With images of sugar plums, and sweet year-end new airplane deals still dancing in their heads, business aircraft customers begin the New Year with hope for a solid economy, optimistic consumers and bright days ahead, projects Rollie Vincent, Editor, Market Indicators...
The year 2018 finished with a flurry of business aircraft transactions, as new and used models traded hands in the ramp-up to the December 31 deadline. Although some paperwork may ultimately have been finalized on (or about) December 32, in the euphoria and camaraderie of the New Year celebrations, did anyone even stop to take notice?
Optimism amongst the business aircraft owner/operator community continues, at least based on the results of the JETNET iQ Q4 2018 Survey. With more than 90% of the targeted 500 quarterly survey responses received by press time, optimists outnumbered pessimists by a factor of 3.8-to-1 – continuing the rather upbeat outlook that has characterized the market. No more so is this true than in Europe and North America over the last four quarters.
Large-Cabin Jet Progress
Large-Cabin Jets look strong, at least for the time being, as OEMs begin to see the fruits of their years-long efforts to bring new designs to market.
Gulfstream’s G500 and G600 are in production ramp-up. These aircraft were smartly conceived from the outset with a high level of commonality of parts, structures and systems; fly-by-wire flight controls to enhance flight safety and cabin comfort; and enough long-range/high-speed performance to make an aerodynamicist put down the TV remote and take notice.
Never to be outdone, Bombardier’s sparkling new Global 7500 took to the skies with initial customer deliveries beginning late last month. Meanwhile Dassault’s loyal customers continue to flock to the French OEM, especially for the elegant Falcon 8X and versatile Falcon 2000LXS.
Dassault’s much-anticipated Falcon 6X may be a few years away, but it is positioned to put the W-I-D-E in ‘widebody’. The 6X will inaugurate a platform that will be the basis for a new family of business jets from the good people who also bring us CATIA design software, the Rafale fighter, nEUROn unmanned flying aircraft, and (one day) Europe’s sixth generation fighter jet.
Middle of the Market
In the middle of the market, competition is fierce and customers are the beneficiaries, as Bombardier, Gulfstream, Embraer and Textron battle for market share, each with their respective offerings in the increasingly crowded Super-Midsize Jet segment.
With capabilities that match (and for the most part even exceed) most customer mission requirements, the Challenger 350, Gulfstream G280, Praetor 600 and Citation Longitude offer significant value for the dollar to new aircraft buyers, who have nevertheless been consistently able to negotiate substantial price discounts from the OEMs.
Just below the Super Mid-size offerings, business jets at the higher end of the Light Jet segment (from the Phenom 300 to the Pilatus PC-24 and Citation CJ4, and newer offerings like the Citation Latitude and Praetor 500) are well received by customers, and account for the bulk of remaining shipments at this time.
The 2019 ‘High Watch’ List
With essentially flat utilization rates, weak charter pricing, still-reduced residual values, flat overall production rates, and continuing OEM discounting, it is apparent that not all is well with Business Aviation, however.
In the high-rollers game of business aircraft development, returns on investment on hundreds of millions (and sometimes billions) of dollars are far from certain.
Collectively, with too many OEMs building too many different aircraft models at too low production rates, the pressures are mounting for something to change. From a market outlook perspective, what are some of the items that are on our ‘high watch’ list as we launch into 2019?
- Residual values: Although their rate of decline has slowed, aircraft residual values remain depressed, discouraging existing owners/operators who have limited trade-in equity to bring to any new aircraft deal.
- New aircraft prices: Some OEMs continue to aggressively discount their prices to sell aircraft. Will this change?
- Aircraft utilization: It is hard to get too excited about 2% Year-over-Year (YoY) utilization growth when the underlying fleet is only expanding at about the same rather tepid rate.
- Production rates: We look for modest increases in overall business jet delivery volumes in 2019, with YoY growth concentrated among models that have been certified recently.
- Very light jets: What’s up with the very light jet segment? Certainly not orders. This segment has not recovered in the post-2008 financial crisis and looks particularly vulnerable in a slower-growth era in North America, Latin America and Europe.
- Talent: Companies and organizations that ‘get it’ are working diligently to find the right new people they need to keep their operations humming. Pilots, mechanics, engineers, technicians, flight planners and dispatchers, and sales experts are already in short supply. Therefore, talent shortages will remain a hot topic in 2019 and beyond.
With most key national markets expected to grow more slowly in 2019/2020, we should not be surprised if the New Year brings some newsworthy changes in the Business Aviation industry – with Darwin’s theories regarding survival of the fittest making for some informative, if not entertaining reading on a cold winter’s night.
European Business Jet Fleet ADS-B Out Risk
More than one-tenth of Europe's business jets could be grounded by the beginning of the next decade, a new study warns, as upgrading certain older aircraft to meet new safety requirements will be prohibitively costly…
Under European regulations, all aircraft operating in the region from June 7, 2020 are mandated to be equipped with Automatic Dependent Surveillance–Broadcast (ADS-B) Out technology.
UK aircraft sales and marketing company Colibri has identified 219 business jets from Europe’s 1,944-strong fleet where the cost of installing the new equipment will prove too much for operators. The identified aircraft have a value of $750k or less, and were built in 1996 or earlier, according to Colibri.
The list includes 42 aircraft in France (23% of the country's fleet); 31 jets in the UK (16%) and 46 in Germany (11%).
Depending on the platform, an ADS-B Out upgrade can cost between $25,000 and $200,000, Colibri says. It describes this outlay as an ‘unjustifiable expense’ for some aircraft, which could prohibit them from flying and leave them grounded.
“The value of certain business aircraft in Europe may mean it's not worth spending tens of thousands, and sometimes hundreds of thousands of pounds installing ADS-B Out,” says Oliver Stone, managing director, Colibri.
He predicts that many of these models will be broken up and sold for parts to maintenance companies as it “will become even harder for these owners to sell their aircraft in one piece.”
Why are Medium Jets so Hot Right Now?
Avinode has revealed a strengthening in the Medium Jet sector with charter inquires up by 39% in the US and by 29% in Europe.
According to a company spokesman, “as we travel around, we’ve been hearing a lot of excited talk about the Medium Jet sector (Mid-size, Super Mid-size and Heavy). We couldn’t stop ourselves from investigating. Are Medium Jets on a high right now and, if so, why?” Following are some of Avinode’s conclusions.
- Medium Jets fit the US perfectly. In key areas such as range and cabin size, they’re ideal for the vital US domestic market. You can easily find a Medium Jet for coast-to-coast travel (over 2,000nm) or for a popular East Coast route such as New York-Miami. Unlike many Small Jets, a Medium Jet can comfortably carry a C-suite team of seven passengers or more.
- The numbers prove the point. For the year November 1, 2017 to October 31, 2018, there were 100,209 trips (meaning journeys sourced, not necessarily booked, through Avinode) for Medium Jets for domestic US flights. That’s a very impressive 39% increase on the previous 12 months (72,262 trips). By comparison, Small Jet demand is only growing at 32% (up to 76,314 trips) YoY.
- Medium Jets are very popular in Europe too. There were 176,848 trips for Medium Jet flights originating in Europe between November 1, 2017 and October 31, 2018, up 29% YoY.
- New is always exciting. Embraer plans to bring us the Super Mid-size Praetor 600 in Q2 2019 and the Mid-size Praetor 500 in Q3 2019. Meanwhile, Textron promises imminent certification of the company’s Super Mid-size Cessna Citation Longitude.
“To say Medium Jets are enjoying a revival would be misleading, they’ve never been away,” Avinode summarized. “…Medium Jets are at the heart of the modern Business Aviation industry.”
Avionics Q3 2018: Robust YoY Sales Increase
The Aircraft Electronics Association released its Q3 2018 Avionics Market Report and total worldwide Business and General Aviation avionics sales amounted to more than $2bn.
The figure represented a 15.5% increase in YoY sales compared to the first nine months of 2017 amount of $1.73bn. Sales during Q3 2018 were $679.8m, a 15.6% increase compared to Q3 2017 ($587.9m).
YTD, both the retrofit and forward-fit markets have seen double-digit increases in sales compared to the first nine months of 2017. The forward-fit market was up 16.6%, while the retrofit market was up 14.7%.
"With robust growth in sales during the first nine months of 2018, industry is on pace to produce the largest dollar amount of year-end avionics sales since the reporting process began back in 2012," said AEA President Paula Derks.
"We have now seen seven-straight quarters of positive YoY sales growth dating back to the end of 2016, and it's an encouraging sign for the industry that sales are strong in both the forward-fit and retrofit markets."
Flight Activity – North America
TRAQPak’s review of Year-over-Year (YoY) North American flight activity (November 2018 vs. November 2017) indicates an expected decrease of 1.2%. Month-over-Month (MoM) also saw the anticipated decrease, versus October’s activity…
The YoY results by operational category were mixed, with Fractional activity posting the only yearly increase and Part 135 activity, declining for a sixth consecutive month, representing the largest decrease in November.
By aircraft category, Mid-size Jets posted the only increase YoY over 2017, while the worst decrease came from the Turboprops category.
November Business Aviation flight activity by operational category were all down in November 2018, versus October 2018, with the Part 91 segment posting the largest monthly decrease. Aircraft categories were all negative, too, with Turboprops again posting the largest decrease.
Looking ahead, TRAQPak analysts estimate there will be a 0.8% increase in overall flight activity YoY in December 2018.
Flight Activity - Europe
According to WingX, Europe saw a big drop off from the tail-end of the summer’s business jet activity with 62,726 Business Aviation departures in Europe during November. Down 1% YoY, as of November Business Aviation activity in Europe had a rolling 12-month trend of +2%.
Growth was seen in France during November, and fairly strong increases were reported in YoY activity in Germany and Spain too. But Business Aviation departures were off more than 5% YoY from the UK, Italy and Switzerland. (Domestic UK activity fell by 9% YoY.)
YTD growth, after the first 11 months of 2018, was still up in all top six markets, but only substantially so in Germany and Spain. Elsewhere, the Netherlands, Finland, Portugal, Greece and Hungary have strong trends this year, but substantial declines were recorded in Turkey for 2018 YTD.
Large Jet activity was up 1% in November, with solid 4% gains from the UK, Italy, Germany, and 8% growth in France. Small and Mid-size Jet activity declined 2.5% overall, and as much as 8% in the UK.
Flights to North America from Europe were robustly up in November, although transatlantic flights into Europe were down. Middle East arrivals continued to decline around 10% YoY, while flights to Africa are up by 8% YTD. AOC/Charter and Private flights were equally flat.
“Flight activity trends in November reflect widespread anecdotal evidence that the market has seen a substantial slowdown, which may be just a seasonal drop-off but may also hint at growing economic concerns in the European region,” Richard Koe, managing director, WingX Advance remarked.
“The overall trends, which are flat YoY, camouflage the underlying fall in business jet demand, clearly faltering in the Charter market. There are exceptions, most notably the comeback in demand for Medium-size Jets.”
Used Aircraft Values and Maintenance Condition
Asset Insight’s market analysis on November 30, 2018 covering 93 fixed-wing models and 1,662 aircraft listed for sale, revealed a 4.6% increase to the tracked inventory fleet (73 units), with all four groups contributing to the increase…
Large Jets led the way with an 8.9% increase in inventory, Small Jets were next at 5%, Medium Jets increased 3%, while Turboprops posted the lowest rise at 1.8%. At year-end, sellers appeared bullish with respect to ask prices.
While a price escalation argument can continue to be made for certain Large Jets (due to the limited inventory of younger models), Medium Jet sellers are presumably betting on their aircraft’s maintenance status to justify higher pricing.
As the Asset Quality Rating for Small Jets lost ground, so did their pricing, while many Turboprop sellers will likely find it difficult to obtain a higher price if their asset’s maintenance status is the basis for their increase.
Inventory Fleet Maintenance Condition
Changes to the Large Jet inventory fleet has led to assets with generally fewer upcoming maintenance events, albeit more expensive ones. The Medium jet inventory pool, on the other hand, showed more upcoming events, but ones that are likely to cost less than those for the average aircraft listed in October. Asset Quality worsened for both Small Jets and Turboprops.
Overall, the Quality Rating stayed within Asset Insight’s ‘Excellent’ range, although it decreased slightly to 5.321 on a scale of -2.5 to 10.
In concert with the inventory’s latest Quality Rating, Maintenance Exposure (an aircraft’s accumulated/embedded maintenance expense) worsened by 2.2%. However, at $1.413m the figure is better (lower) than the 12-month average.
Maintenance Exposure to Ask Price (ETP) Ratio
The ETP Ratio is a useful indicator of an aircraft’s marketability. It is computed by dividing the asset's Maintenance Exposure (the financial liability accrued with respect to future scheduled maintenance events) by its Ask Price.
‘Days on Market’ analysis has shown that when the ETP Ratio is greater than 40%, a listed aircraft’s time on the market increases, usually by more than 30% and, during Q3 2018, assets whose ETP Ratio was 40% or more were listed for sale nearly 58% longer (on average) than aircraft whose Ratio was below 40% (280 versus 374 Days on Market).
November’s analysis revealed that more than 51% of all tracked models and nearly 63% of the tracked fleet posted an ETP Ratio above 40%. The tracked fleet’s ETP Ratio remained unchanged at 65.1%.
Turboprops led the way, posting the lowest ETP Ratio (50.4%); Large Jets followed (60.2%); Small Jets registered a figure of 66.1%; and Medium Jets improved for the third consecutive month, albeit to an unimpressive 75.6%.
Overall inventory asset quality remains better than average, as does Maintenance Exposure, which should allow sellers and buyers the opportunity to close transactions.
For some sellers, it will be difficult to justify their Ask Price, but their deal-making opportunities could improve through an understanding of their asset’s standing relative to competitive aircraft.
Large Jets: The inventory fleet expanded by 29 units leading to an improvement in the group’s Quality Rating, but upcoming maintenance events are going to cost buyers a bit more. Ask Price is just below the highest figure posted during the past twelve months, helping decrease the ETP Ratio for the second consecutive month.
Assuming they understand the asset they are selling or buying, sellers had the opportunity to close out 2018 at a good price – relatively speaking – while buyers should have been able to identify some good values.
Medium Jets: The tracked fleet’s inventory increased by another 15 units during the past month, but this is good news for buyers as the new fleet mix is comprised of higher Asset Quality aircraft carrying lower Maintenance Exposure. Ask price also rose 2.1% helping improve the ETP Ratio.
Based on competition to sell before year-end, Asset Insight is not convinced that pricing is likely to hold, but many sellers have the facts in their favour (assuming they know them), potentially justifying their higher pricing logic.
Small Jets: Inventory increased by 24 units, following October’s addition of 25 assets to the inventory fleet, and the latest additions are generally of lower asset quality, leading to worsening Quality Rating and Maintenance Exposure figures.
Ask Prices are down 4.4%, month over month, and while that has led to an ETP Ratio increase, the Ratio is better than the 12-month average, giving some sellers reasonable hope they can achieve a decent transaction price during 2018.
Turboprops: The for sale fleet increased by five units during the past month, and while the Quality Rating improved 2.5%, Maintenance Exposure worsened 8.5%, as upcoming events, although fewer, will be more expensive.
The 2.9% increase in Ask Price will be challenging for sellers to achieve but it is quite possible, given this group’s high level of market activity and the maintenance condition of many listed assets.