Business Aviation Market Overview - October 2019

What are the latest trends, data points and observations in the Business Aviation marketplace? Rollie Vincent presents a medley of the latest analysis from around the industry...

BizAv Market Insight

Rolland Vincent | 07th October 2019

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Rolland Vincent

With 35+ years in the aviation industry, Rolland Vincent, president, Rolland Vincent Associates (RVA)...

What's the pulse of the market as NBAA-BACE rolls around?

With Business Aviation’s biggest convention just around the corner, Rollie Vincent, editor, Market Indicators checks the pulse of the Business Aviation marketplace…

With NBAA-BACE 2019 approaching, October 2019 will be remembered for all of the camaraderie, airplane deal-making, and new product and service announcements that only such an industry-spanning event can inspire.

On many people’s minds will be whether this can be the venue for one or another OEM to launch a new business aircraft to capture the attention – and grab a share of the wallets – of prospective customers. Our guess? Yes!

ADS-B Compliance: The Grim Reaper Looms

As the December 31, 2019 deadline looms large for aircraft owners and operators to achieve ADS-B Out compliance to maintain their privilege of operating in most US airspace, the number of business jets and turboprops that have yet to be modified remains jaw-dropping, at least to some in the industry.

On September 12, US-based MRO specialist Duncan Aviation reported that 23% of the US-registered business jet fleet - totalling almost 3,400 aircraft - were still non-compliant, despite the deadline looming like Halloween’s Grim Reaper in a post-harvest corn field. This time, however, the scythe is real.

The story amongst N-registered business turboprops is bleaker still, with almost half the fleet (about 3,800 machines) not on a path for year-end compliance.

There are less than 90 days remaining in the calendar year, and clearly there is not the capacity to close the gap, leaving many chunks of aluminium exposed to the swinging steel scythe – an opportunity for furniture makers working with polished airfoil (or, as they say somewhat more elegantly in Britain “aerofoil”) and fuselage shapes.

US President Abraham Lincoln once said, “Things may come to those who wait, but only the things left by those who hustle.” This is no doubt a sentiment echoed by the good folks at Duncan Aviation and others in the MRO community, who will be keeping the lights on every evening until year-end in the hopes of serving last-minute ADS-B Out shoppers.

The Secret of the Aging Fleet

A deep, dark secret in many corners of the business aircraft marketplace is that an argument can certainly be made that it is high time to take a lot of this old aluminium out of circulation; if not to put out in the trash then at least into the great recycling bin of life.

An analysis of more than 60 years of business aircraft deliveries recorded by JETNET reveals that, on average, about half of business jets are still in service some 43 years after initial delivery. For business turboprops, half of the fleet is still active 48 years after leaving the factory door.

To put those numbers into some perspective, the average age of the business jet fleet worldwide in mid-2019 was 17.4 years, while the turboprop fleet average was 23.6 years, suggesting that these fleets still have very long lives ahead of them.

Aircraft owners, their trusted A&Ps, and a vast network of MRO shops have proven time and again that there surely is long life after C- and D-checks, despite the inevitable dual headwinds of economic and technical obsolescence.

Improving Book-to-Bill, Slipping Used Sales

As the numbers roll in and we evaluate the state of the markets at the end of Q3 2019, the large business aircraft OEMs have been enjoying a solid sales year, with book-to-bills above 1.0 for the year-to-date (YTD) through August. This is indeed welcome news after several years of flat-to-declining order backlogs. The total value of backlogs has increased 7% since the beginning of the year.

On the other hand, pre-owned business jet transactions as measured by retail sales and leases of whole aircraft continue to lag significantly below last year’s pace, down about 20% Year-over-Year (YoY) on a YTD basis.

While some of this year’s shortfall is due to limited inventory quality available for sale, other factors such as a tough YoY comparable are also in play.

The results from 2018 were likely ‘juiced’ by the initial year of US tax cuts and changes to rules allowing 100% depreciation on pre-owned aircraft for the first time. And complicating matters is a recent shift in the mood of the owner/operator community.

Market Optimism Continues to Wane

Sentiment amongst respondents to JETNET iQ’s Q3 2019 Survey was down for the fifth consecutive quarter, with net optimism slipping to 18%, well below its average score as measured over the past eight years and its lowest point in almost 12 quarters.

Concerns about the potential for a global economic slowdown have been mounting, with more than 65% of respondents voicing a yay/nay opinion suggesting that there is an increasing risk of global recession in the next 12 months.

Business Aviation powerhouses including Italy, Germany, the UK, France, Spain, Turkey, Brazil, Mexico and South Africa are perilously close to economic recession, while the outlook for the US, China, Canada and other nations in the Euro Area in 2019 has also deteriorated.

With the UK mired in a near-farcical Parliamentary crisis of its own curious doing, the English Channel separating Great Britain from Europe seems to be inexorably widening, to cries of “Mind the Gap!” and a cacophony of somewhat less polite expressions emanating from the other side of la Manche.

Meanwhile, far from the Madding Crowd…

Attendees of the 2019 NBAA-BACE will once again be dazzled by the glitter, bright lights, powerful spirits, and spectacular entertainment that only Las Vegas seems able to provide. Although 2019 is unlikely to break any attendance records given the dampened mood in many markets, NBAA-BACE is the place to be for anyone seriously considering a new or pre-owned business aircraft purchase.

What better place to meet business acquaintances and colleagues, even if they live in your same neighbourhood or town? What better place to see and touch the hardware, experience the latest in cabin and cockpit technologies, and meet the finest business airplane sales professionals on the planet?

Even without an announcement about a new business jet, Vegas will be the place to be and to be seen in October 2019.

MIwww.navigating360.com

Flight Activity – North America

For H1 2019, North American flight activity has already proven that 2019 will chart its own course, notes ARGUS TRAQPak. Reflecting on the early part of the year, these were the key trends…

Between January to the end of June, ARGUS recorded three positive months and three negative months in terms of North American flight activity. Strong growth was recorded in the fractional segment, negative growth in the Part 135 segment and slight gains were recorded for the Part 91 activity.

Specifically, after moving towards a cooling trend in 2018, the Part 135 segment has spent all of 2019 in the red as each of the six months have declined from 2018. The Fractional industry, on the other hand, has produced yearly gains during all six months of 2019. The Part 91 segment has also been mostly positive in 2019 with gains in four of the six months.

Overall, for H1 2019 flight activity in North America was up 0.3% from 2018 while flight hours rose 0.7% for the same period.

Unsurprisingly, fractional activity reported the strongest mid-year gain of all the categories, and was up 6.2% during H1 2019. Part 91 flight activity was up 0.7%, while Part 135 flight activity was down 2.2% for the period.

A Projection for H2 2019

Looking ahead, after a relatively flat H1 2019, TRAQPak analysts are expecting flight activity to increase during H2 2019. TRAQPak analysts estimate that flight activity from July – December of 2019 will rise by 2% (compared to the same period in 2018).

Activity is anticipated to rise during five of the six remaining months. August is the only month that is forecast to decline from 2018, with an expected decrease of 0.7%.

The strongest month is expected to be September, with a forecasted increase of 4.6%, followed by December (anticipated to rise 3.3%). November is third with an expected gain of 2.4%, followed by October and July which are projected to show increases of 1.7% and 1.0% respectively.

MIwww.argus.aero

Flight Activity - Europe

European business jet departures continued their downward trend. August’s totals were down by 10,000 departures compared to July, according to WingX Advance. Activity in August was down by 2.3%, YoY…

With activity trending down -1.9% so far for 2019, only Spain has shown growth for the year. During August, Germany, the UK, Italy and Switzerland all saw YoY declines of between 6% and 10%.

On the positive side, Greece, Austria, Turkey and Russia saw increases over the previous August. Flights from Russia into Europe saw a strong boost, while domestic European activity slipped 2.4%.

Overall, the Light to Mid-size Jet sector was down 4% in August, with declines of 11% and 8% in Germany and the UK, respectively. The Ultra-Long-Range and Large Cabin jet segments rose YoY in August, with flights up by 3%.

“August rounded off a slower summer than last year, and flights were down by 2%. But Europe was still busier than other summers since the 2009 crisis,” said Richard Koe, Managing Director, WingX.

“The overall decline is due to a prolonged dip in light aircraft activity, especially owner and private missions,” he added.

MIwww.wingx-advance.com

AMSTAT Q2 2019 Market Report

Overall, 4% of the business jet fleet and 3.5% of the turboprop fleet turned over in H1 2019 versus 4.9% and 4% during H1 2018, according to AMSTAT…

The overall inventory of aircraft has also increased over the last 12 months and today 9.4% of the business jet fleet, and 7.5% of the turboprop fleet, is for sale.

Pre-Owned Transactions by Age Segments

Heavy Jets: Resale retail transaction activity in all age segments underperformed in the H1 2019 versus H1 2018. The greatest YoY slowing was in the Mid‐Age (11‐20 years) segment, where 6.1% of the fleet sold in H1 2018 versus 4% in H1 2019. By contrast the Newer segment (less than 10 years) saw H1 performance slow from 3.7% of the fleet selling in 2018 to 2.9% in 2019.

Medium Jets: Similarly, this segment saw a lower percentage of the fleet transacting in H1 2019 as compared to H1 2018. The greatest slowdown was in the newer (less than 10 years) segment, where 3.6% of the fleet sold in H1 2018 versus 2.3%during the same period in 2019.

Light Jets:The newer (less than 10 years) segment fared better than its newer larger sized compatriots, and 4% turned over in H1 2019, essentially the same as the 4.1% in H1 2018.

Turboprops: The older and mid‐age segments under performed in H1 2019 versus H1 2018. By contrast the newer (less than 10 years) segment saw 3.5% of the fleet turn over, akin to the performance for H1 2018.

MI www.amstatcorp.com

BizJet Market to Grow $16bn Over Five Years

The business jet market worldwide is projected to grow by $16bn, driven by a compounded growth of 6.6%, according to a new report from Research and Markets…

The Light Jet segment displays the potential to grow at over 8.3% according to the report. Poised to reach over $11bn by the year 2025, Light Jets are forecast to bring in healthy gains, adding significant momentum to global growth.

Representing the developed world, the United States will maintain a 5.5% growth momentum. Within Europe, Germany will add over $561.7m to the region's size and clout in the next 5-6 years. Over $1.5bn worth of demand in the region will come from other emerging Eastern European markets, the report predicts.

In Japan, Light Jets will reach a market size of $352.1m by the close of the analysis period. As the world's second largest economy and the new game-changer in global markets, China exhibits the potential to grow at 10.1% over the next couple of years and adds approximately $4.5bn in terms of addressable opportunity for the picking by aspiring businesses and their astute leaders.

MI www.researchandmarkets.com

ADS-B Fleet Grows; Thousands Remain Unequipped

While 79% of the US turbine business aircraft fleet was ADS-B Out compliant by the end of July (up 2% since June), some 3,632 aircraft were still not properly equipped for the mandate approaching on January 1, says FlightAware.

By the end of July, 13,862 US business aircraft were ADS-B compliant, up by more than 500 aircraft compared with June, and by nearly 3,300 from the 10,597 compliant business aircraft at the end of 2018.

Fleets With the Highest Equipage Rates

Cirrus Vision SF50 (98%)
Honda Aircraft HA-420 (96%)
Gulfstream G150 (96%)
Mitsubishi MU-2 (94%)

In all, 11 business aircraft models were at 90% equipage or greater at the end of July, FlightAware data shows.

Fleets With the Lowest Equipage Rates

Gulfstream GIII (57%)
IAI Astra (57%)
Dassault Falcon 20 (56%)
Cessna Citation III (55%)
Bombardier Learjet 55 (42%)

MIwww.flightaware.com

Six Predictions to Shape the Market in 2020

Monarch Air Group sees a series of trends that are starting to loom on the horizon and serve as talking points for leading players in Business Aviation…

Monarch notes the private jet market is changing. Following are six predictions the aircraft charter provider offers for 2020:

1. A move towards on-demand charter:

The on-demand charter market (i.e., the pay-as-you-go model that doesn’t require a membership or block hour purchase) will take on even greater momentum in the industry. Larger players in the market are taking active steps towards it, evidenced through the acquisitions of JetSmarter by Vista Jet; Travel Management by Wheels Up; and PrivateFly by Directional Aviation during 2019.

2. ‘Departure’ from Mid-size jets:

Bombardier has stopped the production of the Learjet 60XR; Textron isn’t reviving the Hawker 800/900 series; and the same is true for the Gulfstream G150. Why? The efficiency of other Super Mid-size Jets that are now available.

“The direct hourly operating costs of many of the Super Mid-size [Jets], not counting cost of capital, depreciation and other fixed expenses such as crew training and pay, is getting close to that of the Mid-size [Jets],” notes David Gitman, president, Monarch Air Group.

3. Accessibility:

For the past decade, accessibility has continued to grow in Business Aviation – and should continue to do so. Private flight is reaching new audiences thanks to its efficiency and flexibility, allowing small and medium-size companies to understand the value of using Business Aviation, saving money compared to scheduled airline flights.

4. Growth in BRICS economies:

Referring to the countries of Brazil, Russia, India, China and South Africa, large countries with major emerging economies, private aviation serves as a special link to a somewhat underdeveloped airline ecosystem, with gaps in itineraries and infrastructure.

Manufacturers, operators and brokers alike are establishing important ties within these highly populated economies, where the wealthy have very high incomes.

5. eVTOL:

Electric vertical take-off and landing aircraft are things of the distant future, right? Maybe not. For 2020 it will be on the private aviation agenda. OEMs including Bell and Embraer want to make it a reality, and it’s a concept that would work best for short-range or urban flights, especially for cities with high concentration of auto-traffic and skyscrapers. Infrastructure and regulatory matters need to go hand in hand with investment for safer and efficient aircraft.

6. Sustainability:

Stakeholders are demanding a greener stance and rewarding with loyalty. Brand values today affect consumer behavior and for aviation it’s no different. More efficient airplanes, less noise and investment in electric research is shaping the future of aviation.

Improving aircraft efficiencies will help reduce the carbon footprint, as leading executive aviation players Gulfstream, Bombardier and Cessna are pursuing — including teaming with operators to determine more efficient flight plans that will reduce fuel burn. Sustainability comes in different sizes and packages – and will continue to do so in 2020.

MIwww.monarchairgroup.com

Broker Sees Double-digit Gains in Charter Activity

New Flight Charters saw YoY business jet charter activity increases of 16.1% in July and 11.5% in the May-to-July period. Among New Flight's aircraft categories, demand for Super Mid-size and Large Cabin jets grew 34% in H1 2019. Light jet demand grew 33% in the period “at the expense of Mid-size jets,” while turboprop demand was nearly flat.

MI www.newflightcharters.com

BizJet Sales Lack Safety Net of Last Recession

While the last downturn following the 2008 financial crisis was a ‘doozy’ with annual shipments plummeting from 1,300 to under 700, aviation analyst Brian Foley considers what could be in store in the next downturn...

Business jet building is not a high-volume industry, meaning that every jet delivery counts. Complicating matters is that there are too many manufacturers offering a combined 41 business jet models, all vying for their piece of the limited 700 unit-per-year pie. This includes five primary jet manufacturers — Bombardier, Textron Aviation's Cessna, Dassault Falcon, Embraer and General Dynamics' Gulfstream —as well as another five niche players. Oversupply and tough competition have long been the norm.

“Things could have been much worse during the last industry downturn had it not been for a key support element – the continued strength of emerging markets,” Brian Foley notes. “As the economic health of developed countries cratered, emerging markets helped to keep the lights on.”

Fast forward to today and that international backstop is now missing, Foley notes. “Weak commodity prices, particularly oil, have hit places like Brazil and Argentina hard. Sanctions hobble Russia, while a weak economy and a government crackdown on all things ostentatious made China hit the brakes on private aircraft purchases.

“Likewise, the Middle East jet market has been in flux for a number of reasons including Saudi Arabia's corruption crackdown,” he adds.

Therefore, Foley believes there is no world region today that could sustain current business jet delivery levels should markets again decline.

With several forecasts predicting a US economic slowdown beginning in a year or two, it's unlikely that emerging markets will have enough time to recover to again act as a backstop, he reasons.

“Fortunately, it's very unlikely that the next industry downturn will be as cataclysmic as the last, when deliveries halved. Instead, a 10%-20% correction is more within reason,” Foley projects. “This is lower than typical downturns of 30% or more, but each of those was preceded by a multi-year spike in deliveries. In contrast now, deliveries have been flat for the past decade.”

Still, even at this reduced magnitude a drop would still bring today's 700-odd unit deliveries down into the 600s or possibly even mid-500s per year, making that pie even more coveted in an overcrowded market.

MIwww.brifo.com

In-Service Aircraft Values and Maintenance Condition

Asset Insight’s monthly market analysis covering 96 fixed-wing models and 1,714 aircraft listed for sale, conducted on August 31, 2019 revealed yet another 1.2% increase to the tracked inventory fleet (21 units)…

On top of the 40 unit increase during the previous two months. Large Jet inventory increased 0.8%, Medium Jets increased 1.2%, Small Jets, the only group to experience a fleet decrease, receded 0.7% in August, and Turboprops increased by 5.9%.

Aircraft Values

Ask Prices for the tracked fleet increased 2.7%, with Large and Medium Jets posting an Ask Price increase while Small Jets and Turboprops registered an Ask Price decrease.

Inventory Fleet Maintenance Condition

For the first time in five months, fleet asset quality improved, albeit by only 0.32%. Maintenance Exposure followed suit, falling (improving) by 0.6%. Overall, our tracked inventory registered the following figures:

Quality Rating:While an improvement over July’s 12-month worst figure, August’s fleet Rating was still below the 12-month average but within the ‘Very Good’ range after increasing from 5.165 to 5.181 on our scale of -2.5 to 10.

Maintenance Exposure:The figure was only marginally better than the 12-month average, as Maintenance Exposure (an aircraft’s accumulated/embedded maintenance expense) decreased (improved) to $1.44m from last month’s $1.45m.

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 2019, assets whose ETP Ratio was 40% or more were listed for sale 71% longer (on average) than aircraft whose Ratio was below 40% (226 versus 386 Days on Market).

August’s analytics also revealed that more than 52% of all tracked models, and nearly 60% of Asset Insight’s tracked fleet, posted an ETP Ratio greater than 40%. As we closed out August, the tracked fleet’s ETP Ratio improved, falling to 66.8% from July’s 68.3%, with all but Small Jet involvement.

Turboprops led the way by posting the lowest (best) ETP Ratio at 55.9%, although the figure was just shy of the record highest (worst) Ratio posted by this group. Large Jets were next at 57.3%, an improvement over last month and better than the group’s 12-month average. Small Jets followed at 72%, a slight worsening from July’s 71.5%, while Medium Jets experienced the largest change by improving to 73.6% from July’s 77.3%, although the figure still poses serious challenges for sellers in that space.

Market Summary

Ask Prices rose for the second consecutive month, with August’s figure exceeding the 12-month average, even though Small Jets and Turboprops posted lower figures. By virtue of another increase to our tracked fleet, the inventory has expanded by 123 units (7.7%) since December.

Large Jets

The listed fleet increased by three units, and the latest inventory mix pushed the group’s Quality Rating further into the ‘Outstanding’ range due to fewer maintenance items coming due near-term – although those upcoming events are likely to be a bit more expensive.

While the group’s ETP Ratio is not low, it does provide ample room for buyers and sellers to structure mutually beneficial deals – especially if the seller has the aircraft’s engines enrolled on an Hourly Cost Maintenance Program.

Medium Jets

Medium Jet behavior continues to defy logic, as the group’s 73.6% ETP Ratio for August resulted primarily from a 4.6% Ask Price increase that created a 12-month high figure. The group’s Ask Price has increased 14.6% during the past twelve months, and 13.8% during 2019, even though inventory has increased 4.9% since December (24 units).

While analytics revealed that actual transaction values were 14.1% lower than Ask Prices during Q2, the continued upward pricing trend should make at least some sellers happy.

Small Jets

Virtually on the other end of the spectrum we find the Small Jet group. Through its fourth consecutive Quality Rating decrease, the group just managed to stay within the ‘Very Good’ range, although the 5.076 Rating represented a 12-month low figure. Maintenance Exposure was virtually unchanged during August, but ‘Ask Price’ hit a 12-month low, dropping 1.6% for the month, and 6% since December.

As if things could not get any worse, the listed fleet has expanded by 67 units (14.1%) during the year and with many seriously old aircraft populating the ‘for sale’ pool, sellers of such units must locate buyers willing to chance becoming the asset’s final owner.

Turboprops

The group’s Quality Rating and Maintenance Exposure improved in August but Ask Prices fell for the fifth consecutive month to establish a new record low figure, even though the ‘for sale’ fleet has increased by only three units since December. We continue to point out that higher quality assets are the ones trading, and sellers of such aircraft were the ones that benefited in August.

However, a slight decrease in the fleet’s ETP Ratio, when combined with other factors, would seem to indicate that at least some higher quality, departing assets were replaced with units of equal stature, so both buyers and sellers can still benefit, assuming they know how to distinguish between low price and good value.

MIwww.assetinsight.com

Business Aviation Market Overview - October 2019

Rolland Vincent

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Business Aviation Market Overview - October 2019

Rolland Vincent

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