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Business Aviation Market Summary - November 2016

What are the latest business jet market trends and analyses as 2016 year-end bears down upon us?

Rolland Vincent   |   3rd November 2016
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Rolland Vincent Rolland Vincent

With 35+ years in the aviation industry, Rolland Vincent, president, Rolland Vincent Associates...
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An expression widely attributed to the Chinese is “may you live in interesting times”, notes Rolland Vincent, Editor, Market Indicators. Well, November 2016 will have no shortage of interesting moments, beginning with NBAA-BACE 2016 convention in Orlando.

Expected to attract some 27,000 participants, NBAA-BACE2016 is easily the largest single gathering of Business Aviation leaders in the industry. This will be followed almost immediately by the US Presidential election on Tuesday, November 8, an election that could have profound impacts on the geo-political landscape and, by association, on Business Aviation.

Sprinkle in Brexit tensions, BRIC crumbling, oil price gyrations, migrant crises, commodity price and emerging market weaknesses, and all is far from well in the environment that Business Aviation operates within.

Results from the recently completed Q3 2016 JETNET iQ Survey, completed in September 2016 with more than 500 respondents from 63 countries, reflect a deterioration in market sentiment amongst owners and operators of fixed-wing turbine-powered business aircraft. Overall, about 40% of owners/operators are feeling optimistic about where the Business Aviation industry is in the current business cycle, led by respondents in North America (US & Canada), and Europe.

Business Aviation Market Optimism By Region

Market sentiment is weakest in Asia Pacific, Africa, Middle East and Russia (the so-called “Rest of World” region), where pessimists outnumber optimists by almost 3-to-1, a dramatic shift in just the last few quarters. US-based business aircraft salesmen have found that they can, for the most part, keep their passports locked up in the safe for the time being as they focus on near-term opportunities State-side.

Waning confidence among Large Jet owners/operators is one of the most significant changes that has been introduced into the market, especially in the last three quarters). Market sentiment amongst Large Jet owners/operators (defined as aircraft in the Challenger 605/Falcon 2000 families and larger) has sharply lowered since the beginning of 2016.

Business Aviation Market Optimism By Aircraft Type

‘Robust’ Markets

The US and Europe, along with China and Mexico, appear to be the most robust aircraft sales markets today, although ‘robust’ may be quite a misnomer when viewed in comparison to sales achieved in these same geographies in recent years.

Lowered expectations for economic growth as measured by changes in real (inflation-adjusted) GDP have dampened aircraft buyer enthusiasm at the same time as owners have been sharply hit by rapidly declining aircraft residual values.

These have widened the gap that prospective buyers/sellers need to close to facilitate aircraft trades, where a good chunk of the currency has traditionally been locked in the value of the used (trade-in) aircraft.

With residual values falling at rates of more than 10% per year across a variety of models, many current owners (as if they needed another reason) are not surprisingly sitting on the side-lines and continuing to operate (and often upgrade) their current aircraft.

While this should be relatively good news for Maintenance, Repair and Overhaul (MRO) providers and other STC owners that offer product upgrade and enhancement services, the fact is that price competition is intense for the business that does materialize.

Although no one seems to like to mention the ‘D’ word, it seems very clear to us that the Business Aviation industry has collectively and inadvertently slipped into a pattern of deflationary pricing, an unsettling condition in which prices have yet to find a floor. The glut of new production and pre-owned inventory is an industry-wide phenomenon that is like a falling tide that lowers all boats.

Aircraft Residual Value Declines

Getting to the Root

So, what is at the root of declining aircraft residual values in the first five years of aircraft ownership? Respondents to the Q3 2016 JETNET iQ Survey believe that a variety of factors are in play. Most importantly, they point to slowdowns in the economy and changes in fortune of individual businesses, which together are believed to account for about 25% of the decline.

Another 25% of the decline is perceived to be due to the plethora of aircraft models that are available ‘For Sale’, as well as OEM over-production and deep discounting policies to avoid white-tails (unsold finished goods inventory).

Other factors at play include aging and technologically-outdated aircraft, a glut of late-model pre-owned inventory (including highly-utilized former fractional aircraft), and price pressures to move unsold aircraft as the 180-day limit for like-kind exchanges nears.

Oversupplied markets, soft underlying macroeconomic fundamentals, geo-political tensions in (who wudda thunk?) the United States and the United Kingdom… yes, these truly are “interesting times” for the Business Aviation industry. With more to come.

As the good captain often says, it is wise to keep your seatbelts fastened at all times when seated, and sometimes it appears even when you are standing!

MI www.rollandvincent.com


Jetcraft 2nd Annual BizAv Forecast

Ongoing challenges are expected in emerging markets, with continued North American dominance, according to Jetcraft’s second annual Business Aviation market forecast. Gulfstream is projected to top OEM revenues with Pratt & Whitney Canada taking top spot for engine OEMs…

Jetcraft’s second annual Business Aviation market forecast calls for 7,879 unit deliveries representing $248bn in revenues (based on 2015 pricing) to be realized over the next 10 years. The impact of macroeconomic trends are also taken into account, such as the impact of a slowdown in wealth creation, the migration of ultra-high net worth individuals (UHNWIs) from emerging market economies and the fluctuation of oil prices upon Business Aviation throughout the coming decade.

Overall, this year’s predictions are lower than last year’s report in terms of deliveries and revenues.

Yet, despite challenges, there are bright spots on the horizon led chiefly by continued growth of the North American market.

“Last year, we highlighted the unpredictability of our industry since 2008. The impact of global events during the past 12 months have certainly continued this trend,” said Jetcraft’s Chairman Jahid Fazal-Karim.

2021: A Peak Year

This year Jetcraft predicts a marked decrease of 10% in unit deliveries and 9% in revenues from last year. This is largely due to the continued waning influence of emerging market economies as consumers of Business Aviation.

The forecast sees a muted business cycle recovery peaking in 2021, with delivery of 932 units representing $29.4bn in revenues, before beginning a three-year drop as part of a softer downturn. The projected downturn, however, will be less severe as compared to last year’s forecast.

Key Forecast Findings

  • At 30.6%, Gulfstream will secure the highest revenue market share over the forecast period primarily as a result of extending its family of large aircraft.
  • Cessna will regain market leadership in unit deliveries securing 24.4% of all new aircraft deliveries over the forecast horizon.
  • Pratt & Whitney Canada will replace Rolls-Royce as the market share leader among engine OEMs.
  • Honeywell will be the dominant player among avionics OEMs securing a 45% revenue market share.
  • As a new entrant, HondaJet will provide an incremental contribution to deliveries in the very light jet segment, as its delays in securing certification have led to customer back-up.

Effects of the Used Markets?

While used business aircraft inventory is lower than the historical average level of 13%, there is little evidence of an increase in residual values for 5-year old aircraft (a key benchmark due to the typical ownership period in North America). This has led to lags in purchasing and a slowing of the overall market.

Despite its predicted hurdles, the Jetcraft forecast remains optimistic toward the future of Business Aviation.

MI www.jetcraft.com/knowledge/market-forecast

BizAv Activity – Europe

The latest WINGX Advance monthly BizAv monitor indicates there were 76,983 Business Aviation departures in Europe in September, representing a 1.4% Year-over-Year (YOY) growth in activity.

Specifically, growth was recorded in business jet activity with flights up 4% YOY, offsetting declines in turboprop and piston activity. The UK showed the most impressive growth with flights up 5%. On average there were 150 Business Aviation flights a day leaving the UK during September.

The busiest country in September was France, generating 19% of all European departures. Although the YOY trend in France was flat, the Year-to-Date (YTD) trend went up 3%, resulting in an additional 350 flights per month in 2016.

“September completed a positive Q3, adding to the growth in Q2 and offsetting the bad start to the year so that overall trend is now in line with 2015,” summarized Richard Koe, Managing Director, WINGX.

“September was unusually strong, especially for business jet charters. The UK and Spain got a big share of the growth with the tourist season extended by the long, late summer.

“Specifically, VLJ charters played a big role in supporting this demand. Aggregate activity was also boosted by new deliveries into super midsize fleets.”

On the downside, the major markets in decline this month were Germany and Switzerland. Flights within Germany were down -8%. Overall, flight activity within Western Europe was flat this month, as opposed to some growth coming in from Southern and Eastern Europe (although countries such as Turkey and Russia continued to decline).

MI www.wingx-advance.com

Private Flying To Pick Up in 2017

Business Jet Traveler recently released results from its 2016 Readers’ Choice Survey, which indicated that 37% of those who fly privately expect to increase their time in the air in the next year and another 54% expect to fly at least as much.

MI www.bjtonline.com


Gulfstream Model Range Price Lowdown

Within the Hagerty Q3 2016 Gulfstream Quarterly Market Update, James Hagerty notes there is so much utility value in the used business jet market that it should be attracting more first-time buyers and upgrade opportunities than ever before…

Gulfstream G150 jet

Like many other capital assets in the Great Recession, values of coveted business jets reverted to correction territory following an overheated used aircraft sales market. A used GV that sold for $45m in 2008 is today worth $12m. Today’s acquisition prices offer unprecedented utility-value for first-time and upgrade buyers. The increased utility is attracting the “smart-money” buyers who are engaging opportunities to take advantage of historically high returns from historically low prices.

Using its Gulfstream expertise, Hagerty Jet Group has applied its market research and analysis to demonstrate what aircraft are available to buyers with $6m, $12m and $18m budgets. Think of “What You Can Buy” in terms of price for achieving operational objectives and return-on-utility. (All prices assume fleet-average time aircraft with typical equipment and interiors and enrolment on engine programs.)

What Can I Buy for $6m?

2009-2010 Model G150 (Original Sale Price New - $12m): Offering a 2,900nm range, there have been 120 G150s built since 2007. The interior can accommodate up to seven passengers, and the cabin has a dropped floor to offer 5.75 ft height. The G150’s value comes from its operating costs (Variable Operating Cost around $1,900 per hour.

The G150’s main competitors include the Lear 60XR and the Hawker 900XP which are no longer in production. Gulfstream announced in September that the last G150 has been ordered and will deliver mid-2017.

2008 Model G200 (Original Sale Price New - $19m): Built between 2000 and 2011 the G200 fleet comprises nearly 250 units. Offering a range of 3,200nm, its stand-up cabin (6.2ft) can accommodate 8-10 passengers comfortably. Although considerably shorter than traditional Gulfstreams the G200 fuselage is closely comparable in diameter to the larger models, but has a drop down floor and a baggage compartment accessed externally.

The Variable Operating Cost for the G200 is around $2,500 per hour. The key value in the G200 comes from its larger cabin and better range over the G150, but it has been criticized for its lack of short field performance.
Gulfstream G200

2000 Model GIV-SP (Original Sale Price New - $30m): Built between 1986 and 2003, the GIV-SP has been one of Gulfstream’s most reliable and capable aircraft, offering a transatlantic range of 4,200nm. The three-zone cabin can accommodate up to 16 passengers with forward and aft galley configurations.

Variable Operating Costs are estimated at $3,900 per hour. The value in the GIV-SP is the cabin and performance capability of the aircraft, while the operating costs and maintenance are the hardest pills to swallow for most potential buyers coming out of smaller airplanes like Learjets or Citations.

What Can I Buy for $12m?

2007 Model G450 (Original Sale Price New - $35m): The G450 is a current production aircraft that distinguishes itself from the previous GIV models with upgraded EASy avionics found in the G650 and G550. Gulfstream has delivered 350 of these aircraft since 2003. Lighter avionics and Digital Engine Controls increase the range to 4,400nm.

The three-zone cabin accommodates up to 16 passengers with forward and aft galley configuration options. Variable Operating Costs are similar to the older GIV-SP at $3,700 per hour. The G450 is a very capable aircraft with transatlantic range and comfort.

2002 Model GV (Original Sale Price New - $40m): There were nearly 200 GVs, built between 1997 and 2002, with a range of 6,500nm. The GV still boasts longer range than any of its competitors. The GV does everything a GIV-SP can do, but better. It flies farther, faster, higher and more efficiently. Variable Operating Costs are slightly higher on the GV at $4,200 per hour which is mostly attributable to costly engine maintenance. The three-zone cabin in a GV can accommodate up to 18 passengers plus an optional crew rest area.

The GV presents a tremendous utility value in today’s market, particularly for its versatility and cabin. The GV does everything better than any other aircraft in the $12m and below category. Furthermore, the GV has already taken most of its depreciation and prices are first to flatten in today’s market with less than 4% of the fleet ‘for sale’.

What Can I Buy for $18m?

2003 Model G550 (Original Sale Price New - $44m): For the first time in history, G550 prices have dropped below $20m. A current production aircraft, a used G550 offers tremendous capability with current generation technology, and there are more than 550 aircraft in the fleet since deliveries began in 2003. The airframe and engines haven’t changed in 14 years apart from cabin interior improvements.

The G550 is equipped with the current generation EASy avionics which allows for easier integration of upcoming avionics requirements. Aerodynamic improvements and lighter avionics give the G550 an additional 250nm range over the GV, in turn lowering the Variable Operating Costs to $3,800 per hour.

Gulfstream G450 jet

2011 Model G450 (Original Sale Price New - $35m): Since the G450 has lost nearly 50% of its value in less than 5 years, a lightly used G450 offers a lot of value for a buyer who wants a newer airframe but doesn’t want to pay new pricing. A used G450 costs even less than a new G280 which has considerably less range and cabin.

General Dynamics has noted low demand for the G450 and has subsequently reduced production and lowered pricing to attract buyers to this model.

MI www.hagertyjetgroup.com


US Market ‘Attractive’ for Finance

New research from Florida-based Global Jet Capital reveals 90% of Business Aviation professionals from around the world believe the US market is currently attractive for finance companies, with 59% saying it’s ‘very attractive’…

Just 4% of Business Aviation professionals globally describe the US market as ‘unattractive’, according to Global Jet Capital’s research. Some 200 industry professionals were interviewed, and the majority anticipate the US as well as the Canadian market will become even more appealing to Business Aviation finance companies over the next three years.

While almost six out of ten (59%) believe this about the US market, and only 5% think it will become less attractive, the corresponding figures for the Canadian Business Aviation market are 42% and 7% respectively.

Dave Labrozzi, COO, Global Jet Capital observed, “A number of industry reports predict a long-term increase in the number of new business jet deliveries and our findings clearly reflect this optimism.”

Global Jet Capital’s research revealed 51% of Business Aviation professionals expect financing the purchase of medium sized jets to become more attractive compared to 13% who think it will become less appealing, and the corresponding figures for large jets are 48% and 18%.

MI www.globaljetcapital.com


UBS Shows Improving Bizjet Market…

Improvements in the small-cabin jet market drove up the latest UBS Business Jet Market Index, the analyst firm said…

Private Jet

The UBS Business Jet Market index (based on industry surveys) measures perceptions of market conditions on a scale of 0 to 100, with the higher values reflecting improving conditions. The new index reached 34, a 10% jump from the previous survey and up from the low of 29 in May.

The light business jet market showed the greatest improvement, up 34% from the previous survey. The large-cabin jet segment also improved, by 3%, but with an index of 28 it still trails the midsize jet index of 31 (that ranking for midsize jets declined by 5%).

Fueling the improved index was a strengthening of consumer interest (+11%), pricing (+14%) and willingness of dealers to increase inventory (+9%). The index indicated ongoing concerns about the weakness in emerging markets, with large-cabin business jets expected to be the most affected.

MI www.ubs.com


In-Service Aircraft Values & Maintenance Condition

Values for tracked business aircraft models managed to post a second consecutive record low monthly figure during September, dropping an additional 1.0% to $5.14m, notes Asset Insight, Inc…

Only Small Jets gained ground, recording a 1.3% monthly increase. Large Jets decreased -1.9% to a 12-month low figure; Medium Jet prices fell -0.4% to post a new record low, and Turboprops lost -1.4%. All values were down in Q3 vs. Q2, with average Ask Prices decreasing -7.8%. Large Jets were off by -9.5%, Medium Jets by -8.5%, Small Jets down -0.8%, and Turboprops off by -1.8%.

Private jet and turboprop Maintenance ExposureInventory Fleet Maintenance Condition

Overall Asset Quality remained ‘Excellent’, but Maintenance Exposure registered its highest/worst figure for the past twelve months. Specifically:

  • The Asset Insight Quality Rating improved to 5.361 from last month’s 5.346, on Asset Insight’s scale of -2.5 to 10. However, the improvement still left the inventory fleet’s Quality Rating a bit below last quarter’s figure of 5.377.
  • Maintenance Exposure (an aircraft’s accumulated/embedded maintenance expense) worsened to $1.475m, to post a 12-month high/worst figure and an increase of 1.4% since last quarter.

By aircraft sector, the figures were as follows:

  • Large Jets: ‘Excellent’ asset quality at 5.439 (second-best among the four groups), but 5.7 AI2 basis points worse than last month’s 5.496 figure and down 12.6 AI2 basis points since last quarter. Maintenance Exposure worsened from $3.125m to $3.184m – a 12-month high figure and an increase of 2.8% since last quarter.
  • Medium Jets: ‘Excellent’ asset quality at 5.340 (down 2.0 and 1.8 AI2 basis points from last month and for the quarter, respectively) keeping the group in third place among the four sectors; Maintenance Exposure worsened by $13k to $1.287m – a 12-month high figure that was also slightly worse than last quarter’s $1.281m.
  • Small Jets: With an ‘Excellent’ asset quality rating, the group earned the top spot for the first time at a rating of 5.475, versus last month’s 5.401 and last quarter’s 5.433; Maintenance Exposure also improved, decreasing $13k to $764k for the month, and by $5k for the quarter.
  • Turboprops: ‘Very Good’ asset quality at 5.115 and an improvement over last month’s, and last quarter’s figures of 5.038 and 5.074, respectively. Maintenance Exposure improved to $553k, decreasing by $10k, while remaining virtually unchanged since last quarter.

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) remained unchanged at 54.9%. Unfortunately, that also represents the 12-month high figure and a slight worsening over last quarter’s 54.0% Ratio.

Twelve month low Average Ask Price was the primary driver, led by a 12-month low figure for Large Jets and a record low figure for Medium Jets. Asset Insight considers any ETP Ratio over 40% to represent excessive Exposure in relation to Ask Price, and the tracked fleet’s figure has been above 40% for the past 21 months.

  • Large Jets: Posted the best ETP Ratio among the four groups but, at 40.8%, it was above last quarter’s 38.3% and equaled the sector’s worst Ratio for the past 12 months. Once again Large Jets entered excessive Maintenance Exposure territory. Average Ask Price has dropped 9.5% from last quarter and 16.6% since the start of this year, and Asset Insight’s analytics indicate the downward pricing trend is likely to continue.
  • Medium Jets: ETP Ratio has now degraded for six consecutive months, increasing to 61.9% from 60.7% and registering the group’s third consecutive worst figure for the past twelve months. Since December, Ask Prices have decreased approximately $560k, or 14.7%, and at $3.25m the sector posted a second consecutive record low figure this month. With Asset Quality running a little above the group’s 12-month average, Asset Insight continues to believe Buyers should have little trouble locating good values.
  • Small Jets: Although this sector has been consistently posting the highest ETP Ratio, Asset Insight believes Buyers should be able to identify good values for two reasons:
    - First, the sector’s Asset Quality just posted a 12-month peak figure (the highest rating among the four sectors); and
    - Second, Maintenance Exposure is only slightly above the 12-month average.
    While pricing is just below the group’s 12-month high, this only reflects the quality of available assets. Careful analytics should allow Buyers to create good values.
  • Turboprops: The sector continued to post the second-best ETP Ratio. At 43.9%, the figure represented an improvement over last quarter’s 46.1% and is slightly better than the sector’s 12-month average. With Ask Price below the group’s 12-month average and Asset Quality above the 12-month average, Asset Insight thinks Buyers and Sellers should be able to find common ground.

Exposure to Price Ratio Jets and TurbopropsMarket Summary

The final three months of each year traditionally represent the largest number of quarterly transactions. Accordingly, Sellers that are considering holding on to their aircraft hoping for a higher price should keep in mind that prices continue to trend downward.

One firm indication is this month’s record low average Ask Price figure, but there are numerous other factors conspiring against a near-term price hike, such as the number of aircraft in the used inventory and the pricing compression created by new aircraft trading values compared to their published list price.

Think carefully about the price you will accept if you have a jet for sale. As a Buyer, make certain the bargain you are pursuing does not make you the aircraft’s unintentional final owner. Rest assured that a few of those will be created during this year’s sprint to December 31.

MI www.assetinsightinc.com

Read more about: JetNet | Used Aircraft Sales Trends | Business Aircraft Finance | New Jets to Market | Global Markets

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