2011: The Year of Correction?
A review of the pre-owned business jet and turboprop market.
In this month’s JETNET >>KNOW MORE we will provide a status update for the year 2011 as it continues to unfold. After more than two years of industry decline- our expectations were that 2011 would be another year of correction with high hopes for sustained growth starting in 2012.
As you may recall- 2010 showed improvements in pre-owned sale transactions compared to both 2008 and 2009. However- these gains were the result of overall lower pre-owned aircraft prices. The health of the pre-owned market sets the stage for new aircraft orders and we are all anxiously awaiting further signs of improvement.
PRE-OWNED ‘FULL SALE’ TRANSACTIONS
After two years of decline in the pre-owned business jet market- 2010’s 1-888 total pre-owned business jet transactions was an increase of 16% over 2009- and 4.8% over 2008.
The good news continues viewed through a comparison of Full Sale Transactions January-May for the years 2006 through 2011. The YTD results show 845 business jet transactions for the timeframe during 2011 - almost at the same level as for the same period in 2007 (849). However- Turboprops stand at 502. While that’s an improvement over 2009-10- this is well below the retail sale transactions in 2007 and 2008 (see Chart A).
The ‘12 Month Moving Total Trend’ for both the pre-owned business jets and turboprop Aircraft Retail Sale Transactions are illustrated in Chart B spanning from January 2004 to May 2011. In May 2011 the business jet retail transactions were 6.8% below the peak set in February 2008- and down 23.7% off the peak for turboprops (also set in February 2008). Nevertheless- both categories show sharp rebounds from the 2009 lows- and provide good indicators that the correction process is in motion.
As a matter of interest- the ‘For Sale’ inventory of business jets dropped below the 2-500 mark for the first time since November 2008 - and subsequently dropped below 14% to 13.8% in June 2011. The turboprop percentage ‘For Sale’ stood at 10.3% in June 2011. This is another positive sign. The inventory for sale may be moving slowly- but it is dropping.
AVERAGE ASKING PRICES
In comparing the pre-owned business jet average asking prices for January-May 2011 (Chart C) we see a declining trend. The average price stands at $3.8 million compared to the previous five-year average of $5.5 million. Depending how you want to look at it- that’s down 31% or $1.7 million average.
Business turboprop average asking prices are also trending down for January to May 2011 at $1.271 million compared to the five year average of $1.384 million. That’s down significantly less at 8.2% or $113k average. Because the business jet transactions are on the rise at such a healthy rate- we hold with the theory that the ‘For Sale’ inventories just may be filled with aging aircraft. The deals on recently-built- large cabin and longer-range pre-owned models may have been snapped-up by now- forcing the values of the remaining (and less attractive) aircraft downward- thus pushing the entire average lower.
As depicted in Table A- the current ‘For Sale’ inventory consists of more than 59% of aircraft 16 years and older.
The U.S. Bureau of Economic Analysis (BEA) reported that real gross domestic product- the output of goods and services produced by labor and property located in the United States- increased at an annual rate of 1.9 percent in 1Q 2011 (from 4Q 2010 to 1Q 2011) according to the “third” estimate. In 4Q 2010- real GDP increased 3.1 percent. Historically- whenever the US economy shows a growth in GDP of greater than 3.0%- the Business Aviation market is in a growth mode.
US FLIGHT OPERATIONS—DOMESTIC
In May 2011- the 285-000 U.S. Business Jet Domestic Flight Operations recorded stood at 88-000 flights (-24%) below the peak level of 373-000 in October 2007. However- there has been an unsteady improvement from the 225-000 flights recorded for February 2009- according to the FAA (see Chart D).
US FLIGHT OPERATIONS—INTERNATIONAL
Chart E broadens the scope to reveal that U.S. International Flight Operations reached 56-000 in May 2011 - up 19.1% from May 2010 (47-000)- but down from the peak of 62-000 recorded in September 2010. However- the May 2011 results have improved from 44-000 flights in January 2011.
US JET A FUEL PRICES
Chart F shows U.S. Jet A Prices at $6.63 per gallon during 2Q 2011- revealing a rise of $1.27 per gallon over 1Q 2010 prices ($5.36). The current prices are only 20 cents below the 2008 fuel price bubble at $6.83 per gallon.
As we move into the new decade- optimism for our industry’s recovery is everywhere. The first five months of 2011 have shown us that pre-owned retail transactions are picking up nicely and business jets are nearly at the 2007 peak levels. This positive pre-owned activity should be priming us for improved new OEM sales in the near future.
‘For Sale’ inventories are inching down slowly as the average ‘For Sale’ asking prices continue to fall. We believe this is signaling that pre-owned buyers have cherry-picked the best aircraft- leaving the aging models as the majority of the ‘For Sale’ fleet- thus forcing asking prices down. Flight operations continue on an unsteady improvement path with a ‘two-steps forward- one back’ approach to activity gains.
Among the low-lights we see so far this year are continued high fuel costs and a pre-owned turboprop market- which continues to be sluggish. As the summer months pass- we believe the second half of 2011 should continue on the path of correction- and we will once again see proof positive that our Business Aviation industry is resilient and poised for a come-back! We will continue to keep you informed.