With 35+ years in the aviation industry, Rolland Vincent, president, Rolland Vincent Associates... Read More
Business Aviation Market Outlook
Midway through 2016, the global market for Business Aviation products and services is about as flat as the Kansas prairie, notes Rollie Vincent, Editor, Market Indicators.
At 854 units, whole retail transactions of pre-owned business jets through the end of May 2016 year-to-date (YTD) were off by just a handful of units from the same period last year, according to the latest JETNET records.
Business jet cycles (one takeoff and landing), while not available on a global basis from a single reliable source, were up just 1% YTD in the US through the end of May 2016, according to FAA, while business jet cycles in Europe were down about 1% YTD, according to WingX Advance, based on an analysis of Eurocontrol reports. In 2016, it is certainly fair to say “flat is the new up”.
With volatility in emerging markets, mounting consternation and sporadic violence surrounding the UK’s Brexit vote on June 23 (just after we go to press with this magazine), and the build-up to what will be a closely watched and no doubt divisive US federal election in November this year, there are many ‘big picture’ distractions that face business leaders and others in the Business Aviation community.
These distractions, in concert with economic outlooks that have been consistently ratcheted downwards over the past several quarters, have muddied the investment waters and caused many a C-level executive and high net worth individual to reconsider aircraft purchase decisions.
Aircraft Purchase Inhibitors
Based on responses to the Q1 2016 JETNET iQ Survey of 505 business aircraft owners and operators in 60 countries, the primary inhibitor to the purchase of a new aircraft is that owners/operators have no need for additional or replacement lift at this time.
This has been the leading ‘top of mind’ purchase inhibitor amongst aircraft owners/operators in each JETNET iQ Survey conducted over the past 5+ years. In Q1 2016, ‘Do not need additional aircraft’ (see Chart A) was once again the most-often mentioned inhibitor, with a weighted average response of 20.5% globally, and an even higher 23.2% for respondents based in North America (USA and Canada).
Concerns about the economic and regulatory environment, about declining business activity, and challenges associated with high trade-up costs and the sale of an existing aircraft all factor into the currently sluggish purchase outlook.
By many measures, the business jet market is simply oversupplied. Transaction prices for new and pre-owned jets continue to be relatively soft, as overall supply exceeds demand, and as new/newer entrants like Honda and Embraer accelerate their battles for market share.
With incumbent OEMs aggressively protecting their customers from encroachment, aircraft buyers are increasingly being teased by remarkable value for the dollar as they consider their next aircraft, whether new or pre-owned. Falling pre-owned prices, aggressive deal-making for new aircraft sales, higher inventory for sale (almost 12% of business jets worldwide as of this writing), and lower utilization levels per aircraft despite a growing fleet all point to the fact that we are not at an equilibrium.
Of note is a trend that we are watching closely – there appears to be a growing divergence in utilization rates by aircraft age category, with newer aircraft flying extensively and older aircraft flying little (if at all). Although aircraft databases like JETNET report that the size of the business jet fleet has recently exceeded 20,000 units worldwide, there are many older aircraft that are simply sitting around.
With diminished customer support infrastructure as organizations increasingly look to the OEMs and third-party service providers for even the most basic of maintenance responsibilities, we may well be quietly witnessing a long-expected wave of business jet retirements that have yet to be categorized as such on the various aircraft registries.
At the OEMs, book-to-bill ratios (measuring the volume of net new orders being written, divided by the number of new aircraft that are being delivered) have slipped below 1.0 over the past year or more, drawing down order backlogs.
At the end of 2015, total jet backlog value was about $37bn at the ‘Big Five’ OEMs – Bombardier, Dassault, Embraer, Gulfstream, and Textron - representing more than 18 months of production at recent delivery rates. While this might seem adequate and a buffer against the current headwinds facing the manufacturers, it is important to note that backlog value was down 18% over the prior year.
Our current outlook for 2016 is that the industry will deliver 681 new business jets (excluding twin-aisle airliners like the B787) valued at about $20bn in 2016, which will be down 4% in units and 10% in value over the results of 2015.
With more than 40 business jet models in production or announced for delivery in the next few years, there is no doubt that buyers have a tremendous variety of choice in today’s market.
Although we believe that OEMs are overproducing for the current level of demand, they are facing difficult choices, and the potential risks and costs associated with slower production rates are enormous. These include conceding market share to an aggressive competitor, disappointing Wall Street investors, releasing employees and shuttering production lines and facilities, while slowing down the supply chain.
With white-hot commercial airliner markets – especially for the popular 150-200 seat single-aisle and 250-350 seat twin-aisle segments – suppliers might think twice about re-allocating assets and capital back to business aircraft programs in the light of diminished demand from a business jet OEM.
For business aircraft buyers, these are the best of times to find value in a jet purchase. It is hard to imagine a time when a dollar bought more in the business aircraft marketplace. For those who can bridge the gap between the offer they can accept on their existing aircraft and the sweet deal they can negotiate on their new or pre-owned purchase, it is a good time to step up into a more capable aircraft.
For concept buyers considering their first foray into Business Aviation, now is a great time to take action. Just like Kansas in the summer, the days are long, the breezes are warm, and the fields of gold are abundant.
BizAv Activity – US & Canada
May Business Aviation flight activity posted an anticipated Month-over-Month (MoM) increase from April to May, finishing up 3.5%, notes ARGUS TRAQPak. Year-over-Year (YoY) flight activity (May 2016 vs. May 2015) increased 2.2%; the third straight YoY increase for the month of May…
Results by operational category were all in the black MoM in May, notably fractional operators posted the largest monthly increase, up 5.3%. The Part 135 and Part 91 sectors recorded a solid rise from April, up 5.2% and 1.9% respectively.
Aircraft categories saw gains as well with the turboprop market leading the way for the largest monthly increase, up 7.4% from April. The small and large cabin markets followed, posting increases of 2.3% and 1.9%, in that order.
Mid-size cabin aircraft posted a slight 0.9% increase for the month. The largest monthly change, for an individual segment, occurred in the fractional turboprop segment, up an astounding 33.3% from April.
The results by operational category were all positive for the month with the Part 135 market recording the largest YoY increase, up 2.6%. The Part 91 market followed in a close second, up 2.1% from May 2015. The Fractional market continued its see-saw trend in 2016, posting an increase of 0.9%.
Flight activity for the aircraft categories was mostly positive, with turboprops recording the largest YoY increase, up 4.0%. Large cabin aircraft followed with an increase of 3.6%, and small cabin aircraft rose 2.3% for the period. Mid-size cabin aircraft recorded the only YoY decrease, down -0.8% from May 2015. The largest gain for an individual segment occurred in the fractional large cabin segment, which saw an increase of 15.9%.
BizAv Activity – Europe
There were 73,687 Business Aviation departures in Europe in May 2016, a -0.1% YOY decline in activity. A 2% growth in business jet activity was offset by a decline in turboprop and piston flights, while the Year-To-Date (YTD) trend is now at -1.2%, notes WingX.
A weak growth trend was sustained in Western Europe, bolstered by 6% increase in flights from France this month. Other leading Business Aviation markets declined, especially in Spain and Turkey.
Most of the decline in the top markets came from turboprop activity, with jet activity slightly growing in UK, Switzerland and Italy. Countries with the highest growth in all Business Aviation activity in May included Sweden, Greece, Belgium and Netherlands.
Germany continued to see significant decline, averaging 242 fewer flights per month this year. Declines in both Russia and Turkey are trending at more than -10%. YTD, France is Europe‘s strongest market, slightly up compared to last year.
Arrivals into Europe from the Middle East were up 7% in May, with transatlantic arrivals up 2%; inbound from Africa down -1%; and flights from China to Europe up almost 70%. Flights from Europe to the CIS region were down 3%.
Asia-Pacific BizJet Fleet Report
The Asia-Pacific business jet fleet stood at 1,134 aircraft by year end 2015, a 6.2% increase over the prior year, and in line with most market forecasts. Asian Sky Group elaborates…
Overall, Asia-Pacific added 140 aircraft – 66 new and 74 pre-owned – but also saw 74 aircraft leave. China remains the largest market in the Asia-Pacific region with 300 business jets, though its growth rate was just 3.8% in 2015, reflecting a significant deceleration from previous years.
After China, the next two largest markets in the Asia-Pacific region are Australia with 184 aircraft (7% growth in 2015) and India with 145 aircraft (4% growth in 2015). Hong Kong saw the largest number of aircraft added to its fleet in 2015, an increase of 16 business jets, which was partly a reflection of ongoing changes in the China market.
Taken together, the key territories of China, Hong Kong, Australia and India represent over two-thirds of the region’s business jet fleet.
The top three OEMs in the Asia-Pacific region by market share are Bombardier, Gulfstream and Cessna, with 27%, 23% and 19% of the fleet, respectively. Examining only fleet additions in 2015, Bombardier saw the largest increase with 51 additional aircraft (28 new and 23 pre-owned), while the most popular model added across the region was the Global 6000.
The top 20 operators in the Asia-Pacific region fly 35% of the fleet, with nine of the top 10 being operators in Greater China. Australia and India have the most operators, but these markets are extremely fragmented where 70% and 67% of the operators, respectively, have just a single aircraft.
By Aircraft Age
From an age perspective, the Asia-Pacific region’s aircraft fleet remains one of the world’s youngest, with 63% of fleet being less than 10 years old (Hong Kong has the youngest and Australia the oldest fleet, on average).
The US aircraft (N) registration is still the most popular in the Asia Pacific region, and is currently being utilized in at least 15 countries.
New Frost Study Released
The global Business Aviation market is softening, according to various sources. But is there opportunity for lighter aircraft? A new study by Frost tackles that question.
Providing detailed market forecasts, drivers and restraints as well as market shares and competitive analyses of participants from 2015-2020, Frost’s study covers the ‘heavy aircraft’, ‘medium aircraft’, ‘light aircraft’, and ‘turboprop aircraft’ sectors. Additionally, this study presents some technological changes to the market and the companies marketing those changes.
Beyond the delivery of new aircraft, this study examines the modification programs of aircraft and the MRO for existing fleets.
This research looks at the market from 2015 through 2020, in terms of aircraft deliveries and potential aircraft sales. Key questions the study addresses are:
Have cessations of business activities reached a logical conclusion?
Can aircraft manufacturers expect to gain additional sales?
Will price points drive less functionality?
Do very light aircraft have much of a future?
Will production of new aircraft eliminate most modification operations?
What effect will the reduction in original equipment manufacturers (OEM) have on the aircraft price point?
Global Jet Capital: 1 In 9 Large Jets ‘For Sale’
Global Jet Capital has launched an aircraft sales division at a time new research reveals 11.5% of the world’s midsize to heavy business aircraft (1,500 jets) are currently available ‘For Sale’…
Recognizing that the large number of pre-owned aircraft on the market gives buyers opportunity to be increasingly demanding, Global Jet Capital believes that the combination of its experience and the caliber of aircraft it is bringing to the market, along with including maintenance and training support with the purchase of an aircraft, will have unrivalled appeal to prospective owners.
The aircraft available through Global Jet Capital’s aircraft sales division are those for which it has previously provided financing, and therefore the company has detailed knowledge of the aircraft’s ownership and maintenance history, technology and refurbishment requirements.
The company has partnered with JSSI to provide a six-month comprehensive unscheduled maintenance package with worldwide technical support, and with FlightSafety to provide initial pilot and maintenance training programs.
According to Dave Labrozzi, COO, Global Jet Capital, “With a relatively large number of large business aircraft on the pre-owned market, anybody wanting to sell an aircraft has to present the best possible package to prospective buyers.
“Our new aircraft sales division does just that, and we are confident that what we can offer is unmatched by anyone in the industry. Our aim is to become the first port of call for anyone looking for a pre-owned business aircraft.”
In-Service Aircraft Maintenance Condition & Price
An Asset Insight Analysis conducted on May 31 covered 91 fixed-wing models, and 1,957 aircraft listed for sale, revealing: Excellent Asset Quality; record low average Ask Price (3.4% lower than last month); higher average Maintenance Exposure value; and, a 3.1% higher average Maintenance Exposure to Ask Price Ratio. Specifically…
The Asset Insight Quality Rating was virtually unchanged, rising to 5.349 from last month’s 5.344, on the AIQ Rating scale of -2.5 to 10.
Maintenance Exposure (ATFE Value)
Maintenance Exposure (an aircraft’s accumulated maintenance financial exposure) worsened 1.4% over the past month, increasing $14k to $1.44m from $1.42m. By aircraft group, the Asset Quality Rating and Maintenance Exposure figures were as follows:
Large Jets: ‘Outstanding’ asset quality (consistently the best among all groups) at 5.516, a 1.5 AI2 basis point improvement over last month; Maintenance Exposure worsened slightly, increasing from $3.033-3.061m.
Medium Jets: ‘Excellent’ asset quality at 5.389 (versus last month’s 5.376), a 12-month best figure, but insufficient to move the group into second place; Maintenance Exposure improved slightly, falling to $1.251-1.262m.
Small Jets: Barely edged out Medium Jets to retain second place with an ‘Excellent’ asset quality rating at 5.393, versus last month’s 5.385; Maintenance Exposure worsened $11k, increasing to $721k – but was only slightly higher than last month’s 12-month best figure.
Turboprops: ‘Very Good’ asset quality at 4.986, but the third consecutive monthly asset quality drop since February’s 5.146; Maintenance Exposure worsened $11k, climbing to $567k, equalling the group’s 12-month average.
Maintenance Exposure to Ask Price (ETP) Ratio
Spread in the ETP Ratio (the aircraft’s Maintenance Exposure divided by its Ask Price) increased slightly since last month. Concurrently, the average ETP Ratio worsened, increasing to 52.9% from 51.3%, with all four groups losing ground for a second consecutive month.
Higher Maintenance Exposure figures for all but Medium Jets and a record low average Ask Price were the primary drivers. Asset Insight considers any ETP Ratio over 40% to represent excessive Exposure in relation to Ask Price, and the Ratio shows no signs of significant improvement.
Large Jets: ETP Ratio: best among the four groups – worsened, increasing to 37.4% from 35.4%. Ask Price fell to $14.15m from $14.89m (a 5% reduction and another 12-month low figure). While this group continues to offer great values, due to high asset quality and an average Ask Price at a 12-month low point, Sellers are finding it difficult to locate Buyers, giving the latter a distinct advantage that could lead to further price erosion.
Medium Jets: ETP Ratio worsened slightly, increasing to 55.2% from 54.0%, remaining just below the group’s 12-month 56.0% average. Ask Price decreased another 2.6% and, at $3.46m, now sits just $50k above the group’s 12-month low figure. Good values are available, but Buyer demand is lacking.
Small Jets: ETP Ratio worsened for the third consecutive month, increasing to 68.2% from March’s 12-month low of 66.3%. Ask Price also pulled back a bit, averaging $2.15m versus last month’s $2.20m. We previously stated our belief that recent price increases would not be sustainable as market saturation was visible for a number of popular models. Accordingly, we are not surprised to witness this change.
Turboprops: This group also incurred a double penalty this month, as the ETP Ratio and Ask Price worsened 6.3% and 3.2%, respectively. The ETP Ratio – which is still the second best among all sectors – increased to 47.5% from last month’s 44.7%, while Ask Price fell to a 12-month low at $1.53m. During the past year, Turboprops have not experienced large valuation swings. Accordingly, this month’s rather significant value change may signify Seller desire to entice the limited number of prospective Buyers.
National election years always create business uncertainty and negatively affect capital expenditures. Asset Insight believes once the US election is over – and assuming no new instability appears – sufficient pent-up replacement demand exists to improve aircraft transaction numbers and, perhaps, pricing.
In the near-term, for Sellers that need to move their asset, prices are not in their favor. For Buyers, historical asset quality has been better by only a slim margin, so taking advantage of current low prices can lead to great values – unless, of course, you are one of those unlucky individuals that also have an aircraft to sell.