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Business Aviation Market Update - Jan 2015

An enthusiastic market outlook for 2015 is supported by recent data on pre-owned aircraft sales activity, notes Dave Higdon.

Dave Higdon   |   9th January 2015
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Dave Higdon Dave Higdon

Dave Higdon writes about aviation from his base in Wichita Kansas. During three decades in...
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Transactions seem to be picking up speed. Maybe not yet with the momentum of a truck gaining speed on the downhill side of the mountain, but certainly with more pace than in recent years. Overall, expectations point to 2015 as being the year that sales growth begins to exceed ‘tepid’ by rising above the mean of the post-Great Recession years.

During the week after Thanksgiving, the Dow Jones Industrial Index closed within double digits of 18,000 (at 17,912.62), adding on December 3 yet another ‘record close’ to a long list of record closes in 2014. Weeks earlier, during the National Business Aviation Association convention in Orlando voices from both the new and pre-owned aircraft sales segments held remarkably consistent views of the year ahead. These based their outlooks more on current activities in both segments – “It's already improving,” said one. “It's happening now” observed a Southeast broker who was escorting a prospect for an up-close look at a jet, adding “we've had years of improving conditions that did no appreciable good.”

Indeed, economic growth hasn't necessarily worked in the favor of most of the Business Aviation market. Late last year Congress finally renewed bonus depreciation – as Business Aviation manufacturers quietly expected would happen before the close of 2014. But again, Congress approved only a short-term extension. As of January 1, 2015, those tax terms once more went on hiatus, with expectations this year of something longer-term becoming law.

“We keep depending on temporary breaks getting repeatedly renewed and in the meantime, the market moved on without a guarantee of the accelerated depreciation benefit,” noted the Southeast broker.

One observer who caught the drift early is Brian Foley of Brian Foley Associates. Absorbing the mood and the data during the NBAA convention he noted that business-turbine aircraft sales are less about economic numbers and more about human numbers. “It's about fulfilling the needs of the operator, and those have been increasing with business' improvements. There are signs that the entire spectrum of private aviation is on the brink of growth – and not just the turbine variety. It's even getting better for the light jet end, while the big business jets are running to keep up with demand.”

An Upward Trend with Many Drivers

Some numbers emerge from the Business Aviation arena that help explain the optimism. Consider the new jet market in the context of today's used jets for sale:

- Inventories of pre-owned business-turbine aircraft stand at their lowest percentage since 2008, according to an aggregate look at several sources;

- AMSTAT reports that the first nine months of 2014 saw the largest percentage of the active business jet fleet change hands than in any first three quarters during the prior decade;

- Utilization increases during 2014 make this the busiest year since 2008;

- OEMs are upbeat with most noting growing order backlogs;

- New-model development continues unabated.

A Midwest broker we spoke with and who was working at the NBAA Convention in Orlando noted, “Many of the people who buy new will be coming out of a pre-owned aircraft, while others will be sending a late-model jet into the pre-owned market. All the same, with low finance cost and high cash holdings, many pre-owned jets are an attractive alternative to waiting for a new one.”

Another broker who deals on both coasts noted the increasing number of pre-owned jets being imported back into the US from Europe as demand has increased. “Part of shrinkage of pre-owned inventories is because of aircraft exports to the Asian markets,” the broker added. Some observers go so far as to predict the pre-owned inventory shrinking to the point that prices might finally start to appreciate more in line with the residual value of the aircraft.

Regardless, aircraft go where the demand exists, and these days the majority of the demand is from outside of North America. But it's trending back slightly.

Seat Belts Fastened...

Until the cost of money goes up appreciably, look for pre-owned and new jet sales to keep increasing,” advised an East Coast dealer with an international presence. “More people want to fly more often, and as long as that continues we'll keep moving hardware.”

2014's nine-month flight activity numbers varied with the sources, but growth numbers in the 4-5 percent range according to consensus. Meanwhile, prices of actively For Sale pre-owned aircraft remain remarkably stable (flat from 2013 through 2014, was the popular opinion).

“When you look at what's available in the light and medium jet markets - aircraft built in the 15 years that included the record-level boom years – the ‘For Sale’ fleet holds a lot of jets with lots of life left,” the East Coast dealer stressed.

Five-Year- Used Aircraft Preview

There’s no question every dealer, broker and new aircraft marketing and sales staffer will tell you something approximately the same: The delivery of a factory new jet usually triggers a ripple that may touch several other aircraft – and lead to multiple transactions down the line.

The OEMs will provide plenty of catalysts and fodder for pre-owned transactions over the next five years, according to Foley. He and another Business Aviation analyst tried to tally the in-development programs currently in-play with a first-delivery date identified. According to Foley's count, 18 new and derivative business jet models are due to enter the market between 2014-2019.

“New products act as a sales catalyst, stimulating the market by giving customers a reason to buy,” he noted. “This will keep the pump primed for deliveries to continually increase until the 2019 timeframe,” (at which point Foley expects the next cyclical downturn). Downstream from most of those new deliveries a pre-owned aircraft will enter the ‘For Sale’ fleet (assuming a savvy buyer, broker or dealer doesn’t sewing up the aircraft before it hits the public market).

How well that pre-owned market fares during those five years should also track well with new aircraft sales, several brokers note. “Baring something that classifies as a world-changing event we should see the pre-owned market return to a balanced level that keeps pace with new plane sales,” the Southeast broker outlined.

Predicting when that turn may come is near impossible, he, and several other insiders confess. “Larger backlogs don't automatically trend to higher deliveries. But if backlogs grow too long, sales can suffer.”Of course, when backlogs grow large enough, OEMs increase production rates.

That's where Foley expects this trend to go. “The industry's improved outlook will manifest itself [in 2015] as markedly higher manufacturer backlogs, increasing book-to-bill ratios and a jump in unit deliveries in double-digit percentages show.”

The Consensus

Those same drivers of new airplane sales should continue to ripple through the pre-owned markets with similar benefit - as long as the world avoids an economic cataclysm.

The business aircraft sales market appears ready to merge back into the cruising lane and get back up to speed across the board… “Even in the piston aircraft markets,” Foley said. That means more options for attracting new people to Business Aviation through the Light Business Aircraft that Foley expects to also see better times in the coming years. “Life is good,” he concluded. Happy New Year!

View the latest jets for sale.

Read more about: Dealer Broker Market Update | Used Aircraft Sales Trends

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