What are the various market indicators telling us about the Business Aviation industry moving into Summer 2017? Aviation Analyst Rollie Vincent reflects...Back to Articles
Utilization, Used Aircraft Sales Volumes Trending Up
As we shift into H2 2017, a spectrum of market indicators continues to point in varying directions, clouding the near-term outlook for Business Aviation, notes Rollie Vincent, Editor, Market Indicators.
On the one hand, business aircraft utilization rates are improving in the key US and European markets, together accounting for almost 70% of the installed fleet. Year-over-Year (YoY) in May 2017, utilization was up more than 6% in the US and more than 3% in Europe, with traffic increases led by higher activity amongst charter and fractional operators.
Comparing results in 2017 to 2016 on a Year-To-Date (YTD) basis, US business jet flight cycles (measuring 1 takeoff and landing) were up 2.8% through the beginning of May 2017, an encouraging result on what is nevertheless proving to be a long road to recovery in the post-2008 crisis era.
Used business aircraft transactions continue at a steady pace, averaging about 155 whole retail sales per month worldwide from January through the beginning of June 2017, as buyers recognize and act on today’s unprecedented opportunities to acquire aircraft at attractive prices.
The volume of whole retail business jet sales was up 5% YTD at the beginning of June 2017, according to JETNET databases, driven by generally lower prices across most segments, but especially for larger aircraft.
Encouragingly, and in line with supporting anecdotal evidence that we hear from the business aircraft broker/dealer community, whole retail used jet transactions were up 7.5% in March-April-May 2017 over the same period last year, although days-on-market for aircraft that have sold continues to hover around 300 days. According to JETNET, there were 2,357 business jets listed ‘For Sale’ worldwide at the beginning of June 2017 (down 80 jets YoY), representing 11.1% of the fleet (versus 11.7% one year ago).
Key Building Blocks Forming
With aircraft utilization and used sales volumes trending upwards through H1 2017 compared to the same period last year, two key building blocks that are necessary for a broad-based market recovery are being formed.
Flight activity will need to remain strong and used aircraft sales will need to be sustained through the doldrums of the Northern Summer (when most folks would rather be sitting on the dock of the bay than negotiating complex aircraft purchase agreements) before pricing stabilization can occur.
Business aircraft OEMs will need to continue to do their part, primarily by moderating production rates and throttling back on aggressive discounting to sell whitetail inventory. Existing aircraft owners and operators continue to represent the industry’s largest pool of prospective buyers, but are clearly discouraged by low trade-in values and the gap this leaves them to transition into a new aircraft.
Beginning in late 2014, this phenomenon began to impact the large-cabin business jet segment, which was late to feel the cold headwinds of the demand slowdown that has confounded the light and medium jet markets.
According to Asset Insight analysis (below), large-cabin business jet asking prices have slipped by a troubling 20% over the last twelve months compared to the same period YoY, while medium jets were down about 11%.
While some of these pricing adjustments reflect the normal product life cycle – for example, with aircraft transitioning to an out-of-production status – a myriad of other factors are at play.
In the long-cycle of new aircraft development programs, it is normal that some deals are being negotiated to take wait-and-see buyers ‘off the street’ and into interim aircraft in anticipation of a ‘to-be-certified’ model. Any knowledge of pricing of these deals seems magically to trickle out of water-tight Non-Disclosure Agreements and percolate throughout the market, impacting prices and the cadence of used aircraft sales activity.
Are some segments and/or models doing better than others? Yes – and perhaps herein lies some lessons learned on the road to healthier, stronger, more stable markets. As we have noted previously, the business turboprop segment has all the signs of a recovered (albeit stable) market, with little evidence of continued deflation in asking prices, and less than 8% of the fleet available ‘For Sale’, according to JETNET records.
With an average fleet age of just 13 years, the single-engine turboprop segment – led by Pilatus, Daher, Piper and Textron Aviation - is arguably the most balanced in terms of worldwide demand and supply.
There are few residual value darlings in the industry today, but the Pilatus PC-12 is definitely one of them.
Occupying a unique and ultimately more defensible market segment, used PC-12 prices have remained as stable as a towering Swiss mountain both before and after the 2008 financial crisis.
According to the latest Vref aircraft value guide, a typical 2012-era PC-12/47E model has a current retail value of about $3.9m, representing 87% of the new retail price. This compares favorably to in-production light and medium-sized jets, which have depreciated to 50-70% of their new retail value after five years, according to Vref. With more than 1,400 PC-12s in operation worldwide, only 4.1% of the fleet is listed as ‘For Sale’ (at press time).
Asking prices for the third-generation PC-12NG are hovering in the $3.0-3.8m range, a granite-solid performance that reflects: Smart design; Strong product quality, reliability, and support; Disciplined approach to production, R&D development (and new aircraft discounting); Limited direct competition; and a Healthy dose of good fortune (which tends to come to those who are prepared to take advantage of it).
If imitation is indeed flattery, the Swiss can take some solace in the development of the near-lookalike Cessna Denali, as they and Textron Aviation prepare for battle in a market segment that Pilatus has effectively ‘owned’ since creating it almost 25 years ago.
BizAv Activity – North America
Business aircraft operations in the US, Caribbean and Canada soared 6.5% YoY in May, led by significant gains in Part 135 activity, according to ARGUS TRAQPak data…
Reviewing YoY flight activity (May 2017 vs. May 2016), TRAQPak data indicate that results by operational category were all positive with Part 135 activity rising significantly once again, Fractional activity recording a solid rise and Part 91 activity also increasing.
The aircraft categories were positive too, with Large & Mid-Size Jets posting the largest gains.
Business Aviation flight activity posted a larger-than anticipated Month-over-Month increase from April to finish up 4.7%. Results by operational category were all positive, with Part 91 posting the largest increase.
Aircraft categories looked good as well with Turboprops posting the largest monthly gain over April activity. Light Jets, Large Jets and Mid-Size Jets followed in that order. The largest individual MoM increase occurred in the Fractional Turboprop category.
June Activity Forecast
Looking ahead, TRAQPak analysts estimate a 5.3% increase in overall flight activity YoY for June 2017.
BizAv Activity - Europe
May’s flight activity in Europe resumed the growth trend following a blip in April. According to WINGX, there were 77,068 business aircraft departures in Europe during May, a 3.3% increase from a year ago and the busiest month so far this year…
The growth in Business Aviation activity was evident mainly in the largest markets of France, Germany and the UK. Activity growth from the UK was particularly notable, with London's Light Jet departures growing 10% YoY, notes WINGX Advance managing director Richard Koe.
Growth during May was strongest among business jet flights, which climbed 4% YoY. Business turboprop and piston flights also increased, but specifics were not given.
Flights arriving into Europe increased from all regions except North Africa. Arrivals from Russia were up 3%, in contrast to a -6% decline in the last 12 months. Departures from Europe to North America were up 8%, and flights to Asia-Pacific increased 18% from a year ago.
Also noted were “modest growth” at Paris Le Bourget and Geneva, with strong YoY gains at London Luton (+6%); Farnborough (+15%); and London Biggin Hill and Stuttgart (+18% each).
Robust European Growth
EBAA’s European Business Aviation traffic was up 7.6% in May from a year earlier, continuing a positive trend in the previous six months.
“This further reinforces a strong start to 2017, with close to 7% growth in Q1 of this year,” summarized Brandon Mitchener, EBAA CEO, citing data provided by Eurocontrol. “Given that the summer is normally the peak season for Business Aviation traffic, we are hopeful that this marks a promising trend.”
UBS: Customer Interest Solid, Market Softer
The business jet market shows signs of slightly weakening, according to UBS’s recent Business Jet Market Index, which dipped 4% from the previous survey, coming in just below the break-even level at 49…
UBS noted the survey had remained around the break-even measurement of 50 since it bounced up late last year. “This move is beginning to resemble the false start that we saw in late 2014/early 2015,” UBS analysts noted.
The market for Small-Cabin aircraft leads the index at 52, but that is down by 6% from the previous month. The Medium-Cabin market measured at 49, while the Large Cabin sector was the weakest, measuring 46.
While customer interest appears lower, it is “still near post-crisis peak,” UBS notes.
Factors contributing to the softened results include a limited willingness on the part of dealer efforts to increase inventory; weaker customer interest; and lower pricing. However, these are offset by lower inventory levels, UBS said, and “our customer interest score…remains near its high since the financial crisis”. North America customers show the strongest interest, followed by Europe and Asia. (Words courtesy of AIN)
Collins: No Change in Market Demand
Rockwell Collins is standing by the conservative Business Aviation market outlook it took at the beginning of the year, according to company president and CEO Kelly Ortberg…
“We have seen about what we’ve expected in Business Aviation,” Ortberg told AIN recently. “We saw a lot of rate decreases last year. I haven't seen further rate reductions, and I haven’t seen upticks.” Ortberg remains hopeful that Business Aviation will bottom out sometime next year.
Non-ADS-B Aircraft Values to Drop
Owners of business aircraft that are not ADS-B-compliant, or in the queue to have equipment installed, risk seeing already depressed residual values fall even further in advance of FAA’s January 1, 2020 deadline, warns GAMA’s Pete Bunce…
In his warning to operators and owners of business aircraft that have yet to comply with upcoming ADS-B mandates, Pete Bunce outlined, “The value of your asset is going to start dropping even before 2020—this is for rotorcraft and fixed-wing—if you don’t have a slot to upgrade.
“If you’re in the Business Aviation category and you hit 2020 [without an upgrade], the price [of your aircraft] is going to just plummet.”
While the FAA is adamant that the ADS-B deadline will not be pushed back, Bunce said that too many operators are holding out hope that the date will slip. “Because of that belief, right now, we are not on pace to get the fleet equipped by the 2020 mandate,” he warned.
GAMA is working with the aircraft-valuation community to collect data that will help quantify the problem, Bunce said. The association plans to make the data available to encourage equipage while there is still time to shift momentum. “We have the industrial capacity to get the fleet modified,” Bunce said. But, he cautioned, “If everybody waits until 2019, then it’s not going to happen."
Thousands of Aircraft Could be Grounded
Duncan Aviation estimates an alarming number of business aircraft could be grounded for ADS-B non-compliance after the company’s data analytics team developed even more accurate methods for determining the number of aircraft in compliance…
Using data from its proprietary customer database, the FAA, and other industry sources, Duncan Aviation’s researchers discovered that as of March 31, 2017, roughly 73% of the business jets registered in the US have not yet complied with the ADS-B mandate, meaning that a little over 10,000 business jets are not yet equipped.
“At the current rate of ADS-B adoption, about 4,760 aircraft will still need ADS-B when the mandate goes into effect,” says Mark Cote, Duncan Aviation’s VP, Parts Sales, Avionics & Satellites. “Those aircraft, for all intents and purposes, will be grounded. For the entire fleet to be ADS-B compliant, 320 aircraft need to be updated every month from now until the mandate goes into effect.”
That is more than twice the number currently being upgraded on a monthly basis, and a source of big concern for Cote. “The FAA has stated several times that the mandate deadline will not change.
“With limited labor and hangar capacity, operators need to plan ahead to ensure their business aircraft will be able to continue to meet its mission and company needs.”
Cheap Heavy Metal: The Knock-On Effect
Richard Aboulafia reflects on his recent visit to EBACE, where he heard talk of four used Singapore A380s about to be retired and made available for VVIP conversion. This got him thinking about the wider impact of ‘cheap heavy metal’ in the BizAv market…
Soon, any potentate could buy a ten-year old A380 for less than $100 million, according to Aircraft Value News. But that represents everything that’s wrong with the business jet market today. There’s too much cheap heavy metal having a knock-on effect against all the stuff beneath.
Recent History of the High End
After the 2008 economic debacle, the bottom half of the business jet market ($3-25m range) fell by 57%, while the top half ($26m+) just kept growing. It grew through 2014, a remarkable 11-year run. But over the past two years soft emerging markets, low commodity prices, and China’s anti-corruption campaign have all pressured the high-end market downward, with deliveries falling 27% by value between 2014 and 2016.
As is standard OEM practice, record output rates were sustained well after market alarms were clanging, thereby guaranteeing a steeper drop and a worse over-supply situation. While the bad times were catching up with the high-end, another headwind kicked in. In 2011 Gulfstream started delivering its G650, a completely new class of business jet, with a price tag $15m higher than any previous traditional business jet model. 230+ have since been delivered.
Some people just want the biggest, and that’s great. But consider: with the G650, in six years the market saw $18bn in additional deliveries at the high-end. By comparison, last year saw just $20.5bn in new business aircraft deliveries, from turboprops to G650s, with the entire top half worth $12.5bn.
That sudden input distorted the market’s top-line. In fact, without those G650s, the market would not have seen any kind of top line recovery at all from the 2009-2010 downturn.
Inevitably, as the rest of the market stayed flat and G650 output continued at a four-per-month rate, the previous high-end jets were displaced. New and used G550s, Global 6000s, and Falcon 7Xs got cheaper, particularly when they were traded in for new G650s. They, in turn, displaced G450s, Global 5000s, and whatever else. Those got cheaper too. The pain kept cascading down, until G280 sales were threatened by cheap G450s. Challenger 300s started displacing mid-sized jets, helping to kill Bombardier’s own Learjet 85. And these are just new prices; cheap heavy metal got even cheaper when it was a few years old.
Next year Bombardier will start delivering its Global 7000, a belated response to the G650, and even more expensive. Since there’s an up-front order book of eager early adapters, and a manufacturer eager to bring in cash, there’s no way to stop several hundred more large jets hitting the market in the next few years, accompanied by many trade-ins and existing large jet sales.
The bottom half of the market, on the receiving end of all this top half trickle-down tyranny, has yet to recover to its 2008 peak. It won’t get back there any time soon. With the new ultra-high-end models all coming on line in the next few years, there will clearly be some disappointing returns on investment.
Time to Become Creative?
Aside from general market pessimism, my one conclusion from all of this is that OEMs should differentiate themselves. These new heavy models conform to the usual ‘cabin + range/price formula’. It might be time to think creatively.
Speed is one possibility. In addition, OEMs might consider differentiation with alternative airframe concepts – anything from trapezoidal wings to blended-wing-body configurations. This is a conservative industry (the Starship and Avanti stories prove that), but when your market is getting commodified fast (with profits falling in tandem), out-of-the box thinking might be useful.
Coming Full Circle to the A380…
This brings us back to that Singapore A380 announcement, which may be the first of many such A380 announcements. No matter what the business aircraft market top-line does, the very top of the market may have an A380 problem. The last of 235 A380s will be delivered by 2020 (Teal’s forecast). Many will retire in the 2020s. Most will be retired by around 2033.
Again, there’s no secondary airline market, and there won’t be cargo conversions. If these planes have any kind of value, it will be as VVIP conversion candidates.
There will likely be just a few A380 VVIP takers. Airport access would be terrible, and twin (and single) aisle jetliners have always been available for VVIP conversion, with relatively little impact on the broader market. But we can’t rule out a dozen or two sales, producing a deflationary downward cascade effect on the other business jetliners.
After all, that’s just an exaggerated, jumbo-sized version of what’s afflicting the entire business jet market today.
In-Service Aircraft Values & Maintenance Condition
An Asset Insight market analysis conducted on May 30, 2017 covering 92 fixed-wing models, and 1,914 aircraft listed ‘For Sale’, revealed Ask Prices for tracked models fell -2.0% in May, following April’s -0.8% decline, for a total decrease of -14.4% over the past twelve months. Following are the details…
All four tracked groups experienced a price decrease. Large Jets were down -1.6%, posting a new record low, while Small Jets were down -2.6%, to post a 12-month low figure. Medium Jets and Turboprops fared no better, posting a -0.7% and -1.8% value reduction, respectively.
Although the Quality Rating Trendline remained negative, overall Asset Quality increased sharply in May, placing the inventory fleet firmly within the ‘Excellent’ range. Curiously, a larger proportion of lower-quality assets were acquired during this period, thereby improving the inventory fleet’s Maintenance Exposure figure.
Maintenance Exposure to Ask Price (ETP) Ratio
Asset Insight’s tracked fleet’s ETP Ratio (an aircraft’s Maintenance Exposure divided by its Ask Price) posted a further deterioration to 54.8%, from last month’s 54.1%. Any ETP Ratio over 40% represents excessive Exposure in relation to Ask Price, and the tracked fleet’s average has been above 40% since March 2014. At 45.6%, Turboprops once again posted the lowest/best figure – the only group to experience an improvement – followed by Large Jets (47.1%), Small Jets (59.8%), and Medium Jets (61.5%).
Combined with a record low Ask Price figure, values continue to be available for buyers, especially with respect to Large Jets. Sellers must take solace in the industry’s Maintenance Exposure improvement, although that can be a weak hand to play, even for those whose aircraft record a high Asset Insight Index.
Large Jets: Quality Rating vaulted back into the ‘Outstanding’ range with an Asset Quality Rating and a Maintenance Exposure figure better than the group’s 12-month average. While the news is good for Buyers, the challenge for Sellers is an average Ask Price that fell -1.6% since April (-19.6% during the past 12 months) to post a new record low. Knowing how their aircraft compares to its peers and competitive models has become imperative in order for a Seller to optimize and justify their Ask Price.
Medium Jets:The group’s Asset Quality posted a 12-month low figure, earning an ‘Excellent’ rating by a very slim margin. While Financial Exposure posted a better than average figure, average Ask Price fell slightly, to record a -10.9% decrease over the past 12 months. Additional aircraft joined the ‘For Sale’ inventory, leading to the ETP Ratio registering below the group’s 12-month average. Buyers are likely to find value a little harder to decipher within this group, although good deals are available.
Small Jets: Improved Asset Quality to a rating of ‘Excellent’, a better Financial Exposure figure, a 12-month low Ask Price, and a better than average ETP Ratio create deal-making opportunities for both Buyers and Sellers within this group.
Turboprops: Asset Quality improved to ‘Very Good’ during the past month, equaling the group’s 12-month average – as did the Financial Exposure figure. Ask Prices dipped -1.8% during the past 30 days, but that is a bit misleading – the group’s pricing over the past year is only down by -1.4%. While still excessive at 45.6%, the ETP Ratio has consistently remained low relative to the other groups, offering opportunity for Buyers and Sellers to find mutual ground.
Asset Insight recommends all owners keep in mind the NextGen mandates that are approaching much faster than many think. Numerous service facilities are now requiring non-refundable deposits to secure a position for NextGen modification work, and the likelihood many aircraft will be grounded is becoming quite evident.