Business Aviation Market Overview - August 2020

Though impacted deeply by the COVID-19 crisis, Rollie Vincent sees no evidence for widescale panic among aircraft owners looking to offload their assets (per the Great Recession). Instead, owners are taking the opportunity to press the ‘Great Big Pause’ button…

There is a saying that goes something like this: “If it looks like a duck, swims like a duck, and has feathers and webbed feet like a duck, it just might be a Black Swan”.

Most of our colleagues in the Business Aviation community have probably long since labeled 2020 as the ‘Year of the Asterisk’. Entering the seventh month of the most disruptive year yet for our industry, analysts from Arlington to Zurich and their leadership teams are still trying to develop mitigation and recovery plans in the face of the deep and lingering impacts of COVID-19.

In many ways and for many industry participants, 2020 began much like other recent years. After January’s typically slow start (as customers and suppliers came off the year-end rush), February followed with a relatively good performance.

In fact, the JETNET iQ Market Sentiment indicator, measuring the optimism of the aircraft owner/operator community, was up 9% in Q1 2020 after declining steadily for six consecutive quarters. All was well – or so it seemed.

In March, the wheels fell off the industry’s landing gear. Since mid-March, we may not have realized it but most of us have been trying to figure out what to do with our GBP [not the Pounds Sterling in our pocket, but rather The Great Big Pause].

If there is anything that can simply describe what has happened to business travel, by private aircraft but especially on commercial airliners, it is ‘gone quiet’ and in some cases very quiet.

Utilization of business aircraft reached a low point in April 2020, off by 75-80% by some measures on a Year-over-Year (YOY) basis. As we have noted previously, commercial airline traffic dropped by >95% at several key airline hubs in May 2020 – an unbelievable shock to our international travel system from which we have not yet come close to recovering.

At the time of press, rebounding business aircraft flight activity continues to be most pronounced at the Turboprop and Light Jet end of the business aircraft spectrum, with considerable regional variation (see WingX Advance and ARGUS reports below).

Indications from anecdotal evidence and airport-pair analyses suggest that much of the flight activity in the US and Europe (particularly in the on-demand charter segment) involves moving individuals and families to second homes, sunspots, and mountain resorts. 

Aircraft Sales Activity

In H1 2020, pre-owned business jet retail sale/lease transaction volumes were down by ~25% YoY, based on JETNET databases. From March (when COVID-19’s impact really began to be felt in Europe and North America) transactions were off ~35%.

While overall sales activity is lower this year, there continues to be little evidence of a build-up in the for-sale inventory, with just 7.5% of the in-service turboprop fleet (~1,170 turboprop aircraft) and 10.3% of the jet fleet (~2,300 jets) listed (according to JETNET data) at press time.

Unlike the last sharp downturn in the aftermath of the 2008-2009 Global Financial Crisis, we have not witnessed any evidence of a “rush for the exits”. The vast majority of owners and operators have elected to hit the GBP button, and wait for the skies to clear - and aircraft valuations to crystallize.

Peeling away a few layers of the pre-owned market onion reveals that very few of the most desirable aircraft (most popular, delivered recently) are currently available for sale.

A review of a selection of seven popular models illustrates the relative tightness of today’s business jet and turboprop market. With for sale inventory of nearly-new models hovering between 0.5% and 2.7% of the in-service fleet (see Table A, above), these aircraft are few and far between. In fact, they are probably best sourced by Sherlock Holmes and his able assistant Dr. Watson (or in their absence an experienced broker/dealer).

While some prospective buyers have been circling like sharks sensing blood in the water, there have been few opportunistic deals to be had. Aircraft owners appear to be wisely following doctors’ orders, holding on to their aircraft and taking advantage of the Great Big Pause to be with the most important people in their lives - on flights to paradise.

MI www.navigating360.com

Flight Activity – North America

TRAQPak’s review of year-over-year flight activity indicates that June 2020 recorded another substantial decline, down 25.7% versus June 2019. However, June posted another large month-over-month increase, finishing up 40% compared with May 2020…

Year-over-year, the results by operational category were all negative, with Part 91 activity posting the largest yearly decrease from 2019. Fractional activity saw a monthly drop that was more in line with the industry average, while Part 135 flight activity recorded a better-than-industry-average decline. 

The aircraft categories were also negative for the month, with Large Jets recording the largest yearly drop. Light Jets recorded the smallest decline.

Month-over-Month

Positively, June Business Aviation flight activity posted another large month-over-month increase, finishing up 40% from May. Results by operational category were all positive for the month, with Fractional flight activity posting another significant increase.

The aircraft categories were also positive for the month, with Large Jets posting the largest monthly increase. The Turboprop market recorded the smallest (but still substantial) monthly gain.

July Forecast

TRAQPak analysts estimate there will be a 17.0% decrease in overall flight activity year-over-year in July 2020.

MI www.argus.aero

Flight Activity – Global

During June 2020, global Business Aviation activity continued to recover, ending the month with 28% fewer flights than in June 2019, according to WingX Advance.

The North American market showed the largest rebound since the global slump in April, but recovery trends in the US have slowed this month as lockdown-lifts have slowed across a number of US States.

In Europe the recovery rate in the second half of June was stronger than in any other region, though the full month activity trend still looked to be ~40% behind last year. Flight activity in the UK and Spain remained way behind the norm (~60% under par for June). France resumed service as the busiest European market (flights still down by 40%), but the best performer in June was Germany (activity down by 18% YoY).

Regions outside North America and Europe accounted for less than 10% of Business Aviation departures in June. Of those:

• Oceania activity re-stabilized at around 90% of normal;
• Asian activity was stuck at 30% below normal;
• Africa improved to 38% below normal; and
• South America has yet to see any significant erosion (87% of June 2019 activity).

Globally speaking, the strength in activity recovery continues to be inversely related to cabin size:

• Ultra-Long-Range Jets flew 50% less;
• Heavy Jets were down 43%;
• Mid-size Jets declined by 33%;
• Super Mid-size Jets were down 28%;
• Light Jets flew 22% less;
• Very Light Jets were down 19%; and
• Turboprop flight recovery was robust in May and early June but tailed off, trending down by 28% in June YoY.

“Overall, June’s 30% YoY decline was a clear improvement on May’s 50% slump,” Richard Koe, managing director, WingX Advance summarized. “Assuming that the opening up of economies can be resumed, we would expect stronger recovery in July, driven primarily by leisure travel in Small and Mid-size Jets.”

MI www.wingx-advance.com

Short-Term Impact of COVID-19 on the Used Aircraft Market

According to AMSTAT and partner VANGAS Aviation Services, the average and median values of used business aircraft have fallen between 10% and 15% so far during the COVID-19 crisis, with some individual make-model markets seeing larger decreases…

AMSTAT sees declines in value in all segments since early April, but with some evidence of a recent slowing of this decline in some market segments.

The report also shows that inventories have increased since mid-March, but the increase is a continuation of a pre-existing trend.

The report shows that inventory of business jets was up 1.6% between January and March, and then up 4.2% since mid-March. By comparison, business turboprop inventory was largely unchanged between January and March, and up 2.8% from March to May. Nevertheless, inventory levels remain below 2016 levels and significantly below 2009 levels.

Moreover, resale retail transactions for business jets were ahead of 2019 levels in January and February but were down 23% in March YoY and down 40% in April YoY. Resale retail transactions for turboprops were (at or ahead of) 2019 levels in January and February, but were down 27% in March YoY and down 40% in April YoY.

“It remains to be seen whether the trends of the last few months will continue long term,” said Andrew Young, general manager, AMSTAT. “What is also interesting is that inventories, while up, are not indicating a panic to sell, and levels remain below recent highs seen in 2017.

“If inventory levels remain relatively low and interest in Business Aviation materializes as an alternative to commercial travel in parallel with an economic recovery, then we might expect to see a significant uptick in transaction activity leading to a recovery in aircraft values in the coming months.”

MI www.amstatcorp.com

Volatile Business Jet Markets are Actively Trading…

Hagerty Jet Group assesses the pre-owned Gulfstream markets with a particular focus on G650s and G550s…

According to Hagerty Jet Group, it feels like business has been picking up since May. The good news is that deals are happening. The bad news is that prices are down steeply. “We would argue that the entire business jet market is down at least 10% and in some cases as much as 20%,” the company noted. “A few deals have been discounted by as much as 30%.”

G650 Market

The G650 market has been the most interesting market to watch. “We have seen five deals come together in the past 4-6 weeks. Prices are down approximately 10% from Q1, and down 16% from a year ago,” the company adds. “But the true depreciation will not be clearly reflected…for another 3-6 months.”

One airplane that was marketed for sale at NBAA-BACE 2019 is selling for approximately $10m (25% below where the market was just nine months ago), while another is selling for $8m below a Q4 offer that was rejected. 

“There appears to be strong demand from buyers looking for aircraft at the new pricing levels, but they’re being met with a lack of supply, and sellers hesitant to accept these new pricing levels.”

There are now over 415 G650’s in service (since 2013) meaning less than 3.5% of the fleet is for sale – the lowest of any Gulfstream model. “We expect pricing to be volatile over the next six months, but do not foresee losing another 10% in value unless supply increases sharply,” Hagerty projects.

G550 Market

The G550 market has been actively trading too. Seven transactions closed in Q2, many of which likely started in Q1. “Several sellers had to make concessions to get deals closed, and some deals fell apart altogether. The good news is that we are currently tracking five deals pending in this market,” Hagerty Jet Group revealed.

Prices are down 10-15% and Gulfstream recently announced the end of production for the G550. “We don’t expect prices of late model G550s to be impacted significantly by that announcement.”

Buyer Hesitancy…

Hagerty Jet Group believes that heading into H2 2020, buyers will be reluctant to enter the market until after the US Presidential elections in November. “Fears of additional COVID-19 shutdowns or restrictions on air travel will most likely also impact the short-term markets for business jets.”

MI www.hagertyjetgroup.com

Why Bizjet OEMs Downsize Despite Rebound in BizAv Travel

With new jet deliveries high in 2019 and charter activity soaring, why are the major business aircraft OEMs laying off their staff? Brian Foley paints the bigger picture…

Business jet flight activity is recovering smartly while scheduled airline flights remain comatose. Private charter flight inquiries are ringing off the hook, and jet card sales are selling like hot cakes. Giddy private aircraft charter outfits report a brisk business with upwards of 50% of sales going to first-time users.

Moreover, current aircraft owners are holding onto their jets, causing the number of used jets for sale on the market to barely budge since the start of the coronavirus pandemic. This all comes on the heels of new business jet deliveries that shot up 15% in 2019. So why have business jet OEMs been laying off their workers?

• Bombardier has shed 2,500 jobs.
• Gulfstream has made 1,145 redundancies since October 2019.
• Amid widespread furloughs, Textron Aviation’s Cessna unit cut 250 jobs (with possibly more on the way).
• Other major OEMs have also made cuts.

Assessing the Layoff Juxtaposition

It’s important to first understand that the jump in 2019 new jet deliveries was something of a “head fake”. OEMs often build and stockpile new model entrants even before they’re certified by the authorities, resulting in a big slug of initial deliveries.

Furthermore, 2019 was a bumper year of deliveries for the smallest single-engine jets, further distorting the appearance of the traditional market.

Add to this that in reality, buying and caring for a business aircraft is costly, limiting the potential buyer base. Many of those with the financial will and wherewithal already own a jet. Feedback from fractional providers is that ‘newbies’ aren’t buying fractional shares, but rather a jet card which is simply prepaid charter, and indicative of a more short-term commitment.

While some will perhaps try ownership to skip the airport crowds, there won’t be enough to meaningfully move the new jet sales needle.

Repeat buyers will wait for some of the economic uncertainty to subside before risking their capital, and we are not going to run out of charter or fractional program jets in the near-term to warrant fleet expansion. These assets have been underutilized for years.

So Why the Layoffs?

Production lines have been curtailed or closed for up to three months, robbing jet builders of their normal cash received when delivering finished airplanes to end-customers.

Potential new buyers are remaining cautious in this environment, resulting in OEMs not even having buyers for all of their planned 2020 jet production, which could result in them being stuck with ‘white tails’ at year-end.

There will inevitably be some new jet sales uplift from lasting concerns over traveling in large groups, but that will take a while to materialize. Increased charter and fractional usage must continue into next year before new orders are placed, and traditional buyers must first recover from their own financial situations and have confidence in the future.

The recent surge in private air travel popularity hasn’t yet translated into jet sales for business jet manufacturers who may continue to trim the workforce until order books show sustained growth over consecutive quarters.

MI www.brifo.com

In-Service Aircraft Values & Maintenance Condition

Aircraft transactions appeared to be increasing as June closed, although Asset Insight’s June 30th, 2020 market analysis of 134 fixed-wing models revealed a 1.5% inventory fleet increase over May…

June’s inventory increase more than doubled the previous month’s increase and raised Asset Insight’s tracked fleet’s YTD inventory by 8.2%. Turboprop inventory again led the way through a 3.2% rise, followed by Medium Jets (1.8%), Large Jets (1.6%), and Small Jets (0.1%).

Aircraft Values

Average Ask Price for aircraft in the tracked fleet decreased 2.0% in June, but Q2 posted a 4.0% decrease overall, and H1 2020 saw a 3.6% value decline.

• Large and Small Jets gained 2.9% and 1.6%, respectively, during the month.
• Medium Jets lost 3.7% and Turboprops were down 2.3% for the second consecutive month.

Inventory Fleet Maintenance Condition

Including June’s quality rating, Asset Insight’s tracked fleet has now posted a 12-month best (highest) figure for three of the past four months.

Additionally, June’s ‘for sale’ fleet mix showed a decrease in the cost of individual upcoming maintenance events, with that figure below (less expensive than) the 12- month average. Our tracked inventory recorded the following:

• Quality Rating: June’s ‘for sale’ fleet Quality Rating remained within the ‘Excellent’ range for 2020, repeating April’s 5.311 figure on Asset Insight’s scale of -2.5 to 10.
• Maintenance Exposure: After last month’s degradation, Maintenance Exposure (an aircraft’s accumulated/embedded maintenance expense) fell (improved) 1.0% to $1.376m, signaling upcoming maintenance for the latest fleet mix would be 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%.

During Q2 2020, assets whose ETP Ratio was 40% or more were listed for sale nearly 53% longer on average than aircraft whose Ratio was below 40% (251 versus 384 Days on Market). Asset Insight’s June analytics revealed that 51.8% of the tracked models, and 54.2% of the tracked fleet, posted an ETP Ratio greater than 40%.

June’s fleet ETP Ratio remained virtually unchanged at 69.9% for the third consecutive month, maintaining a figure about half-way between the worst (highest) 12- month figure and the 12-month average Rating.

• For the seventh consecutive month, Turboprops registered the lowest ETP Ratio (45.9%).
• Large Jets, in second place, improved slightly to 64.0%.
• At 73.4%, Medium Jets registered a figure about halfway between their best (lowest) 12-month figure and their 12-month average Rating.
• Small Jets (statistically) improved for the third consecutive month, posting a Ratio of 85.8%.

Market Summary

10.9% of our tracked fleet was listed for sale in June, compared to 11.3% in May, and 10.7% in April. The lowest (best) figure was again posted by Turboprops (7.4%). Large Jets were next (9.7%), followed by Small Jets and Medium Jest (11.5% and 12.4%, respectively).

Large Jets: With our tracked Large Jet fleet posting a record high 5.788 Quality Rating, and Ask Prices at only slightly above the 12-month average, buyers and sellers should have no trouble negotiating mutually-beneficial transactions.

Inventory for our tracked fleet increased by eight more units in June, with the newest fleet mix maintaining the group’s Quality Rating at a record high for the third consecutive month, this time at 5.788, to remain within ‘Outstanding’ territory.

Maintenance Exposure also decreased (improved) 1.5%, bringing that figure to only slightly higher (worse) than the group’s 12-month best. Average Ask Price rose 2.9%, but was still down 7.3% for the quarter and 9.6% for the year, potentially allowing savvy buyers to uncover exceptional values.

Medium Jets: This group’s Quality Rating and Maintenance Exposure posted 12-month best figures in June. The former improved for the second consecutive month to remain within the ‘Excellent’ range, while the latter decreased 1.1%.

Inventory increased by 12 units, and the new fleet mix lost 3.7% in Ask Price during the month, equating to an Ask Price loss of 2.7% for the quarter and a 5.2% through H1 2020.

The ETP Ratio did increase a bit after posting consecutive 12-month low (best) figures, and while our tracked fleet listed for sale did decrease from May’s 13.2% to 12.4%, buyers are still the ones better-positioned, due to availability.

Small Jets: Inventory remained relatively steady in June, with only a single unit increase to the listed fleet, placing availability of our tracked fleet at 11.5% (an increase of 59 assets year-to-date).

Asset Quality did improve 1.65% to 5.268, earning the group entry into ‘Excellent’ territory, and even Maintenance Exposure improved a nominal 0.3% (compared to the two consecutive 12-month worst figures).

Ask Price increased 1.6% in June to register a 12- month high figure, although we doubt that actual transaction values are likely to see a significant increase in the current environment. However, the Ask Price increase did improve the group’s ETP Ratio (though at 85.8% that fact may be a moot point).

Turboprops: The listed fleet has been rising since February, and last month’s 15-unit upsurge led to a 7.6% increase for the year. However, with only 7.4% of the fleet listed for sale, buyers will have to work a bit harder to uncover good values, especially with the group’s Quality Rating falling to 4.861 (dropping it into ‘Good’ territory for the first time in 2020).

Sellers are also facing a 1.7% increase in Maintenance Exposure, but that figure is better than the 12-month average. Ask Prices decreased to just above the 12-month average, and conspired with Maintenance Exposure to increase (worsen) the ETP Ratio, although it is still better than average.

All in all, the news is actually quite good for buyers and sellers, assuming they both do their homework.

MI www.assetinsight.com

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