With 35+ years in the aviation industry, Rolland Vincent, president, Rolland Vincent Associates... Read More
Bombardier Business Jet
Rising tides lift all boats, and a falling tide lowers all boats, notes Rollie Vincent, Editor, Market Indicators. Up until 2015, however, the large cabin business jet segment seemingly defied the laws of gravity by growing in an otherwise declining market. Not anymore, but what’s the impact on the overall market?
The well-documented ‘bifurcation’ was supported by a rapid expansion of wealth creation, emerging market demand, strong commodity prices, and an enticing array of shiny new aircraft to choose from.
For those who have been around for more than a few years, and experienced first-hand the cyclicality of business aircraft markets, there is little doubt that some of the shine has surely come off of the previously gleaming hardware.
Pre-owned business jets and business Turboprops for sale reached 11.7% and 8.3% of their respective worldwide fleets at the halfway mark of 2016, up from 11.2% and 8.0% one year ago. JETNET records suggest that there were 2,220 whole retail pre-owned business jet transactions in the 12-month period through July 31, 2016, a solid performance given the soft market conditions, down 2.3% Year-over-Year (YOY). Most of the YOY softening was due to a particularly weak performance in July, with worldwide jet transactions off 36% from a year ago, and marking the lowest sales levels for the month since 2009.
With inventory ‘For Sale’ trending upwards, and asking/transaction prices continuing to slide, used jet sales are outpacing new business jet deliveries by 3.15-to-1, according to JETNET and GAMA records.
With the exception of July 2016, the volume of pre-owned transactions has remained robust, although prices and residual values continue to fall. According to JETNET records, average asking prices in H1 2016 for all jets with price information were 11% lower than for the same period last year, without accounting for any changes in the mix of aircraft in each group.
Although new aircraft production/delivery rates are beginning to slow, there are many indicators suggesting that the market remains oversupplied for the current level of new aircraft demand. Discounting of new production models is reportedly widespread, especially for models that are nearing the end of their production lifecycles, creating a domino effect that is compressing prices and residual values in adjacent and lower-priced segments.
As we have noted in prior Market Indicator reports, we are clearly in a jet buyers’ market, with exceptional quality aircraft available at prices that offer unsurpassed value-for-dollar.
With few exceptions (most notably, the G650/G650ER and Pilatus PC-12 NG), it would appear that value-priced new aircraft can be found in virtually all product segments. Price discounting, overtrades, and other incentives to sell factory-new aircraft are like an incoming tide that is lowering all boats.
With most of the OEMs having a public ownership structure, pressures have become intense to demonstrate a commitment to shareowner expectations for higher profit margins and quarter-over-quarter performance improvements. In 2016, this has already led to initial decisions to slow production rates and lower investor guidance for unit deliveries at some of the OEMs.
We expect more of the same through the remainder of this year and next.
GAMA Q2 2016 new aircraft shipments report reflected a soft market across all categories (fixed- and rotary-wing). Business jet, business turboprop, and piston aircraft shipments were down 4-5% in H1 2016 versus the same period last year.
Recognizing that shipment data are mostly lagging indicators of past order activity, we note that aircraft manufacturer book-to-bill performance was below 1.0 for the industry in H1 2016, implying backlog erosion. Based on regulatory filings, the ‘Big 5’ OEMs (Bombardier, Dassault, Embraer, Gulfstream and Textron) collectively had about $US36bn of firm orders in backlog at the end of H1 2016, which was down 3% YOY.
Based on OEM financial reports and our own estimates (to fill in gaps in reporting year-to-date), backlog values have increased at Textron Aviation, stayed stable at Bombardier Business Aircraft, but slipped somewhat at Embraer Executive Jets, Dassault Falcon, and Gulfstream since the beginning of 2016.
Compared to pre-2008 crisis conditions, we note that there is now less distinction amongst business aircraft size categories in terms of available inventory for sale.
Large Cabin and Long Range Jet categories have been the absolute darlings of the market until recently, with very limited availability of aircraft in these segments until the onset of the worldwide financial crisis in 2008. Collectively, inventory Jet ‘For Sale’ has now increased into the 9-12% range for Large Cabin business jets, with the Ultra Long Range category (at 8.7%) continuing to have the least availability at the top of the market.
For the time being, jet buyers should rightly feel that they are in a position of strength in an aircraft transaction negotiation, whether for a new or pre-owned jets for sale. This pendulum will begin to swing more towards a balance as OEMs individually and collectively take actions to align their new aircraft production and delivery rates with the level of sustainable demand.
To some, this will suggest that flat is the new up, at least for the next few years of new business jet deliveries, although newer models such as the Challenger 350, Citation Latitude, Embraer Legacy 450/500, Falcon 8X, Gulfstream G500 and Pilatus PC-24 are expected to command an increasing share of the available market.
But there is little that is flat about a cyclical market, and we should therefore expect little to remain unchanged for long. Ladies and gentlemen, for your safety and comfort, please fasten your seat belts and remain seated – turbulence may occur at any time.
BizAv Activity – North America
North America’s July 2016 flight activity surprisingly fell -1.7% Year-over-Year, compared with July 2015, and -2.1% compared with June 2016, according to ARGUS…
Results by operational category reveal a mixed picture when comparing July Business Aviation flight activity with June.
Part 91 activity was down -5.0%; fractional saw a 2.7% uptick; and Part 135 on‐demand charter recorded a modest increase of 0.5%. The aircraft categories were down month over month across the board, however.
YoY Flight Activity
Reviewing Year-over-Year flight activity (July 2016 vs. July 2015), TRAQPak data indicates that July 2016 posted a decrease of -1.7%; marking the second YoY decrease in 2016.
The results by operational category were lower across the board, while all of the aircraft categories were lower, too, with the exception of large jets.
Bizav Activity - Europe
Flying in Europe climbed 1.9% to 85,685 Business Aviation departures, according to WingX Advance. This marks the largest monthly gain so far this year in Europe, taking the year-to-date trend to -0.2% versus a year ago.
Europe’s busiest market, France, did not disappoint, as business aircraft departures there rose 11% YoY and YTD activity is up 4%, averaging 389 new flights per month.
Flight activity also increased in Italy, Spain and Switzerland, while no obvious Brexit impact on the UK could be seen with overall activity flat last month.
Business aircraft flying in Germany, however, slumped -7% and is down -3% YTD. The failed coup attempt in Turkey resulted in flight activity falling -17% and -12% YTD. There also was no sign of recovery in the Russian market, and Middle East arrivals to Europe slowed, though North America-inbound traffic from Europe increased.
“This was the most encouraging month of 2016, with 2% YoY growth in peak season activity bringing the activity level close to where it was pre-2009,” summarized WingX managing director Richard Koe. “Obviously the Euro Championships gave the market a boost, especially in France, but activity trends in Western Europe have also apparently ridden the impact of Brexit and recent terrorist attacks. The recent comeback in activity is clear in most business jet segments, particularly in very light jets.”
US BizAv Turbine Accidents Drop
The number of US-registered business turbine-aircraft accidents fell by five during the first six months of 2016, although fatalities were up by four, according to data from Robert E. Breiling Associates.
US bizjet and turboprop accidents totaled 16 from January through June, notes Molly McMillin, Aviation Week. That’s down from 21 for the same time a year ago, the report said. Of those, four were fatal accidents, killing 13 people, up from nine fatalities during the same time a year ago. Meanwhile, the number of incidents during the first six months of 2016 totaled 40, compared to 61 in the first six months of 2015.
Accidents involving business jets used for corporate and executive travel fell from three a year ago to one in 2016. Jets used for commercial and air taxi use fell from two accidents to one in 2016, while accidents among jets used for private and business purposes rose from one to three, including one fatal accident in 2016.
Turboprops used for commercial and air-taxi service recorded six accidents in 2016, down from seven a year ago. Five of the accidents, including two fatal accidents with nine fatalities, involved turboprops used for private and business purposes. Meanwhile, turboprops used in corporate and executive, public and government, fractional, manufacturing and other uses recorded no accidents.
Non-US-registered business jets were not involved in any accidents during the first six months of 2016, an improvement from five in the first half of 2015. Turboprops were involved in 18 accidents in the first half of this year, including seven fatal accidents with 26 fatalities. That is down from 19 turboprop accidents in the same time a year ago, including six fatal accidents with 38 fatalities.
In the first six months of 2016, total worldwide Business and General Aviation avionics sales amounted to more than $1.1 billion, reports AEA, representing a -6.5% decrease in YoY sales compared to the first six months of 2015.
Sales during Q2 2016 were more than $549m, -9.3% less than Q2 2015 sales of over $605m.
Of the more than $1.1bn in sales YTD in 2016, 54.3% (more than $605m) came from forward-fit sales (avionics equipment installed by airframe OEMs during original production). By contrast, the retrofit market (avionics equipment installed after original production) amounted to 45.7% of sales (more than $509m).
According to the companies that separated their total sales figures between North America (US and Canada) and other international markets, 66.8% of sales YTD occurred in North America, while 33.2% occurred internationally.
“With so many new and innovative avionics products introduced to the general aviation market in the first half of the year, it is disappointing to see decreasing sales figures compared to the first six months of 2015, particularly in the retrofit market,” said AEA President Paula Derks. “The lower sales figures are somewhat surprising given the fact that the deadline to equip aircraft flying in US controlled airspace with ADS-B Out avionics is only 40 months away, and the fact that we have seen a slight uptick in the ADS-B equipage pace this year.
“It will be interesting to see future sales reports following the recent AirVenture Oshkosh event that brought even more avionics products to market, along with the FAA's ADS-B Rebate program expected to begin later this year.”
The dollar amounts reported (using net sales price) includes all Business & General Aviation aircraft electronic sales, but excludes repairs and overhauls, extended warranty or subscription services.
AsBAA – Does Brexit Matter?
Does Brexit Matter for the corporate jet owners and lessors in Asia? While opinions vary significantly, following are some tentative thoughts from Asian Business Aviation Association (AsBAA).
While it is too early to reach any definitive conclusions in predicting the outcome of Brexit negotiations, AsBAA identified the following issues as relevant to Asian corporate jet owners and lessors in the wake of the Brexit vote…
Contracts: In many aircraft financing and leasing transactions, there is no nexus to the UK, other than the choice of English law to govern the transaction documents. While the substance of English contract law will not be affected by a UK withdrawal from the EU, such contracts may have references to EU Regulations, EU Directives or EU Sanctions. As negotiations regarding the UK’s exit from the EU evolve, it will become important to review the interpretation provisions of financing and leasing agreements and identify references to EU law for closer examination.
AsBAA anticipates that English law will continue to remain a sensible choice for commercial parties in corporate jet financing and leasing.
Cape Town Convention: Last year, the UK Government ratified the Cape Town Convention and designated it as an EU Treaty pursuant to the European Communities Act 1972. Following the UK’s ratification of the Cape Town Convention, this was extended to the Cayman Islands through the implementation of local legislation.
While the legal effect of the UK’s EU treaty obligations following an exit from the EU are uncertain, given that the UK Government and the Cayman Islands have implemented secondary domestic legislation in respect of its Cape Town Convention obligations, AsBAA expects that the rights and protections afforded under the Cape Town Convention will not be affected by the Brexit referendum result.
Ownership: The Cayman Islands and British Virgin Islands (BVI) are jurisdictions of choice for ownership of corporate jets, offering creditor friendly, cost effective, low-risk structures in aircraft acquisition, financing and leasing. While the BVI and the Cayman Islands are Overseas Territories of the UK, they have their own separate legal systems and are not directly subject to EU law.
At this early post-Brexit stage, AsBAA does not anticipate that BVI or Cayman Islands law will be directly impacted by the departure negotiations between UK and the EU.
In fact, the BVI and Cayman Islands’ robust legal framework and political stability provides certainty to financiers and borrowers, and are expected to continue to maintain their positions as leading international finance centers for corporate aircraft ownership, financing and leasing.
Access to UK & Europe: Non-EU nationals and corporate aircraft registered outside of the EU do not have automatic access to the internal EU aviation market, and the UK leaving the EU is unlikely to change this. However, the UK’s exit from the EU may lead to restrictions being placed on corporate jet owners or lessees looking to fly between the UK and an EU country.
Brexit negotiations will need to address continued access either by signing up to bilateral agreements with the EU or with individual countries, or by joining the European Common Aviation Area (ECAA). For non-EU registered private aircraft travelling between the UK and the rest of the EU, post-Brexit changes will need to be monitored to flag any changes to the treatment of eligibility of aircraft for temporary importation and variation on fees including VAT and tariffs on imports.
Outside of Europe, the UK has operated under the EU-US Openskies agreement. The unrestricted access between the UK and US aviation markets is important, and the UK will be sure to negotiate continued unfettered access to the US as part of Brexit.
Opportunity: Some believe that the UK’s exit from the EU would give the UK more freedom to re-evaluate its approach to regulatory red tape in Business Aviation.
For many in Asia, the market volatility triggered by the Brexit referendum signifies opportunity. In the short-term, Asia has already seen an increase in private jets being chartered to London as HNWIs and corporate investors take advantage of the weakened pound, buying luxury goods and London property.
The spotlight continues to focus on growth in Asia, particularly amidst the political unpredictability of Brexit as well as the upcoming US presidential elections.
Watch this space: The Asian business jet market is in a good position to ride the wave of Brexit, though if there is one lesson that the Brexit referendum has imparted, it is to prepare for the unexpected. As the UK’s exit negotiations unfold in the months and years to come, it is vital for those in the Asian corporate jet industry (and others globally) to continue to monitor and assess the evolving impact of UK’s exit from the EU.
Teal Group Business Aircraft Briefing
The global business aircraft market remains dynamic with substantial opportunities (and pitfalls) for suppliers and customers, reports Teal Group. Aircraft variants and their associated engines vie for success in a difficult marketplace characterized by demanding customers and (in some segments) serious overcapacity…
Teal Group's Business Aircraft Briefing offers a comprehensive look at the market and where it is headed. An assessment of the OEMs and new product development prospects along with a forecast (including assumptions and segment details) are complimented with Teal’s quantitative market forecast covering all jet and turboprop business aircraft, and their associated engines.
Among the key findings within the briefing:
Business aircraft were hit harder by the economic downturn than any other aerospace market. After record growth in 2003-2008, the market fell by 29% (in value of deliveries) between 2008 market peak and 2012.
The market's 2008-2012 decline was typical of a cyclical downturn. Yet these top-line numbers understate the pain felt by a large part of this industry. The top half of the market (jets costing $26m and above) actually grew through the 2008-2012 downturn, with deliveries rising by 0.3%. The bottom half (jets costing $4-26m) fell by a catastrophic 56%. The market has never seen bifurcation like this in any previous downturn or growth period.
The market drop last year reflects weakness in the top half of the market. The bottom half actually grew. This represents an unwelcome form of market convergence.
Teal’s forecast calls for another drop of -5.3% this year, driven down by top half weakness. This in turn has been driven by low oil prices and weak emerging markets. Right now, given macroeconomic and geopolitical uncertainty, Teal believes it is best to maintain a conservative outlook, and its forecast calls for just modest, single-digit growth through 2019, with a faster (but still historically modest) growth rate in the next decade.
An Asset Insight market analysis conducted on July 29, 2016 covered 91 fixed-wing models, and 1,973 aircraft listed for sale. It revealed the following…
With very few exceptions, transaction values continue to demonstrate that aircraft are depreciating assets. Indeed, values have dropped so far, that nearly half of the aircraft tracked are registering a Maintenance Exposure to Ask Price Ratio above the 40% figure Asset Insight considers to be excessive.
While some Small Jet and Turboprop Ask Prices appear to have achieved stability, it remains to be seen if the actual selling prices will do the same.
Inventory Fleet Maintenance Condition
Overall Asset Quality remained ‘Excellent’, while Maintenance Exposure matched the tracked fleet’s historical average. Specifically:
Quality Rating fell to 5.366 from last month’s 5.377, on a scale of -2.5 to 10.
Maintenance Exposure (an aircraft’s accumulated/embedded maintenance expense) remained virtually unchanged, once again matching the historical fleet average of $1.46m.
By aircraft sector, the figures were as follows:
Large Jets For Sale: ‘Outstanding’ asset quality at 5.527 (the best among all groups) albeit 3.8 AI2 basis point worse than last month’s record high figure of 5.565. Maintenance Exposure worsened $14k, increasing from $3.096m to $3.110m.
Medium Jets For Sale: ‘Excellent’ asset quality at 5.339 (versus last month’s 5.358), once again earning the group third place among the four sectors. Maintenance Exposure decreased marginally, improving to $1.274m from $1.281m.
Small Jets For Sale: Retained second place with an ‘Excellent’ asset quality at a rating of 5.431 – very similar to last month’s 5.433. Maintenance Exposure unfortunately worsened by 1.5% to a 12-month peak, increasing to $781k, versus last month’s $769k.
Turboprops For Sale: ‘Very Good’ asset quality at 5.097, versus June’s 5.074 rating. Maintenance Exposure degraded a bit, increasing $12k to $564k – a figure worse than the group’s $556k 12-month average.
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) worsened, increasing from 54.0% to 54.7% and posting a 12-month high figure. Higher Maintenance Exposure figures for all but the Medium Jet sector, along with a new record low average Ask Price were the primary drivers.
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 nineteen months…
Large Jets For Sale: ETP Ratio – best among the four groups – has been steadily worsening since February and, by registering 40.8% this month, crossed into the excessive Maintenance Exposure range to post a 12-month high figure. Ask Price fell to $13.83m from $14.22m, a -2.7% reduction and another 12-month low figure. By virtue of the sector’s high Asset Quality and low Ask Prices, Large Jets continue to offer great value for Buyers. Sellers, on the other hand, have been feeling the financial pain of devaluation for six of the last seven months.
Medium Jets For Sale: ETP Ratio degraded for the fourth consecutive month, increasing to 58.4% from 57.7% and registering its worst figure for the past twelve months. Ask Price degraded for the third consecutive month, decreasing another -2.0%, and at $3.40m posted a 12-month low figure. Considering the group’s Excellent Asset Quality rating, and Ask Prices that are only $10k above Asset Insight’s lowest recorded figure, Buyers should be able to structure deals offering good value. Sellers are unlikely to be as fortunate.
Small Jets For Sale: At 68.9%, the ETP Ratio improved a bit and posted a figure slightly better than the group’s 12-month average, 69.1%. Ask Price remained stable at $2.19m and was only slightly lower than the group’s 12-month peak number of $2.20m, and $2.21m record high. With an Asset Quality Rating just 0.005 below the group’s 12-month best figure and Ask Prices holding steady, Buyers should be able to locate good values by carefully analyzing each candidate aircraft’s Maintenance Exposure. Sellers of high quality assets should carefully consider the cost of ‘holding on’ for a better offer, as price stability is a rarity in the current environment.
Turboprops For Sale: The ETP Ratio (once again the second best among the four groups) improved to 45.4%, decreasing from last month’s 46.1%. Ask Price also improved slightly, rising to $1.54m from $1.53m. With Ask Prices $10k above the group’s 12-month low figure, and an Asset Quality level better that the 12-month average, Asset Insight believes good values should be achievable for both Buyers and Sellers.
If you are a prospective aircraft buyer that is waiting for prices to ‘bottom out’, you are missing what’s actually taking place, as transaction figures show that high quality assets are trading.
If you are an aircraft seller holding on to a high quality asset until values increase, you are missing the opportunity to move your aircraft by not knowing how to quantify its maintenance condition to help justify your Ask Price, while concurrently incurring holding costs.
Considering all the life-extending (and inexpensive) technical solutions companies are making available to aging aircraft owners, the number of new units being manufactured, and the increasing number of aircraft listed ‘For Sale’, we are unlikely to see an average Ask Price increase. The key is learning how to deal with the market we have, rather than hoping for a better tomorrow.