Business Aviation Market Overview - June 2021

Forecasting certain stubborn trends in Business Aviation is like trying to predict precisely where oil prices or the stock market will be a year from now. One of the perpetually perplexing metrics in our industry has been determining future pre-owned aircraft prices, which, despite numerous calls for a floor, have continued to freefall for more than a decade.

Despite this, there are several factors coming together that could not only stabilize further price declines this year, but also cause a price rise across all cabin segments.

Before the 2007-2008 financial crisis, prices of used business jets were relatively stable and predictable. Those financing new aircraft typically assumed residual values five years later would be upwards of 80%. In some instances, values actually appreciated over time, as demand exceeded supply of newer models.

Ever since then, average asking prices for all pre-owned classes have consistently fallen, and residual value assumptions for new aircraft are now closer to 50% after five years. (In all fairness, this is actually the rate of depreciation one would expect for aircraft, which are capital goods and should lose value accordingly. When considering this, it’s not at all unexpected that jets depreciate much faster now.)

Lately, though, there have been some market developments which in the near-term could – at least for now – arrest this downward price spiral, and perhaps even produce a modest increase.

Economy

The outlook is for an improving worldwide economy, with the US expected to see 2021 GDP growth at upwards of 8%. Typically, a GDP of just 3% or higher bodes well for jet sales. This is topped with individuals having higher-than-normal savings, and stock portfolios that have spiked with the US stimulus infusion.

After many years being absent, inflation is back in the everyday vernacular. While the jury’s out on whether it will be merely transitory or remain for the longer-term, either way could lift the prices of nearly everything, including pre-owned jets.

Supply

Business jets have not gone out of fashion during the pandemic. Rather, more flyers have been introduced to private air travel, a few of whom will stay for the long term. This will further make owning a pre-owned airplane an attractive proposition for some, further denting the pre-owned supply.

As detailed in my May AvBuyer column, pre-owned inventory (as a percentage of the fleet) is hovering near all-time lows. Over the past couple of months that figure has ranged from roughly 5-7% of the business jet fleet being for sale, versus an historical average of 10-12%.

Thus, what we’re beginning to see is a classic case of demand continuing to exceed the now limited supply of used inventory. This would suggest that 2021 could actually see a slow reversal of the price decreases we’ve all become accustomed to, with prices instead increasing modestly.

Effect

Implications of flattening or rising pre-owned prices should be minimal. Perhaps more jet buyers will pull the trigger if they perceive they’re buying at a bottom, which would further exacerbate the pre-owned supply availability.

Conversely, if prices were to rise more substantially, there may be more buyers priced out of the market. 

Life could even get a little easier for financiers and lessors, who, with the help of more stable prices, can get more comfortable with their residual value assumptions.

Finally, a short supply and rising prices could encourage more buyers to consider a new airplane, further improving what has already been a pretty good year for beleaguered manufacturers.

Whatever the case, brokers should be prepared for the possibility of prospective buyers waiting for prices to come back down while sellers delay listings with the expectation that prices will continue to rise.

MI www.brifo.com

Global BizAv Flying Trends

According to WINGX, from the start of April through the first week of May, global fixed-wing flight activity was up 219% compared to 2020, but still trailed the same period in 2019 by 35%...

Specifically, global Business Aviation traffic was up 200% on 2000, but down 8% versus April-May 2019. Year-to-Date (YTD) bizav activity was up 28% compared to 2020, but down 9% compared to 2019.

United States Flight Activity

In the US market, just under one million flights YTD was 8% below the same period in 2019, but April activity was only 6% behind that recorded in April 2019.

The charter market continued to be the strongest space, with branded charter operators flying 6% more sectors than in April 2019, and up 3% this year compared to same period 2019. (Charter activity was up 37% on the first four months of 2020).

Twenty percent of the charter activity in the US leading into the first week of May came from Florida, with trends 60% above 2020 levels, and more than 20% ahead of 2019.

All US regions were seeing more activity YTD, compared to 2020, although trends varied. The Southeast and Southwest were ahead of the West coast. The Midwest and Northeast were proving to be the slowest regions to recover.

• Activity out of Texas was up 39% YTD; 23% in California; 24% in Illinois; and flights out of New Jersey were 8% ahead of 2020.
• New York was up 42% over last year, when activity was at a virtual standstill.
• Business Aviation flights to and from Colorado were up 33% YTD (and 1% ahead of 2019 YTD, or 7% up versus April 2019). The busiest connections with Colorado were with Texas, Arizona, Florida and California.

European Flight Activity

Europe continued to see a gradual and stuttering recovery, varying widely from the weaker Western region to the stronger Southern and Eastern regions. Overall, Business Aviation flight activity in Europe was up 10% on the same period in 2020, but still 20% below 2019 trends.

• France was the busiest market, up 13%, with domestic traffic up by 40%. But overall, flights from France were still 22% behind 2019, YTD.
• The UK has been the third busiest market this year, but one of the few European countries still behind 2020 trends having recorded 31% fewer flights than last year.
• Russia and Turkey enjoyed the largest growth in traffic between January and April, both with more than a 60% (mostly domestic) increase over last year’s traffic.

Rest of the World Activity

Beyond Europe and the US, Business Aviation trends were up 26% YTD in April, compared to 2020. Canada was the only top market yet to surpass last year’s activity.

• Business Aviation activity doubled YTD (compared to the same period in 2020) in China, Nigeria and Brazil. In each case, this was owning almost entirely to domestic flying.
• Flight activity in India remained 60% up this year compared to last year, despite the surging pandemic.
• The Bahamas recorded a strong rebound, with arrivals into Nassau up by 50%.

“Business Aviation is steadily closing in on parity with 2019, powered by a rebound in demand in the US,” Richard Koe, Managing Director of WINGX, said. “Strong demand in other countries such as China, Nigeria, Brazil and Australia also help.

“Flight activity in Europe is only just recovering 2020 trends and may struggle to keep up with the relatively quick recovery we saw in flight demand as restrictions got lifted last summer.”

MI www.wingx-advance.com

In-Service Aircraft Values & Maintenance Condition

Overall Asset Insight’s tracked inventory fleet availability continued to shrink, entering Q2 with another 1.5% contraction. The April 30, 2021 market analysis covering 134 fixed-wing models accounted for 1,633 aircraft, equating to a year-to-date (YTD) decrease of 14.6%.

By aircraft group, results were mixed. Large Jets and Turboprops posted an inventory increase of 0.8% and 1.5%, respectively, while Mid-Size Jet availability was down 2.3% and Light Jets were down 4.5%.

Aircraft Values

The tracked fleet’s average Ask Price remained virtually unchanged in April, maintaining its 1.5% contraction YTD, while decreasing 4.2% year-over-year (YoY).

• Large Jets were the only group to post an increase – a healthy 3.6%.
• Mid-Size Jets lost 9.3% of their Ask Price to post a 12-month low figure.
• Light Jet prices decreased another 5.6%, the group’s seventh consecutive monthly loss (a drop of 13.6% YTD and 18% Y/Y), resulting in a record low figure. For the first time, the group’s average Ask Price fell below that of Turboprops.
• Turboprop pricing dropped 0.8%, but the group is still up 0.2% YTD.

Inventory Fleet Maintenance Condition

Alterations in the units comprising the inventory fleet decreased the Quality Rating while concurrently improving Maintenance Exposure, which is a rather unusual event… Specifically: 

Quality Rating decreased for the third consecutive month, this time by 0.3% to 5.296, a figure that maintained the fleet within the ‘Excellent’ range on Asset Insight’s scale of -2.5 to 10. The decrease in Quality signifies the latest fleet mix will have to complete more near-term maintenance events.

Maintenance Exposure, defined as the aircraft’s accumulated/embedded maintenance expense, improved (decreased) by 0.4% to $1.485m for April. Accordingly, while the fleet will, on average, experience more near-term maintenance events, their cost is forecast to be a little lower.

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’ (DoM) 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 Q1 2021, assets whose ETP Ratio was 40% or higher were listed for sale 69% longer (on average) than aircraft whose Ratio was below 40% (285 versus 482 Days on Market).

April’s market review revealed that over 49% of the tracked models, and almost 60% of the tracked fleet, posted an ETP Ratio greater than 40%. The 75% ETP Ratio posted by our tracked fleet for April represented the second consecutive record-high (worst) figure.

• While Turboprops continued to record the best (lowest) ETP Ratio, April’s 44.4% was above the 40% ‘excessive’ mark for the second consecutive month (following three months below the 40% level), and was not far off the group’s 12-month worst figure.
• At 61.1%, Large Jets fared marginally better than March’s 61.3%, and the Ratio was between the group’s 12-month low and average figures.
• The Ratio for Mid-Size Jets landed half-way between the 12-month worst and average figures at 72.2%, and represented an increase (worsening) from March’s 69.3%.
• Lastly, Light Jets demonstrated the effect of the group’s sagging Ask Price by establishing a third consecutive record-high (worst ever) figure, at 113.8% (versus March’s 113.6%).

Market Summary

While overall Ask Prices remained relatively unchanged, it was only due to the surprising increase generated by Large Jets. Pricing for all other groups fell, as expected, but at a faster rate than anticipated.

With overall inventory down to 7.7% of the active fleet, the extremely limited supply of younger, lower-time aircraft could result in higher prices for such assets.

No doubt aging aircraft sellers hope to benefit too, but that will be a much taller order on most older models due to the high number of available aircraft. Still, all groups are now posting availability below 10%, with Turboprops at 6.3%, Large Jets at 7.4%, Light Jets at 8.0%, and Mid-Size Jets at 9.2%.

Large Jets: Inventory is now down 9.3% YTD, representing a 40-unit decrease. The Quality Ratio improved by 0.1% to 5.788, keeping the group in ‘Outstanding’ territory while identifying an inventory pool sporting a smaller number of near-term maintenance event.

At the same time, Maintenance Exposure dropped (improved) 1.0%, signifying those maintenance events will be less expensive to complete, although they will also be approximately 4.4% more costly than they were a year ago.

With Ask Price increasing 3.6% for April, pricing was up 0.2% YTD, although it’s still off by 5.9% YoY. Asset Insight continues to believe that value levels will favor sellers in the short term, except for those seeking a home for aircraft in the antique category (i.e. older than 25 years).

Mid-Size Jets: Mimicking Large Jets for the second consecutive month, the group’s Quality Rating improved (increased) 0.2% to 5.330 (remaining within the ‘Excellent’ range), while Maintenance Exposure improved (decreased) 2.0% to post a 12-month low (best) figure.

Inventory is now 16.1% below the group’s December 2020 total, having shed 84 assets from the total pool, and availability now stands at 9.2%.

In our review of March, we noted that buyers and sellers had ample room to structure mutually-beneficial transaction values, and April’s 12-unit inventory decrease proved that theory.

Light Jets: The average Light Jet is currently spending 14.5 months on the market before trading. Some models have been searching for a buyer for over three years. Perhaps this explains why the average Ask Price for a pre-owned Light Jet reached a record low figure, after decreasing 5.6% in April, bringing the group’s average Ask Price below that posted by Turboprops…

Still, Light Jet buyers are quite active, with inventory decreasing 19.7% (109 units) YTD, and availability now at 8.0%. The change in fleet mix lowered (worsened) the Quality Rating by 0.3% to 5.154, but kept the group within the ‘Very Good’ range, while Maintenance Exposure, quite surprisingly, decreased (improved) by 1.0%, although the figure is still worse than the 12-month average.

What does all this mean? Buyers and Sellers of younger assets are able to structure value-based transactions, while sellers of aging units will probably continue to operate their aircraft until an expensive maintenance event makes it more logical to park the asset.

Turboprops: Although inventory increased by 1.5% in April (six units), availability is down 11.3% (46 units) since December 2020, and Ask Prices, which dropped 0.8%, equated to year-end 2020 figures too.

Trades of higher quality aircraft, and inventory additions of lower quality assets, reduced the Quality Rating by 2.5%, but the group’s 5.052 rating kept Turboprops within the ‘Very Good’ range. Maintenance Exposure climbed 6.7% to approach the 12-month high (worst) figure, but the value is 0.6% lower YoY.

The ETP Ratio climbed to 44.4% from 41.5% which, while in the range we consider excessive, is likely to affect only a nominal number of additional sellers, considering that only 6.3% of the active fleet is listed for sale. Asset Insight sees no obstacle to reasonable buyers and sellers transacting at current market prices, and even at a slight premium for some aircraft.

MI www.assetinsight.com

Read More About: Light Jets | Large Jets | Mid-Size Jets