Business Aviation Market Trends
BizAv Owner/Operator Sentiment Improves Somewhat for Q1 2017
In what has become a pattern, those of us who seek to understand and draw insights from the dynamic business aircraft marketplace are once again facing a spectrum of indicators that seemingly point in different directions. Rollie Vincent, Editor, Market Indicators, seeks to make sense of the latest trends…
Some market indicators are positive, some discouragingly flat and some continuing negative. From a 30,000-foot perspective, this mix of indicators continues to look more like a choppy sea than a smooth and protected sailing area.
Depending how you look at it, aircraft utilization - perhaps one of the most fundamental measures of the value of Business Aviation - is up approximately 4-5% Year-over-Year (YoY) through the first few months of 2017 in the key US and European markets.
While this is certainly a positive development, we should expect flight activity to increase at least somewhat in sync with fleet growth, as new deliveries outpace the number of aircraft that are removed from service. Based on recent industry performance, the business jet fleet has been expanding at about 2% per year, so overall business jet utilization should presumably be expanding at a rate at least that high and hopefully even higher.
As always we need to be cognizant of the dangers of looking at something too myopically. There is an argument to be made that aircraft utilization growth should be higher than, say, the low single-digit percentages, especially if the prior year’s level of flight activity was muted – making for an easy comparable.
A slow but steady increase in activity after a market correction will be inadequate to return to the prior peak. A simple arithmetic example will help to illustrate the point:
If an indicator (for example, the number of take-offs and landings, the volume of airplane sales or new factory deliveries, or the average transaction price of a pre-owned business jet) drops 50% during a cyclical downturn, it will ultimately need to double (i.e. increase by 100%) simply to return to its prior level. This implies that rates of growth, especially in a classic V-shaped recovery, can appear to be relatively high, and well above the single-digit percentage values that we are witnessing today.
After a sharp downturn in US business jet flight activity in the post-crisis 2009 period, growth has certainly returned but at a slower pace than expected. In fact, overall US business jet utilization levels as measured by take-offs and landings (cycles) are now only eclipsing those from 2003, despite the fact that the US fleet has expanded by more than 50% since that time to today.
What does this tell us? We are in a classically oversupplied market.
How Does this Situation Change?
There are two sides to any recovery – more demand or less supply. More demand is certainly the preferred path for those who are currently gainfully employed in the industry, and could be reflected in more and new buyers coming into the market to take advantage of attractively priced business aircraft assets.
As we have said in prior articles, the value-for-the-dollar calculation in a business aircraft has not been more attractive. Airplanes that offer exceptional performance, comfortable and productive ‘offices-in-the-sky’, and advanced technology features have never been more attractively priced.
This is especially so in the used business aircraft market, where some 5+year-old aircraft that still retain the factory-fresh look, feel and aroma can be purchased for just 50 cents on the dollar, or sometimes even less.
So – have we seen a massive influx of new buyers, swooping in to take advantage of historically attractive prices? Not so much. From what we understand, the level of concept buying (people purchasing a business aircraft who did not previously own one) is actually down in the post-recession period. Depending upon how you look at things, this is either a marketing problem (i.e. we are not yet effectively communicating the appeal of the product or service) or an opportunity to convince the less-than-savvy to finally join the jet set.
Recent residual value performance is clearly dampening enthusiasm for business aircraft ownership, especially amongst those who have counted themselves fortunate to miss this most recent cyclical downturn.
An Uber-style business aircraft service - or something completely different but offering access to Business Aviation across a much broader spectrum of users – is another potential pathway to growth for the industry. In the late 1990s and early 2000s, the acceleration of fractional ownership programs and the advent of the popular ‘Jet Cards’ and other lease-type products propelled business jet utilization growth, especially in the US.
These programs continue to be popular with customers, although much of the recent aircraft order activity from this segment has been for replacement aircraft rather than all-new growth. For the time being, the search for the Holy Grail of lower-cost business aircraft flights will continue, not helped by an environment of higher than expected costs for Jet-A fuel and for aviation professionals as commercial airlines accelerate pilot and A&P hiring and increase their pay/benefits levels.
The Advantage of a Deal
On the supply side, OEMs have been prudently lowering their production rates to be in better alignment with the current levels of demand. Pricing discipline is “all the talk” right now, but the proof is always in the proverbial pudding, and the costs of losing a long-loyal customer to a discounting competitor can be too much for anyone to reasonably bear.
In the short-term, the advantage of a ‘deal’ certainly goes to the customer. In the longer-term, the more strategic question is whether OEM actions essentially ‘train’ the customer to expect a discount the next time they need an airplane. Getting off this slippery slope is a collective imperative for the industry to return to health sooner than later, involving strategies such as lowering production rates, taking low-volume aircraft out of production, and eliminating aggressive promotional pricing.
Owner/Operator Market Sentiment
Results from the most recent JETNET iQ Survey of business aircraft owners and operators were still being assessed as this issue of AvBuyer was being produced. Based on more than 350 respondents (about 70% completed as we went to press), owner/operator sentiment is certainly rebounding after a sharp downturn in 2016 that was driven by discouragingly low scores in the Large Cabin jet segment and from markets outside North America and Europe.
When asked to describe where Business Aviation is in the current business cycle, 54% of respondents worldwide indicated that we are past the low point. Optimists outnumbered pessimists by a factor of almost 2.5-to-1 in Q2 2017, continuing a significant uptick that has been underway since Q4 2016. Sentiment appears to be strongest amongst respondents based in Europe, and weakest in so-called emerging markets in the Rest of World (namely, Africa, Asia Pacific, Middle East, and CIS).
By size category, owner/operator respondents who operate large cabin business jets (in the class of the Bombardier Challenger 650 and larger) are somewhat more pessimistic than those flying other size categories of business aircraft, which is a significant improvement over results just a few quarters ago in the closely watched upper-end of the market.
As we have seen in all recent JETNET iQ Surveys, the impediments to business aircraft transactions remain largely the same: overcapacity (customers do not need additional aircraft at this time), high trade-up costs given the diminished aircraft residual values, difficulties selling their pre-owned aircraft, and uncertainty regarding the economic and regulatory environment.
Short of some unexpected shock, like a geo-political event or a welcome stimulus program (for example, the repatriation and re-investment of internationally-held US corporate profits), it looks to be more of the same for Business Aviation over the next several quarters. Uncertainties about the future direction of the market, and mixed signals about its current state, are factors that are hampering demand for aircraft and Business Aviation services in what continues to be a frustratingly slow and unsteady post-recession recovery.
BizAv Activity – North America
Reviewing Year-over-Year (YoY) flight activity, TRAQPak data indicate that April 2017 posted an increase of 5.3% over April 2016. Nevertheless, April posted a Month-over-Month (MoM) decrease of -4.1% versus March 2017…
The YoY results by operational category were all positive with Part 135 activity rising significantly, Fractional activity also recording a large rise, and Part 91 activity increasing marginally.
The aircraft categories were positive as well with Large & Mid-Size Jets posting the largest gains, up 8.8% and 7.7% respectively. Small Jets and Turboprops (led by the fractional single engine market) saw increases of 2.9% and 3.3%.
April’s down-trend Business Aviation flight activity represented the typical movement for this period. Results by operational category were negative for the month, with Part 91 posting the largest decrease. Part 135 and Fractional activity were also off for the period.
Aircraft categories were down as well with Large Jets posting the largest monthly decline.
Next Month’s Forecast
TRAQPak analysts estimate there will be a 3.9% increase in overall flight activity YoY in May 2017 (versus May 2016).
BizAv Activity - Europe
There were 63,587 Business Aviation departures in Europe in April 2017, representing a -1% YoY slowdown in activity according to WINGX’s latest monthly Business Aviation Monitor…
Business jet activity was flat, Piston flights were up and Turboprops were down in Europe during April. YTD, 2017 Business Aviation activity is still up by 4%. Germany took the brunt of the declining activity this month, with Business Aviation flights down by -11%. (The biggest drop came in business jets departures, dropping -17%. Germany domestic and Germany-UK flights declined the most.)
Flight activity from France continued to increase, however. UK activity was slightly down, and Italy maintained its YTD decline. In contrast, flight activity in Spain jumped more than 20%, while flights from Switzerland and Russia were slightly up.
Whilst overall activity within Europe declined this month, there was strong growth in flight arrivals from Africa and Asia. Arrivals from the Middle East and CIS region were moderately up, but transatlantic arrivals slumped -12% YoY and are trending down this year.
Contrasting trends were seen between Private and AOC flights, with Private flights declining -5%, maintaining a slowing trend over the last 12 months, whereas AOC flights were up 4% and have increased in each of the last six months. AOC activity was well up in several countries, including >10% in Italy, 15% in France, >20% in Spain and Greece, and almost 40% in Portugal. Conversely, Private flights declined in all top five markets and by approximately 10% in Germany, Italy and Belgium.
“Clearly the slowdown this month was due to the later timing of Easter this year, which shows that Business Aviation is about ‘business’ in Northern Europe, whereas the Easter vacation period saw an increase in leisure flights to Southern Europe,” noted Richard Koe, Managing Director of WINGX Advance. “A number of city pairs are well up YTD, including those which have regular airline connections…Hybrid business aviation shuttles seem to be supporting this trend.”
JETNET Q1 2017 Used Aircraft Sales Summary
JETNET released its Q1 2017 pre-owned business jet, business turboprop, helicopter and commercial airliner market data, and generally, inventories are down across the board, except for business jets…
Highlighted in the table below are key worldwide trends across all aircraft market segments, comparing March & Q1 2017 with March & Q1 2016. The Business Jet market is the only segment to show an increase (+6.7%) in sales transactions.
Commercial turboprops and business turboprops showed the largest decreases in the ‘For Sale’ numbers (101 and 86 fewer turboprops, respectively) in Q1 2017 vs. Q1 2016. Turbine helicopters were the only segment to show an increase in ‘For Sale’ numbers, up 18 units from 1,461 in March 2016 to 1,479 in March 2017. Across all aircraft sectors, there were a total of 6,355 or -6.9% fewer aircraft ‘For Sale’ in the quarterly comparison.
Accordingly, fleet ‘For Sale’ percentages for business jets and business turboprops showed the largest decreases of all market sectors in the quarterly comparison: 11.2% (-0.5pt), and 7.8% (-0.7pt), respectively.
As mentioned, business jet retail sale transactions showed a 6.7% increase, and are taking less time (-21 days) to sell than last year. However, business turboprops showed a decrease of 9% in sale transactions, and are also selling in less time (-5 days).
Turbine and piston helicopters saw declines in sale transactions in the Q1 comparisons, at -3.1% and -20.2%. These aircraft took more days to sell, with turbine helicopters taking 56 days and piston helicopters 10 days more.
Commercial airliners are reported by JETNET and include the numbers ‘For Sale’ for both commercial jets (including airliners converted to VIP) and commercial turboprop aircraft. Interestingly, business jets (at 586) and commercial jets (at 454) accounted for 55% of the total full sale transactions (1,883).
AMSTAT: Used Light & Mid-Size Jet Sales Rise
Used retail transactions in the Light and Mid-Size business jet segments experienced one of their best Q1 results in the past 10 years, according to Amstat…
Mid-Size jet turnover was 2.6% of the fleet in Q1 2017, just shy of the rolling 10-year high of 2.7% (in Q1 2014). Light jet turnover, meanwhile, was 2.8%, narrowly trailing the 2.9% and 3% turnovers recorded in Q1 2013 and 2008, respectively.
Business jet transactions increased slightly in Q1 2017, with 2.4% of the fleet turning over versus 2.3% a year ago, Amstat said.
However, transaction activity in the Large Cabin jet segment declined by -0.1 points from a year ago, to 1.6% turnover. Business turboprop transactions, at 1.6% fleet turnover, had the worst Q1 performance for this segment since 2009.
Business jet inventory finished the quarter with 11.2% of the active fleet ‘For Sale’, unchanged from a year ago. Mid-Size and Large Cabin jet inventory continued to contract—now at 11.2% and 10%, respectively—but light jet levels increased from 11.2% in January to 12% in March. The number of Turboprops ‘For Sale’ also crept up over the last quarter, from 8.2% to 8.5%.
Average asking prices declined across the board from a year ago: Light Jets declined -1.4%; Mid-Size Jets declined -4.6%; Large Cabin Jets declined -1.8%; and Turboprops declined -3%.
Avionics Q1 2017 Sales Report
The Aircraft Electronics Association released its Q1 2017 Avionics Market Report, which showed a large uptick in retrofit sales versus Q1 2016...
In Q1 2017, total worldwide Business & General Aviation avionics sales amounted to >$566m. The figure represented a 0.01% increase in sales compared to Q1 2016. Although the sales amount was nearly identical to Q1 2016, it marked the first time since Q4 2015 that sales increased during the same period from the previous year, snapping a string of seven consecutive quarterly reports showing a decrease in sales from the previous year.
“This quarter offers mixed reviews, as industry saw a substantial decrease in forward-fit sales (43% total) offset by a larger increase in retrofit sales (57% total),” said AEA President Paula Derks.
“We have seen an increase in the percentage of sales coming from the retrofit market for four straight years, but this quarter marks the biggest swing toward that industry segment. Although the final sales amount was nearly identical to Q1 2016, it indeed showed a slight increase for the first time in several reporting cycles, which ends a downward trend during the last couple of years.”
According to the companies that separated their total sales figures between North America (US and Canada) and other international markets, 69.3% of Q1 2017 sales occurred in North America, and 30.7% in other international markets.
UBS Bizjet Index Down, but Optimism Still High
The latest business jet index from UBS Global Research dropped two points, to 51, but is nonetheless the third consecutive month it has been above the 50 mark, which denotes a strengthening market…
By cabin size, the Light Jet index leads at 56, followed by Mid-Size Jets at 50 and Large Cabin Jets at 47. All three of those indexes eroded slightly from the previous month. According to UBS aerospace analysts David Strauss and Darryl Genovesi, the drop in the index is driven by lower willingness of dealers to increase inventory, less optimism about the 12-month outlook, higher used business jet inventory levels and weaker customer interest, partially offset by better pre-owned pricing.
“While lower, our customer interest score (77) remains near its high since the financial crisis,” they said.
Customer interest remains strongest in North America at 79, followed by Europe at 57 and Asia at 54.
Of survey respondents, 59% now expect the outcome of the US Presidential election to ultimately be positive for the business jet market—down from 65% in February. Meanwhile, 11% don't see a positive impact and 30% are unsure. Regarding actual pre-owned transactions, half said they have seen an increase since the election, similar to UBS’s prior survey, versus 8% that have seen lower volumes, up from 5% in the previous survey. (Words courtesy AIN)
Is Europe Turning the Corner?
Presenting the state of the European Business Aviation industry at its annual press conference, Brandon Mitchener, CEO, EBAA, said that the sector was showing promising signs of vigour after a few years of flat figures...
“We’ve now had six months of steady growth in traffic numbers and they’re the best since 2011,” said Mitchener. “This is an exciting time for Business Aviation, with innovative new aircraft, technologies and business models coming to the fore. The industry is looking dynamic as it expands its offerings for new and existing customers and aircraft owners.
“It’s a vibrant, evolving industry and many players are developing new ways of working that further expand customers’ freedom of choice. This includes online booking platforms with faster response times, more transparency and better pricing.”
In-Service Aircraft Values & Maintenance Condition
An Asset Insight market analysis conducted on April 28, 2017 covering 92 fixed-wing models, and 1,942 aircraft listed for sale, revealed Ask Prices for tracked models fell -0.8% in April…
The -0.8% decline for April follows March’s -1.7% decline, for a total decrease of -13.5% over the past twelve months (representing a new record low figure). Large and Small Jets were down -2.2% and -2.3%, respectively, with Large Jets posting a 12-month low figure. Medium Jets and Turboprops fared better, posting a 2.0% and 0.2% value gain, respectively.
While overall Asset Quality decreased for the fifth consecutive month, the inventory fleet still maintained an ‘Excellent’ rating. The Quality Rating Trendline is now definitively negative, high quality assets having been absorbed and Maintenance Exposure on the rise.
Quality Rating: The Asset Insight Quality Rating remained at a 12-month low figure, decreasing another 2.0 AI2 basis points, to 5.276, from March’s 5.296, on Asset Insight’s scale of -2.5 to 10.
Maintenance Exposure: The tracked fleet’s average Maintenance Exposure (an aircraft’s accumulated/embedded maintenance expense) posted a 2.5% increase/deterioration to $1.46m from last month’s $1.424m.
Exposure to Ask Price (ETP) Ratio
The tracked fleet’s ETP Ratio (an aircraft’s Maintenance Exposure divided by its Ask Price) deteriorated to 54.1%, from last month’s 53.1%. (Asset Insight considers 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 28 months.) Interestingly, at 46.5%, Turboprops returned the lowest/best figure this month, followed by Large Jets at 46.7%, Medium Jets at 59.3% – the only group to post an improvement, and Light Jets at 59.7%.
Asset Quality continues to be ‘Excellent’ – even though it posted the lowest figure of the past twelve months, and great values continue to be available for buyers by virtue of the record low average Ask Price. For sellers, high ETP Ratio figures create ongoing challenges as knowledgeable buyers are likely to decrease their offer price to address maintenance exposure figures.
Large Jets: Quality Rating remained ‘Excellent’, albeit at the group’s 12-month low, as a number of higher quality aircraft transacted this month, negatively impacting that figure as well as Financial Exposure – which worsened in excess of 3%.
The group continues offering good value for buyers, as Ask Prices have receded over 19% during the past 12 months posting another record low figure. For sellers, success is dependent on their ability to analytically justify the value of their asset.
Medium Jets: Although still weak, Ask Price has improved from March’s record low. Last month’s transactions removed mostly average to below average assets from inventory, pushing the Maintenance Exposure value to a 12-month best figure, and maintaining an ‘Excellent’ Asset Quality rating.
Perhaps sellers heeded Asset Insight’s advice to seriously consider all offers. Whatever the case, it will take quite a few transactions for pricing to confidently strengthen, based on the available inventory.
Small Jets: Higher quality aircraft traded last month, but a larger number of lower quality assets were added to inventory, decreasing the group’s Quality Rating to ‘Very Good’, and posting a 12-month low figure. Maintenance Exposure was better than the 12-month average, while Ask Price hovered just above the 12-month low, creating a better than average ETP Ratio.
Market saturation is the challenge for sellers and buyers, the former from a price justification standpoint, the latter from an asset quality analysis perspective, to ensure that a low price also means a good value.
Turboprops: With a near 6% inventory fleet reduction, and with many higher quality assets trading, the group maintained its ‘Good’ Quality Rating last month. Not surprisingly, Maintenance Exposure eroded a bit, but Ask Price remained unchanged helping the ETP Ratio.
Considering the number of aircraft still listed ‘For Sale’, market saturation is a challenge that sellers are likely to face for some time to come. Buyers might see this as a positive market attribute, except that most need to sell an asset before acquiring another one.
Lastly, in conducting appraisals for buyers and aircraft financiers, Asset Insight is surprised by the number of aircraft trading without addressing the upcoming NextGen equipage mandates – many buyers apparently viewing this as a way of reducing their acquisition price.
Asset Insight warns this could be a serious mistake and one likely to ground aircraft come January 1, 2020. The FAA has twice affirmed it will not push back its ADS-B effective date. With facility capacity limited, and decreasing as each day goes by, modification cost is already increasing. Accordingly, Asset Insight strongly recommends buyers and sellers take immediate action to equip their aircraft.
Did you miss last month's Business Aviation Market Summary? Find it here