With 35+ years in the aviation industry, Rolland Vincent, president, Rolland Vincent Associates... Read More
Bombardier Challenger Jet
As the Business Aviation community prepares to gather in Orlando, FL for the National Business Aviation Association’s annual convention (November 1-3), the state of the jet sales market is a “hot topic” on many people’s minds. And why not, asks Rollie Vincent…?
Industry leaders at the sixth annual JETNET iQ Global Business Aviation Summit in New York City in mid-September were laser-focused on the issue of business aircraft residual values, which have fallen sharply in the last 12 months.
The proverbial 800-pound elephant in the otherwise jam-packed conference room, residual values are bellwether indicators of current market conditions, and the market today is unmistakably soft. By many indicators and (perhaps most compellingly) recent trends in transaction prices for new and pre-owned business aircraft, the supply and demand situation continues to be very unbalanced.
What Exactly is a ‘Residual Value’?
In the business aircraft world, residual value is the remaining market value of an aircraft at a given point in time. Residual values are influenced by a multitude of factors, some of which have much to do with tangible product features and an aircraft’s maintenance condition and status.
Other factors that affect an aircraft’s residual value have much more to do with the specific competitive landscape - for example, the presence or absence of other aircraft that can perform similar missions and deliver similar customer benefits. Further complicating the residual value calculus are market factors that are typically cyclical in nature – for example, where is the economy in the overall macroeconomic cycle?
In an increasingly global marketplace with highly mobile assets - aircraft that can be re-positioned quickly to operate and/or be sold to buyers in an entirely different part of the world – how do we even measure where a “market” is?
Ah, price! In the classical Marketing 101 course, we are taught about the so-called ‘Four Ps’ (Product, Place, Price and Promotion) of the Marketing Mix. As the theory goes, companies can use the Four Ps as a lens through which they can view the market and organize themselves to design, sell, and deliver a product or service that customers truly value.
In theory, price reflects the intrinsic value of product and brand attributes – for example, the total value of cabin, speed, range, payload, systems, quality, durability, reliability, service and support, and other features – that together define a business aircraft. In practice, determining an aircraft price or residual value tends to be a lot more complicated.
Much like the proverbial 10 economists in a room who espouse at least 11 different forecasts, we can be almost certain that a room of 10 aircraft sales executives and appraisal experts will come up with at least 11 different prices for a particular aircraft. Truth be told, this observation is anything but a criticism. If there is in fact a science to pricing, there is little doubt that it is inexact at the best of times and complicated at any time.
What’s in a Price?
For an aircraft OEM, ‘Price’ can refer to the original list price of a new aircraft, the asking price of a used aircraft, the transaction price at which a sales contract was actually written, or a multitude of other definitions.
In today’s hyper-competitive market, discounting a new aircraft to encourage a sale might be deemed to be necessary to avoid the build-up and the carrying cost of unsold finished goods inventory. No manufacturer in their right mind sets out to build ‘whitetails’. A discount might also be required to protect an OEM from losing a customer to a competitor, or as a tactical lever to protect against an encroachment of a new entrant into a strategic market segment.
With about 40 new business aircraft models competing for perhaps 600-650 new sales in 2016, aggressive discounting can have an immediate impact on the residual value of recently delivered aircraft, creating a deflationary spiral from which market recovery can be difficult. As an example, if a new aircraft contract is written at a 25% discount to list price, and this price is somehow signalled to the market, that aircraft’s residual value may have been unintentionally but effectively compromised.
What customers thought they owned – an aircraft with a re-sale value of $XXm - might suddenly be worth only half of its previous valuation. This drop might all sound very theoretical, but the consequences for aircraft owners, lenders and lessors are anything but.
Earlier this year, a worldwide JETNET iQ Survey of more than 500 business aircraft owners/operators in 60 countries found that almost half of those who made or influenced their organizations’ most recent aircraft purchase had delayed their decision in the prior two years over concerns about residual values (see Chart A).
With almost 150 different models currently represented in the worldwide fleet of 35,000 fixed-wing turbine business aircraft (jets and turboprops), all competing for about 2,200+ whole retail pre-owned sales this year, prices and residual values are a “big deal” to aircraft owners, operators, lenders and lessors.
With 80-90% of sales typically coming from within the existing community of aircraft owners and operators, the trade-in value that resides in their existing aircraft is diminished by the steepening of residual value curves. In the last 18-24 months, many dealers, brokers, lenders and lessors are reporting that the rates of price depreciation have increased to 10-12% per year in the first five years of an aircraft’s service life, up sharply from the low-single digit percentages just a few years ago.
In recent quarters, this change has hit hardest in the large cabin business jet segment, where the gap between the value of a pre-owned aircraft and a new aircraft has grown sharply, despite OEM discounting.
This is creating a situation where many prospective buyers are remaining on the sidelines, discouraged by the step-up cost and opting to wait until values stabilize. On-going quarterly JETNET iQ Surveys confirm that the gap between pre-owned values and new aircraft purchase prices is a significant and growing inhibitor to aircraft purchases (see Chart B).
Used Business Aircraeft Inventory
The good news is that used aircraft for sale are continuing to transact at relatively high levels, no doubt encouraged by lower and lower prices. Whole retail sales of pre-owned business jets have averaged between 150-200 units per month for the last four years according to JETNET records, although there are signs that the rate of change may have recently slowed. We will be watching these indicators very closely over the coming months.
Used jets ‘For Sale’ represented 11.6% of the active fleet at the end of August 2016, according to the latest JETNET records.
Inventory levels appear to be inching upwards after a long, steady decline – an unwelcome sign for anyone looking for residual values to stabilize or even strengthen going forward.
As a rather unique product that delivers time savings (or that in some ways actually ‘creates’ time), a speedy business aircraft continues to have little direct competition for people who know how to capitalize on the benefits of more face-to-face dealings with clients, suppliers and other stakeholders.
For others, the advantages of a business aircraft include the ability to simply get more done – and arrive home faster – than their peers. For the time being, business aircraft prices and residual values continue to slide, and an unprecedented buyer’s market continues. For those considering an entrée into Business Aviation, now is certainly a good time to purchase a new or pre-owned aircraft.
BizAv Activity – North America
August Business Aviation flight activity posted its anticipated Month-over-Month (MoM) increase from July, finishing up 2.0%. Year over Year (YoY), TRAQPak data indicates that August 2016 posted an increase of 3.0%...
MoM, results by operational category were mixed for the month, with Part 91 activity up 4.0%; Part 135 fairly flat at +0.6%; and Fractional activity down -2.3%.
The aircraft categories were up MoM across the board, again led by Large Cabin jet activity. Turboprops also posted a solid 2.3% monthly rise.
Reviewing YoY flight activity (August 2016 vs. August 2015), an overall increase of 3.0% was recorded, topping 250,000 monthly flights for the second time this year.
The results by operational category were mixed, with rises in Part 91 and Part 135, but a slight drop in Fractional activity. All aircraft categories were all positive, led by a 6.1% boost for Large Cabin jets.
BizAv Activity - Europe
According to WingX, there were 74,689 Business Aviation departures in Europe in August 2016, a -0.9% year-over-year (YOY) decline in activity…
Notably, business jet activity fell by -2% (versus the same period last year), largely due to declines in flight activity in Germany, Switzerland and Turkey. Compared to August 2015, there were 750 (-27%) fewer flights in Turkey. Growth was recorded in the UK and France during August, as well as smaller markets like Norway and Belgium.
“The relapse in activity for August is linked mainly to private jet owners flying less, particularly from Russia and Turkey, and heavy jet activity in general fell sharply,” specified Richard Koe, Managing Director, WingX. “There is no doubt some wariness of the elevated terrorist threat, reflected in markedly less activity at major airports…
“There is still some growth in Ultra-Long-Range and Super Mid-Size segments, where aircraft order books are strongest. VLJ and certain turboprops are also continuing to increase activity, especially in Western Europe.”
Whilst jet activity took the brunt of falling demand this month, turboprop activity saw some recovery, with double digit growth in Spain, Greece and Croatia.
Flight activity within Western Europe retained its slight YTD growth trend. Flights from Eastern Europe were 4% stronger this month, but overall activity in Southern Europe declined this year. The main outbound destination from Europe was the CIS, down -6% YOY.
BizAv Activity - Russia
At last month’s Business Aviation Forum in Moscow, Alexander Kuleshov, chairman of the Russian United Business Aviation Association (RUBAA), revealed they’ve been collecting traffic data on Russian Business Aviation activity since 2014…
Figures prepared by the RUBAA for June–normally the busiest month for Russian bizav—show that business jet movements have steadily declined over the past three years, as represented by Table A.
Flights performed by business jets in the region’s busiest destinations, which generate more than 80 percent of traffic (including Moscow, St. Petersburg, Yekaterinburg, Samara, Nizhy Novgorod, Rostov and Sochi) have trended down. The number of business jet flights have dropped as have the number of passengers carried on these flights.
Comparing figures for the first half (H1) of the year, 2014 vs 2016, Kuleshov noticed that the number of flights performed by foreign operators shank by 34%, while those made by Russian companies rose 22%.
In summary Kuleshov noted, “Clearly, there is a general negative trend…and yet the amount of traffic generated by Business Aviation in this country remains rather big.”
Pre-Owned Gulfstream G650 Inventory Dips
The number of pre-owned G650s/650ERs ‘For Sale’ has fallen from a peak of 18 in May to 13, UBS reports. This now equates to 7% of the installed base, below the typical 10% mark for used business jets.
The available inventory of pre-owned Gulfstream G650s has dropped by more than 25%, according to a recent UBS Business Jet Update published in Aviation International News (AIN). The slide in G650s on the market comes as the overall available inventories of business jets stabilize.
Pricing for the models, however, dropped another percentage point in August and is 19% below peak. This puts average pre-owned G650 prices about $10m below that of new G650s.
The past increase in the number of models on the market had raised concerns from analysts about the potential effect on new aircraft sales.
As for pricing, Hagerty Jet Group (HJG), in its recent market update, suggested that the softening may provide opportunity for G550 owners to upgrade. HJG, noting G650 sellers “are struggling to understand this quickly changing market,” added that the asking price at the end of June still appeared 5-10% higher than it should be.
Industry-wide, used business jets ‘For Sale’ represented about 11.2% of the fleet in August, below the average of 13%. Inventories of aircraft five years or younger crept up 1 percentage point to 7% of the installed base in August, while inventories of aircraft between six and 10 years old dropped 2 points to 10% of the installed base. However, inventories of that six-to-10-year range are still skirting near-historic highs, UBS concludes.
JSSI: ‘New Normal’ For BizAv
According to JSSI’s recent Q2 2016 Business Aviation Index, global flight hours during Q2 of 2016 showed growth of 4% over the previous quarter, following the cyclical trend of higher flight hours in Q2 of a given year…
While there was QoQ growth, there was also a -1.2% decline in flight hours YoY, compared to Q2 of 2015, coinciding with a trend JSSI has seen in past presidential election years of a “holding pattern” by corporations waiting to see who becomes the next US president. However, this is also consistent with the ‘new normal’ for flight hours, which is seen in Chart A for overall flight activity QoQ.
After the peak-year in 2008 and subsequent plunge in 2009, there has been a relatively stable period overall from 2012 through 2016.
“Businesses are using private jets in a very disciplined manner today,” observes Neil W. Book, JSSI President & CEO. “…Q2 2016’s flight activity, while slightly up over last quarter and down from last year, is reflective of a flat US economy. We are in a slow growth environment.”
Business Aviation experienced YoY growth in only two markets – Europe and South America. Of the seven regions, four (Asia-Pacific, Europe, Middle East, and North America) saw positive growth over last quarter. Of those four, only North America saw a decrease in utilization in comparison to this time period last year.
The majority of regions have seen some stabilization over the past few years. Africa, however, continues to see a steady decline in utilization since reaching highs in 2011. With five consecutive years of decreasing average flight hours, the African market is showing little sign of recovery.
Q1 saw helicopter utilization hitting the lowest hours since 2011, but in Q2 the hours rebounded to a more normal level. The major contributing factor was the economic downturn in the power and energy sector.
“Flight hours in the large cabin aircraft segment have seen a steady, but gradual decline since Q2 of 2011. After experiencing its lowest first quarter since 2009, Q2 2016 saw more declines hitting all-time lows in average flight hours,” observed Mr. Book. “This is consistent with the current prudent usage of corporate jets. Private aviation is not a frivolous expense, but rather a valuable business tool for an increasingly interconnected global economy,” he concluded.
Hours Matter on Charter Trips
Nearly half of business aircraft charter flights are booked within two days of departure, according to Avinode’s analysis of 18,000 trips over the past 12 months using the company’s SchedAero system…
Avinode found that 19% of the trips are actually booked on the day of travel, while 20% are scheduled just one day in advance. As many as 80% of departing flights were quoted within the preceding 48 hours, and 90% within the previous five days of the travel date.
What significance does this have? Simply, operators who do not provide customer charter quotes within 48 hours of being contacted face the prospect that 80% of these trips are already booked before clients receive a response, Avinode notes.
Meanwhile, 75% of air charter trips departing within the next seven days do not exist as requests yet, and scheduling more than three days in advance is only 40% accurate.
“We were surprised by just how fast-moving a lot of our bookings are,” said SchedAero business manager Johan Sjoberg. “Flight requests are often short-notice in the Business Aviation world, but we didn’t realize that in some cases a matter of hours can make all the difference.
“If charter providers don’t have a quick enough process to quote a trip request, the flight will often have already departed.”
Asia-Pacific Charter Report
According to Asian Sky Group, the Asia-Pacific region is seeing a growth in interest in business jet charter…
The recent Asia-Pacific Business Jet Charter Report, published by Asian Sky Group, attempts to offer a better understanding of what is available in Asia-Pacific, exploring habits of charter users throughout the region.
An Asset Insight market analysis conducted on August 30, 2016 covering 91 fixed-wing models, and 1,981 aircraft listed ‘For Sale’ revealed the following…
Aircraft values managed to reach another record low figure in August, dropping -3.3% to $5.19m. It required a joint effort by Large Jets (down -3.4%) and Medium Jets (down -5.9%) to achieve this reduction, while Small Jets and Turboprops saw a small value uptick.
It will be interesting to see how final Transaction Values compared with Ask Prices once Q3 statistics are analysed at the end of September.
Inventory Fleet Maintenance Condition
Overall Asset Quality remained “Excellent,” while Maintenance Exposure increased slightly. Specifically:
The Asset Insight Quality Rating fell to 5.346 from last month’s 5.366, on our scale of -2.5 to 10, but the figure was still impressive.
Maintenance Exposure (an aircraft’s accumulated/embedded maintenance expense) increased a mere $3k to $1.459m. While this represents the highest/worst figure for the past twelve months, the Exposure amount was only slightly above the historical fleet average of $1.456m, so the news was only marginally negative.
By aircraft sector, the figures were as follows:
Large Jets: ‘Excellent’ asset quality at 5.496 (the best among all groups), albeit 3.1 AI2 basis points worse than last month’s 5.527 figure and down from the Outstanding rating the group achieved during the first seven months of this year; Maintenance Exposure worsened 3.1%, rising from $3.110m to $3.125m.
Medium Jets: ‘Excellent’ asset quality at 5.360 (versus last month’s 5.339), keeping the group in third place among the four sectors; Maintenance Exposure remained unchanged at $1.274m.
Small Jets: Retained second place with ‘Excellent’ asset quality at the lower rating of 5.401, versus last month’s 5.431; Maintenance Exposure improved by a nominal $4k, to $777k, as opposed to last month’s $781k.
Turboprops: ‘Very Good’ asset quality at 5.038, but lower than July’s 5.097 rating; Maintenance Exposure remained virtually unchanged at $563k.
Maintenance Exposure to Ask Price (ETP) Ratio
Our tracked fleet’s ETP Ratio (an aircraft’s Maintenance Exposure divided by its Ask Price) worsened slightly last month, increasing from 54.7% to 54.9% and posting a 12-month high figure for the second consecutive month. Twelve-month low Ask Price for Large and Medium Jets were the primary drivers.
We consider 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 twenty months. By aircraft sector…
Large Jets: The best ETP Ratio among the four groups and, at 39.4%, below the excessive Maintenance Exposure range it crossed into last month with a figure of 40.8%. Ask Price fell nearly $500k to $13.73m from $14.22m – a 3.4% reduction and another 12-month low figure. Since January, Ask Prices for Large Jets have dropped $2.42m – approximately 15%. Sellers have felt the financial pain of devaluation during seven of the past eight months, and the group’s average value going into Q4 appears to be trending downward.
Medium Jets: ETP Ratio degraded for the fifth consecutive month, increasing to 60.7% from 58.4% and registering the group’s second consecutive worst figure for the past twelve months. Since December, Ask Prices have decreased approximately $550k, or 14.4%, to achieve a new record low figure, $3.26m. With few apparent trades during the past thirty days, it would seem that some Sellers are seeking to move their asset before year-end by reducing their Ask Price. Keeping in mind the group’s Asset Quality improvement and stable Maintenance Exposure figure, Buyers should have little trouble locating good values.
Small Jets: The group’s ETP Ratio has been posting figures within a relatively narrow band during the past six months. At 69.7% the current figure is near the group’s 12-month worst/highest Ratio, but Buyers should note that Asset Quality is Excellent and Maintenance Exposure improved a bit this month. With Ask Prices receding by $50k during the past thirty days, good values are available, and careful analysis of each asset is the key.
Turboprops: The ETP Ratio continues to hold second place among the four groups, improving to 43.4% from last month’s 45.4%, while Ask Price rose by $50k, to $1.58m. Ask Prices now equal the group’s 12-month average and while Asset Quality was lower than last month’s figure, Maintenance Exposure remained relatively unchanged. We believe these data points continue to create good opportunities for both Buyers and Sellers.
In last month’s report, we advised that if we take into account the inexpensive, life-extending technical solutions available to aging aircraft owners, the number of new assets being manufactured, and the number of aircraft listed for sale, we are unlikely to see a sustainable increase in the average Ask Price.
That forecast proved all-too-accurate all-too-quickly, with average Ask Prices this month hitting a new all-time low point. However, purchase or sale price is but one factor of an effective value optimization strategy.
An equal, if not more important, component is careful analysis of the maintenance cost exposure the asset is facing during your anticipated ownership period. If you’re a Buyer or a Seller – learn how to justify the value of your aircraft’s asset quality against competing units. The cost to do so is insignificant, literally equating to less than 0.07% of an average turboprop.