BizAv Industry Green Shoots
With apologies to our good friends south of the Equator, signs of Spring are in the air, notes Rollie Vincent. Whether evident in the early budding of trees and flowers, or the smiles on the faces of consumers and business leaders, the cold grip of winter is starting to succumb to the warmer days ahead…
With politicians doing what they are sometimes known to do – jumping on their horses and galloping off in all directions at once – the business of Business Aviation is preparing for what could be some smoother skies ahead.
Consumer confidence in the US was near a 13-year high as we went to press, and business confidence is also up since November 2014. The Trump Administration has inherited a national economy that has grown more or less steadily for an impressive 28 quarters, while the Euro Area economy has expanded for 15 consecutive quarters on a Year-over-Year (YoY) comparative basis. This sets the stage for what could be a nice uptick in economic performance in 2017, especially Stateside.
With talk of corporate tax cuts and massive infrastructure spending, legislators on both sides of the American political fence have come together in a strong showing of bipartisan support for new US DOT Secretary Elaine Chow. This bodes well for investment in airports, runways and taxiways, public and private terminals, hangars, ATC services, access roads and other aviation enablers.
With lots of excitement and anticipation in the air, the table is being prepared for what looks like a rather hearty Springtime feast that is almost certain to warm the motors of Business Aviation.
Owner Sentiment Rising
In the latest JETNET iQ Survey of business aircraft owner/operator sentiment, optimism in Q4 2016 was on the rise worldwide after a sharp downturn throughout most of last year. Peeling back the onion, respondents in Europe are feeling the most optimistic (perhaps somewhat surprising giving the Brexit challenge), followed by North America.
Market sentiment scores in Latin America remain discouragingly low after a sharp downturn in 2016, while Asia Pacific, Middle East and Africa have begun to rebound.
In many ways, business aircraft owners and operators appear to be content that 2016 is a year for the history books, after a steep decline in sentiment that we believe is linked to slower BRIC economies, low commodity prices and weak local currencies relative to the US Dollar.
While the Spring may have sprung in some parts of the world, however, we would caution aircraft sellers trying to convince folks in Latin America, Africa, Middle East and Asia Pacific that all is well. Sabre-rattling and finger pointing between nations and across border frontiers (real or imagined) are recipes for conflict, not improved business aircraft utilization, stronger pricing and higher sales.
Buyers Set to Return to the Table?
In what may be another sign of thawing after a long, dark winter for Business Aviation, prospective buyers of light jet aircraft appear to be poised to come back to the aircraft transaction table, at least based on results of the Q4 2016 JETNET iQ Survey. For the first time in 24 quarters (since these surveys were initiated), there has been a significant uptick in the 12-month outlook for light jet purchases.
With turboprop markets exhibiting many signs of being fully recovered in the aftermath of the 2008 financial crisis, stakeholders have been long awaiting the thaw in light jet markets.
While one quarter does not necessarily indicate a trend, the Q4 2016 purchase intention signal from JETNET iQ was strong enough to warrant a ‘high watch’ for other signs of clear and warmer skies ahead for light jets and for Business Aviation in general.
In the Large Cabin jet segment, conditions remain a little frosty with the late arrival of a pretty harsh winter. This market didn’t slow down until late 2014 and early 2015 as commodity prices weakened, emerging and developing economies shuddered, and aircraft residual values strapped on the skis for the slippery slopes ahead.
We are optimistic that the actions taken at the OEMs to slow new production rates will be part of a cocktail of medicines that will begin to heal the markets and set the industry on a safer trail.
Increasing Retirements Going Forwards?
The average business jet is now more than 16 years old, and turboprops are older yet (averaging almost 22 years). With most financiers hesitant to get involved in transactions for assets older than even 10-12 years, many buyers and sellers are literally on their own when it comes to getting deals closed.
With a pile-up of older inventory to clear, will there be an increase in the rate of aircraft retirements going forward?
We think so, and it will be driven by regulatory mandated deadlines – for example, ADS-B Out by January 1, 2020 in the US – as well as big-ticket “gotcha” items like an engine or landing gear overhaul.
What to do? Aircraft owners who think they may need to fly, sell, or trade their airplane in the United States - home base for about 60% of the fleet - should already be scheduled for an ADS-B upgrade. If not, we suggest they call their friendly neighborhood MRO (maintenance, repair, and overhaul) facility to take advantage of the time still left to be compliant.
These facilities are already busy, and with a regulation that seems as immovable as a borderline wall, time for action is getting short. For aircraft owners and prospective sellers, the 2020 ADS-B implementation deadline looms ever larger in their collective ski goggles…best to think of these as tree trunks to suddenly stop even the most capable skier.
With the Spring thaw come the first signs of Nature’s splendor – early crocus and tulip blooms to remind us that life is good, airplanes are fast, and that if we work really hard, we may be able to even afford to fly in our own airplane one day…
For others who find that whole aircraft ownership is not their cup of tea, perhaps a call to one of the many excellent fractional programs, charter, or ride sharing service providers would be just the medicine that the good doctor would prescribe.
Amongst the many privileges available to the successful and fortunate, there is nothing that quite compares to having access to private flying experiences to soothe the aches, pains, hassles – and empty legs – of life.
BizAv Activity – North America
January Business Aviation flight activity for North America jumped 2.0% Year-over-Year with Part 135, Fractional and large cabin flight activity leading the way, says ARGUS TRAQPak…
Business Aviation flight activity posted a slight Month-over-Month (MoM) decrease from December, which is the normal historic trend. By operational category, results were mixed for the month with Part 91 posting the only increase (see Table A, below).
January’s MoM flight activity by aircraft category was also mixed, with Large Cabin Jets and Mid-Size Jets posting a monthly increase. Turboprops and Light Jets, however, finished down from December.
Reviewing Year-over-Year (YoY) flight activity – January 2017 vs. January 2016 – TRAQPak data for January 2017 posted an increase of 2.0% (Table B, below). The results by operational category were all positive with Part 135 activity and Fractional activity leading the way.
The aircraft categories were mixed with Large Cabin Jets leading once again, with a substantial increase over last January.
Looking ahead to February, TRAQPak analysts estimate there will be a -0.5% decrease in overall flight activity YoY. Will this materialize? Check in next month to find out…
BizAv Activity - Europe
According to WINGX, 2017 got off to a strong start with 50,335 Business Aviation departures in Europe in January 2017. That’s a 4.4% growth in activity compared to a very weak January 2016…
Business jets operated 64% of flights in January, with a steady 2% growth in Private flights and a notable 11% increase in AOC sectors. Turboprop and Piston Business Aviation activity was flat YoY, extending a negative trend over the last 12-months.
Especially strong growth in flight activity was seen in Western and Southern Europe during January, with flights from France up 6% (adding almost 500 departures YoY). Flight activity in the UK, Germany and Switzerland gained 3%, while Spain and Austria were both up more than 10%.
Intra-European flight activity was up 5% YoY, well ahead of the 0.5% trend last year. Arrivals into Europe from Russia declined 7%, and inbound from North America fell 1%, although flights from Europe to North America were up 6% YoY.
The main growth in January came from AOC activity, with charter flights out of Switzerland and Spain up 13%. Overall AOC activity growth was 8%, the largest YoY jump in the last 12 months, and came mainly from the business jet segment.
JETNET 2016 Used Aircraft Sales Summary
Comparing December 2016 to December 2015, as well as 2016 year-end with 2015 year-end, most market sectors show lower inventory for sale, with fewer full-sale transactions in 2016 compared to 2015, says JETNET...
The fleet ‘For Sale’ percentages for all market sectors except Piston Helicopters, were lower in the December comparisons, with Business Jets and Business Turboprops down the most (see Table A).
Across all market sectors, JETNET reports 8,278 Full Retail Sale Transactions in 2016, including leases, a decrease of 7% compared to 2015. Business Jet and Commercial Jet Airliner transactions accounted for 52% of the total transactions recorded in 2016.
Business Jets and Business Turboprops are taking less time to sell than last year. While there was a significant decrease in average asking price for Business Jets in 2016, there was a very slight increase in asking prices for Business Turboprops.
Sharpwings Bizjet Market Insight
The recently published Sharpwings Market Insight Report provides some stimulating analysis of the current and projected state of the Super Mid-Size, Long-Range & Ultra-Long-Range Business Jet markets…
Whilst overall the annual shipment of Super Mid-Size, Long-Range and Ultra-Long-Range business jets by OEMs has remained roughly constant between 2008 and 2016, the number of models offered by the OEMs in these segments has increased by 50% over this period, from 12 to 18 models. By 2020, it will have increased by 75%.
The business jet market has spent the last eight years seeking renewed growth through these segments, but with limited success. What OEMs now need is demand for new aircraft in these segments to pick-up again. What matters most with regards to this is the macroeconomic climate.
Donald Trump’s election brings with it a great deal of uncertainty.
So, despite some positive factors (a pro-Business Aviation President and a warming of relations between Russia and the US for instance), a rebound in demand for the top categories of business jets is anything but guaranteed.
These top segments enjoyed unprecedented growth rates in the last decade, but along different trajectories. They’ve now entered a new cycle where demand is slower and competition greater.
Until there are some more robust signals that this can change in the right direction, Sharpwings expects values of used jets in these categories to remain under pressure and therefore, for certain models, some further correction in values and depreciation rates will be evident.
'Trump Effect’ To Boost Jet Markets?
New research from Corporate Jet Investor (CJI) reveals that nine out of 10 industry professionals expect the market to grow this year, and this will be partly fueled by the ‘Trump’ effect...
In terms of sales of business aircraft, CJI’s research reveals overwhelmingly that Mid- to Heavy private jets will be the ‘best sellers’ in 2017. A survey of 232 senior Business Aviation executives reveals:
• 33% of respondents believe the election of Donald Trump will have a ‘very positive’ impact on Business Aviation because he is closely aligned with the business benefits of using private jets;
• 47% think he will have a ‘slightly positive’ impact;
• 3% believe it will be negative because critics will use his private jets usage against him.
In terms of why the Business Aviation market will grow this year:
• 36% of industry executives believe it will be fueled by global economic growth;
• 32% say new innovation and technology will make it easier to charter aircraft;
• 27% believe it’s partly because of a growing acceptance of corporations using Business Aviation;
• 25% think it’s because of new membership programs building a bigger base of clients.
When it comes to which regions are the most attractive for the private jet sector:
• 58% of survey respondents said North America;
• 36% said Asia-Pacific;
• 20% believe Europe.
“Donald Trump is the first President of the US to own business jets before becoming elected,” noted Alasdair Whyte, Editor, CJI. “He may split opinions, but our research shows the majority of people in the industry think this will have a positive impact on market growth and there have been increased enquiries from aircraft buyers since the election, particularly for pre-owned aircraft.
“Despite the high level of uncertainty in the world regarding both politics and economics, their findings also reveal that the sector is optimistic about growth this year.
“There are a lot of exciting developments going on to make Business Aviation more affordable and more accessible,” Whyte summarized.
In-Service Aircraft Values & Maintenance Condition
An Asset Insight market analysis conducted on January 31, 2017 covering 91 fixed-wing models, and 1,873 aircraft listed for sale, revealed some important trends on aircraft values and maintenance condition…
Ask Prices for tracked models receded an additional 1.3%, following their previous month’s 1.5% decline. That makes a total decline of 10.7% over the past twelve months.
Medium Jets and Turboprops were actually up 0.6% and 0.8%, respectively, but those nominal gains were offset by -2.3% and -2.8% decreases in Large and Small Jet values respectively.
Inventory Fleet Maintenance Condition
Overall Asset Quality decreased but maintained an ‘Excellent’ rating. The Quality Rating Trendline remained positive, and Maintenance Exposure improved 1.8% (see Table A). Specifically:
• Quality Rating posted a 12-month low figure, decreasing 5.7 AI2 basis points, to 5.336, from last month’s 5.393 on Asset Insight’s scale of -2.5 to 10.
• The tracked fleet’s average Maintenance Exposure (an aircraft’s accumulated/embedded maintenance expense) decreased (improved) to $1.454m from December’s $1.482m.
Maintenance Exposure to Ask Price (ETP) Ratio
Our tracked fleet’s ETP Ratio (an aircraft’s Maintenance Exposure divided by its Ask Price) rose slightly to 52.8% after two consecutive months at 52.4%. 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 25 months.
Large Jets posted the best/lowest figure this month at 44.5%, followed by Turboprops at 46.3%, Small Jets at 57.3%, and Medium Jets at 59.2%.
Large Jets: Retaining their ‘Outstanding’ Quality Rating for the third consecutive month, Financial Exposure also improved over 2.7%. This group offers good value for buyers, while the problem for sellers revolves around the number of assets listed ‘For Sale’ and competitive pressure from new aircraft that OEMs need to sell. Combined, these factors have negatively impacted the group’s Ask Price by more than 15% during the past 12 months – and 2.3% over just the past 30 days. Not surprisingly, the group’s ETP Ratio was negatively impacted, increasing for the fifth consecutive month to reach 44.5%, a 12-month high/worst figure.
Medium Jets: Purchasers took advantage of record low Ask Prices over the past thirty days. Curiously, many buyers focused on aircraft of a lower Quality Rating and higher Maintenance Exposure, perhaps addressing such costs in the actual Transaction Price. Consequently, average Quality Rating has improved for the inventory fleet, as has Maintenance Exposure (posting its lowest/best 12-month figure). While average Ask Prices increased a bit, they still sit only $20k above their 12-month low point. The group’s ETP Ratio is the best it has been during the past six months. In a surprising turnaround, Medium Jets suddenly pose good value. Serious buyers are encouraged to act!
Small Jets: Quality Rating receded to ‘Excellent’ over the past thirty days, primarily due to buyers taking advantage of the value created by high asset quality, low Maintenance Exposure, and below average prices. While the ETP Ratio increased for the third consecutive month, the figure was still below the group’s 12-month average. With good values remaining available, we anticipate actual Transaction Prices to continue experiencing the narrowest differential from Ask Prices among the four groups.
Turboprops: Buyers focused on acquiring higher quality assets last month, thereby creating a 12-month low Quality Rating for the remaining inventory, along with a 12-month high/worst Maintenance Exposure figure. Ask Prices reflect the 12-month average, but the group’s high Maintenance Exposure figure has pushed the ETP Ratio to its highest/worst figure of the past eight months.
While it is important for prospective buyers to examine the maintenance quality of any aircraft under consideration, we believe detailed analytics are imperative with respect to the current inventory fleet. Conversely, sellers need to objectively identify their aircraft’s strengths if they wish to justify the desired price for their asset.
The ability to do so is readily available to both parties. The winner in any transaction will be the one that has invested the time to understand and act on such analytics.