In this month’s JETNET >>KNOW MORE article Mike Chase & Marj Rose present the nine months Year-To-Date (YTD) New & Used business jet market trends, comparing 2016 to 2015...
We’ve stated numerous times before in this column that new aircraft orders are traditionally based on the successful sale of pre-owned aircraft. We use the term ‘coupling’ to describe the trend in which an owner offsets a new aircraft purchase with the sale of a used aircraft. ‘Decoupling’, conversely, implies that owners may be simply holding on to their existing aircraft when purchasing new aircraft.
Thus, as we look at the market trends for business jets for sale today, we will investigate whether owners are choosing to continue flying their aircraft beyond their ‘normal’ upgrade cycle. Alternatively, are they purchasing new aircraft and trading in their older jet with an OEM, or signing exclusive agreements with brokers of pre-owned aircraft with the expectation of a sale?
If owners are retaining their business jets longer since the downturn began in 2008, perhaps it would help explain why the pre-owned business jets ‘For Sale’ inventory has remained at such high levels for over eight years. Over the past 24 months the pre-owned inventory has continued to increase.
The market value of business jets has been one of the key drivers for ‘Decoupling’. Unfortunately, the rapid decline in business jet market values has not recovered, and for those owners that purchased aircraft during the pre-2008 market-peak the result has been a major economic disappointment.
For those who have purchased a new aircraft post-2008, they probably have done so with cash. The majority (>70%) of buyers today are cash buyers, per US FAA Financial documents. Other sellers that have held on to their pre-owned business jets hoping that the ‘Great Recession’ would be followed by the ‘Great Recovery’ (in market value terms) that is just around the corner have been waiting for several years now…
Another dynamic of the market is the bifurcation of large-cabin jets, which are performing stronger than the mid- and small-cabin jet markets. Demand and pricing was more favorable in the large-cabin jet market, thus ‘Decoupling’ may be more pronounced in the mid- and small-cabin markets. However, the large-cabin market has now declined as well.
We think that the bifurcation has disappeared and now we have New vs Used as a possible shift, especially with the rapid decline in residual value of new aircraft.
For example, the value of a five-year-old business jet used to be 80% of its new price. Today, the five-year old business jet’s value is likely to be nearer 50% to 60% of its new price.
Additional dynamics at play could include OEM trade-in policies. As their individual order backlogs evaporated, they became more risk-adverse, thus accepting fewer trade-ins and perhaps offering less-than-favorable trade-in values. Such dynamics have certainly resulted in a “wait and see” mentality among the fence-sitters. Of course, there has been an increase in first-time buyers who do not have a previously owned aircraft to sell.
We can assume that many of the factors listed above all have played a part in this very slow and lengthy business jet market recovery since 2009.
New Business Jet Deliveries
New business jet deliveries by OEMs over the past eight years are reflected in Table A. YTD 2016, new deliveries are down -7.7% versus the same period in 2015. New business jet deliveries by OEM reflect that the Top Three (Bombardier, Gulfstream and Cessna) have all changed positions since 2009, with Cessna now leading the pack in business jets delivered.
Textron’s Cessna is the only OEM showing an increase, up 13.2% compared to 2015, owing in part to new model introductions. Bombardier, Gulfstream and Dassault are all showing double-digit decreases versus 2015.
Overall, new business jet deliveries are lower today compared to 2015, but are at the exact same level as reported in 2012 (first nine months).
Used Jet Sales Transactions
Pre-owned business jet deliveries (by OEM) over the past eight years are presented in Table B. Results YTD: 2016 deliveries are down -2.2% compared to the same period in 2015; 2014 represented a record year for pre-owned business jet full retail sale transactions; and January-September 2016 is only slightly off that pace.
Note, the largest increases in used aircraft sale transactions are from Gulfstream (29 more sales than in 2015) and the Hawker Beech Premier (+11). The largest decreases in pre-owned sales (YTD 2016 vs 2015) were found among Hawkers (-32), Challengers (-24) and Dassault Falcon (-13).
Higher Pre-owned ‘For Sale’ Inventory Levels
Chart A shows the number and percentage of business jets ‘For Sale’ from 2005 to the first nine months of 2016. The chart is broken into four sections: Pre-Recession (2005-2007); Recession (2008-2009); Post-Recession (2010-2014); Current (2015-2016).
The number of business jets ‘For Sale’ jumped 1,100 from 2007 to 2009, going from a 10.8% Fleet ‘For Sale’ to 16.3%. Then from 2009 to 2014, a decline of 580 business jets ‘For Sale’ brought us to the 11.0% fleet ‘For Sale’ level. Finally, in the current period the number of business jets has increased again (by over 200). The fleet ‘For Sale’ percentage is holding steady at 11.5%.
Average Length of Jet Ownership
The average length of business jet ownership has increased since 2005 across all makes and models, as reflected in Chart B. Owners have held on to their aircraft because of the difficult economic times.
Several knock-on effects have resulted in the growth in average length of ownership, including the difficulty in securing new financing; the loss of value retention in aircraft; high ‘For Sale’ inventory levels; greater average days on the market; and (positively) better reliability and maintainability of business jets. Business jet usage (flight hours) has declined since 2008, mostly because business activity in general has been stagnant.
Residual Value Analysis
In years prior to the Great Recession, the industry used a 3-4% per year depreciation schedule to gauge future values for business jets. An aircraft lifespan is established by the OEM and measured not in years but in ‘pressurization’ cycles. Each time an aircraft is pressurized during flight, its fuselage and wings are stressed.
Has the residual value depreciation schedule changed today? One recent analysis suggested that there is now a higher percentage depreciation per year.
The economic useful life is the period of time over which an aircraft is (or is expected to be) physically and economically feasible to operate in its intended role. Periodic maintenance and repair will be required.
There is further evidence that aircraft with greater capability (e.g. range, speed and cabin volume), along with the new generation of avionics and enrollment on an hourly maintenance program, tend to retain value better. Those aircraft that do not possess these greater capabilities tend to lose their value retention.
Historically, the business jet market has been - and will continue to be - stimulated by new aircraft introductions. With each new aircraft model built there is a bump-and-run delivery cycle that occurs. The bump comes with first deliveries of a new model and is generated by the market excitement for the new model and what it has to offer. This in turn creates a backlog of orders that tapers off over time (the run) as the OEM ramps-up production to fill that new demand.
There are in excess of 16 new or derivative business jet aircraft models that have arrived (or will soon arrive) on the market, and over 30 in-production business jets. This fact, in our opinion, will help stimulate recovery and provide needed growth again in the business jet marketplace.
Of course, the World and US GDP growth must be stronger, and lower jet fuel-prices could do nothing but help. The missing ingredient is confidence from aircraft buyers. They hold the key to picking up the pace in both the used and new business jet market trends.