2017, its 16th consecutive quarter of growth after a devastating double-dip recession.
A major tax reform bill being pushed through the US Congress as we went to press was already providing a run-up in stock markets, with a promise of lower corporate tax rates and temporary tax benefits for low- and middle-income earners.
Business aircraft transaction specialists will be watching closely to see how changes to accelerated depreciation and 1031 Like-Kind Exchange rules will impact new and used aircraft sales.
Further Ahead in 2018
Stand by for protracted negotiations on the details of Brexit, a sure-to-be contentious mid-term US Congressional election, more chapters of explosive rhetoric between North Korea and the United States, and what looks to be at least 365 more days of ‘breaking news’ that will continue to influence the levels of confidence that impacts business aircraft buying and selling decisions.
A fresh influx of attractive inventory with the entry into service of new aircraft models will continue to have a moderating effect on pricing, continuing the historic buyer’s market for the year to come.
Flight Activity - North America
TRAQPak data indicate that November 2017 posted an increase of 4.8%, Year-over-Year (YoY). However, November posted the expected Month-over-Month (MoM) decreases over October 2017…
The results, YoY, by operational category were all positive again, notes ARGUS, with Part 135 activity continuing to produce substantial gains. Likewise, the aircraft categories were all positive too, with Large and Mid-size jets posting the largest gains. Only one individual sector, Large jets in Fractional operations showed a decline against November 2016.
Results by operational category were all negative for November 2017 vs. October 2017, excepting Large Cabin jet Part 135 activity. Part 91 posted the largest monthly decrease. Similarly, all aircraft categories were negative for the month, with Turboprops posting the largest monthly decrease.
Next Month’s Forecast…
TRAQPak analysts estimate that for December there will be a 5.6% increase in overall flight activity YoY.
Flight Activity - Europe
November 2017 was another growth month for Business Aviation in Europe, with 61,837 flight departures, up 6.1% Year-over-Year (YoY), taking the Year-To-Date (YTD) growth trend to 4.2%.
Activity in November 2017 was still 10.5% behind the pre-economic crisis peak in November 2007, but the results continue the recent trend. The biggest growth came in Western Europe, with Business Aviation departures up significantly in the leading markets of the UK, Spain and Switzerland. YTD, Germany has added the most flights.
Of the smaller markets, Greece, Belgium and Portugal enjoyed well over 15% growth this month, with flights from Poland and Croatia up 25% YoY. Business Aviation flights from Turkey were down 12%, but are still up 6% YTD.
France was by far the busiest domestic market, with 7,000 flights, up 2% YoY. Flights from France to Germany were up 11%, and from France to Spain were up 31%. Flights within the UK were up 10% this month. Domestic flights in Italy declined 3%.
Business Aviation arrivals into Europe were up due to strong growth in transatlantic connections; elsewhere, arrivals from CIS region and Middle East were flat, and North Africa arrivals were down. Flights to Latin America declined 5% YoY.
AOC activity continued to be the main overall growth driver, representing 47% of activity and up 10% YoY. Charter growth rates since the summer have exceeded 8% each month. Private activity slightly improved this month, though it was flat for business jet sectors.
“November’s flight activity was typically low-season, but the strong YoY growth is evidence of the ongoing recovery in demand in 2017,” concluded Richard Koe, Managing Director, WingX Advance.
“A lot of the additional flying is being operated as Large-Cabin AOC missions, on short European sectors, suggesting some aggressive pricing.
“Excess capacity is encouraging the buyer’s market; overall activity this month was still down 10% on the levels of a decade ago, despite the much larger active fleet of aircraft.”
CJI Miami 2017 Overview
Corporate Jet Investor Miami 2017 brought together senior level financiers, brokers, arrangers, lawyers, manufacturers, operators, appraisers and others active in business jet transactions in the Americas. Following are some highlights to emerge…
Just over half of attendees at CJI Miami 2017 felt more optimistic about the future of Business Aviation. In a poll, 57% said they felt more optimistic about the next ten years. Forty three percent said they didn’t.
40% of US Business Aircraft Won’t Meet ADS-B Deadline: Duncan Aviation president Aaron Hilkeman said to achieve 100% compliance within the next 25 months, the current ADS-B installation rate of 1,758 per month for US-based piston and turbine airplanes and helicopters would have to nearly double to 3,390 per month, which he believes is impossible.
‘Lost Decade’ for Light & Mid-size Jets Nears End: According to Jon Raviv, US aerospace and defense senior equity analyst at Citi Research, the Light and Mid-size jet markets have now ‘found a floor’ since deliveries exceeded long-term trends in the 2000s, which ‘cannibalized’ demand for new aircraft this decade. Raviv is calling for flat deliveries in these segments over the next three years, averaging 444 aircraft annually.
“Large-Cabin jets could be on the cusp of a ‘lost decade’, but new products such as the Global 7000 and Gulfstream G500 and G600 can aid the escape,” he said.
Aircraft Finance - Stay in Your Comfort Zone:That’s the message to the Business Aviation sector from financier Dave Labrozzi. Asked where he saw the financing providers getting into trouble in the future, he said: “My message to the community is very simple. If it seems too good to be true… right?
"The main objective is to be comfortable, stick to your knitting, stay in your comfort zone.”
He added that a problem he foresaw was banks entering the aviation financing market, “loading up like there’s no tomorrow”, doing a number of aircraft deals and then suddenly stopping.
Focus on the Future:Embraer’s Michael Amalfitano offered a glimpse of the future of Business Aviation, noting how it had been changing during the last few decades. “We believe there’s a new platform – a new ecosystem – out there…It’s no longer about the airplane. It’s no longer about owning the plane. It’s very much about how you want to create an experience for the passenger, to have the experience of corporate flight,” he said.
Amalfitano says this is happening because Millennials – Business Aviation’s future customers – have a very different approach to how they buy and use things to previous generations.
They use “the device in their palm to buy everything they need and then share it with everyone they know.”
Making the Case for the Business Jetliner:The used aircraft market is growing across the Business Aviation sector, including business jetliners, says Drew Gough, Boeing Business Jets. He explained how people who may not be able to afford a new jetliner are snapping up used aircraft thanks to a range of features including low depreciation and the amount of extra space and baggage capacity they offer.
Current Trends from Rolls-Royce:Dean Roberts, of Rolls-Royce North America, highlighted some current trends within the US Business Aviation industry, including:
Depreciation the ‘New Normal’:Chris Miller of Shearwater Aero Capital focussed on depreciation as being “the new normal”, noting the Business Aviation industry is acting like a mature industry such as car manufacturing, and the data are showing aircraft depreciating by 10% a year. “That’s the sign of a mature market,” he concluded.
Third Quarter Activity Still Trumping Along
PNC Aviation Finance notes there were 516 used retail sales in the business jet market in 3Q 2017, up 5.7% over Q3 2016, but down 8% from Q3 2014 (the record for any Q3 used retail transaction amount). Jeff Dunn explores…
As of Q3 2017 there were 1,617 transactions Year-To-Date (YTD) in 2017 in the used market, up 7.5% Year-over-Year (YoY) from 2016.
Updated Q3 2017 data suggest a year-end transaction forecast between 2,098 and 2,223 used business jets, and while a difference of 125 transactions seems like a large amount for a single quarter, the number can be broken down for further analyses:
Could the higher end of the projection be true? For the same reasons as stated above concerning the conservative projection, it could be; however, those in the industry that follow this market closely have felt a recent slowing in activity.
Market Speed Bumps
“Relative to the last decade, OGARAJETS has had a very strong year – both from a brokerage standpoint and from an inventory perspective,” offers Johnny Foster, President & CEO, OGARAJETS. “The industry still feels very positive, but inventory remains high to the point where the market cannot absorb all of the supply.
“Another new critical aspect to today’s market is depreciation, not tax, but market. Business aircraft are now widely viewed as a piece of capital equipment – they depreciate every year.”
This topic of continued depreciation has been a hard adjustment for many industry veterans, both owners and brokers. “From 2009 to 2014, I had a hard-time – and even apologized to clients – when we would sell their aircraft for less than what they had paid for it five years earlier.
“It had become an expectation in many circles that if you paid attention and accurately timed those value fluctuations the industry had become accustomed to prior to the recession, you could make money every time you bought an aircraft. Then inventory was very tight though – 1,000 units for sale, give or take, and more than enough buyers to absorb the supply.”
Q4 2017: High or Low Outcome?
So how will Q4 shape up for transactions? What is likely? Based on industry experts noticing this slight slowdown thus far into Q4, a number erring towards the conservative side of what the data indicate may be a safer projection. Irrespective of how the year-end transactional numbers turn out, there are some certainties that can be taken away from 2017:
Africa’s Bizjet Fleet to Grow 25%
Africa's private jet fleet is poised to grow more than 25% in the next eight years, Global Jet Capital projects. Each of the continent's regions will see a net increase...
New analysis of industry data by Global Jet Capital reveals that the continent’s business jet market is set for significant growth. The company predicts 160 new aircraft being delivered to the continent by 2025.
These aircraft are forecast to have a total value of around $3.9bn, or just under $500m per year. A key driver behind this growth will be the southern Africa region which is expected to account for around a third of all the jets based in the continent.
The southern Africa fleet will expand by a net total of about 40 aircraft, to 184, in the next eight years. West Africa will see its fleet climb from 97 to 124; North Africa from 79 to 101; Central Africa from 59 to 75, and East Africa from 29 to 37.
Ensuring operators have sufficient financing options was one of the major topics being discussed at the recent AfBAC.
“We recently carried out research amongst Business Aviation professionals which showed that more than three quarters expect the demand for aircraft financing to increase in the next five years,” said Simon Davies, Global Jet Capital vice president, sales, Africa and the Middle East.
“It is critically important that clients are able to access financial support in order to continue to develop the African Business Aviation fleet.”
In-Service Aircraft Values and Maintenance Condition
Asset quality rebounded from October’s 12-month low (worst) figure, but Ask Price posted a new record low, according to Asset Insight’s market analysis of November 30, 2017. Tony Kioussis elaborates…
Covering 92 fixed-wing models and 1,743 aircraft listed ‘For Sale’, the recent analysis showed Jet and Turboprop transactions for tracked models decreased by more than 75% over the past month.
Ask Prices for tracked models decreased 3.1%, establishing another record low figure. Since December 30, 2016 Ask Price for tracked models has decreased virtually every month for an overall loss of 24%.
Inventory Fleet Maintenance Condition
The decreasing Quality Rating Trendline (Table C) illustrates absorption of higher quality aircraft this year. Turboprop sales last month bucked this trend pushing the overall Asset Quality to the top end of the ‘Very Good’ range. Specifically:
The Quality Rating improved to 5.230 from last month’s 5.165, on Asset Insight’s scale of -2.5 to 10. Given the market’s focus on higher quality assets, Asset Insight expects to see the figure decrease based on Q4 sales trends.
The tracked fleet’s average Maintenance Exposure (an aircraft’s accumulated/ embedded maintenance expense) posted a nominal 0.1% improvement to $1.452m from last month’s $1.454m, but that still represents a 5% Exposure increase over the past 90 days. In other words, higher asset quality units have been the ones transacting.
Exposure to Ask Price (ETP) Ratio
The ETP Ratio (Chart B) calculates an aircraft's maintenance exposure as it relates to the ask price. This is achieved by dividing an aircraft's Maintenance Exposure (the financial liability accrued with respect to future scheduled maintenance events) by the aircraft's Ask Price.
The ETP Ratio is a useful indicator of an aircraft’s marketability. ‘Days on Market’ analysis has shown that when the ETP Ratio is greater than 40%, a listed aircraft’s Days on Market increases (in many cases by more than 30%).
The tracked inventory fleet’s ETP Ratio worsened by 0.5 AI2 basis points over the past 30 days, posting yet another 12-month high figure of 64%. At 48.2% Turboprops once again had the best (lowest) Ratio; Large Jets registered a record high 58.3%; Medium Jets improved to 64.2%; and Small Jets posted a 12-month high figure of 77.8%.
Our tracked fleet inventory decreased by only one unit this month. This is not surprising, considering the lower number of transactions compared to October. Nor is the industry’s continued preferential fondness for higher quality aircraft.
With 49% of tracked models and 55% of inventory posting an ETP Ratio above 40%, it will be interesting to see how values react during the last few trading weeks of 2017.
Large Jets:Sales activity during November was light, decreasing the tracked inventory fleet by 1.5% (six units), and primarily higher asset quality aircraft traded. This was reflected in the group’s Quality Rating decrease to a 12-month low, although the figure remained in the ‘Excellent’ range at 5.297. Maintenance Exposure worsened/increased by 2.6% and, with a record low Ask Price, the group’s ETP Ratio could not help but suffer.
Medium Jets:Sales activity decreased inventory 1.3% (seven units) and the group maintained its ‘Very Good’ Quality Rating at 5.168. Maintenance Exposure improved 0.8%, and that was sufficient to decrease the group’s ETP Ratio a bit, even though Ask Price retained its record low figure. If the optimistic Q4 sales prediction Asset Insight made last month is to materialize, this group’s sales activity needs to register a dramatic increase in December.
Small Jets:With a 3.4% (16 units) decrease to the tracked fleet, this group experienced a fairly active month while improving its ‘Excellent’ Quality Rating to 5.312. Maintenance Exposure worsened nominally and continued registering a 12-month high figure. While average Ask Price improved 2.2%, the increase proved insufficient to favorably affect the group’s ETP Ratio.
Turboprops:The group’s Quality Rating spiked 5.24% to achieve a ‘Very Good’ rating of 5.126 (a 12-month best figure). The 1.3% inventory fleet decrease (four units) also resulted in a 4.8% Maintenance Exposure improvement. Coupled with a 0.8% Ask Price improvement, the group was able to lower its ETP Ratio 3.7 AI2 basis points. Asset Insight continues to believe that Turboprop values have stabilized and does not expect the Quality Rating to maintain its current figure for long. Unlike this month’s Jet sales dynamics, Turboprop transactions absorbed lower quality assets. Either buyers were able to address aircraft maintenance exposure through pricing or sellers secured very good value for their asset.