Mid-year update: flat as can be
It has been eight years since the recession of 2008. And although the crisis hit business aviation particularly hard, recently there’s been whispers of a recovery. With economies growing, especially in the US, one would expect business aviation to be showing similar signs of growth. So where are the numbers?
Last year was an interesting year for business aviation. Although statistics continue to be compiled, it’s safe to say it was an across the board flat year. When looking at units delivered, total movements, backlogs and used aircraft sales – everything comes up flat.
Some of this of course is the result of market demand continuing to shift away from the rest of the world and towards the North American market – a trend that began in 2014 and picked up momentum in 2015. Today, North America constitutes approximately two-thirds of the embedded business jet fleet, reestablishing its preeminence with respect to new deliveries and essentially putting an end to past enthusiasm about so-called emerging markets.
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In 2015, OEMs posted book-to-bill ratios of less than 1.0 and, as a result, backlogs are shrinking. Furthermore, 2H-2015 saw a deceleration in transactions on the used aircraft market, which has the trickle-down effect of causing inventories to trend higher. These trends are worrisome, especially as strong backlogs played a substantial role in keeping the industry afloat during the worse of the recession years.
On the topic of used aircraft, we saw some interesting changes here too. Whereas in the past demand came primarily from the medium and large cabin aircraft, last year this segment posted a double digit decline in value. At least half of this trend could be attributable to the effect of a strong US dollar, although this is only a theory. What is not a theory, however, is that large cabin aircraft are, in general, declining in value at a rate that is inconsistent with the once held truth that these were 20 to 30 year useful life assets.
Which brings us to 2016 – a year where we can expect more of the same. North America will continue to serve as the industry’s engine as other regions go soft due to geopolitical stresses, struggling economies, commodity and oil price pressures and currency fluctuations against the US dollar. The US presidential elections will also impact this year’s numbers, with a likely slowdown during the second half of the year leading up to Election Day.
As this mid-year report makes clear, when you add these trends together, it becomes difficult to see where incremental demand could possibly come from. Thus, expect 2016 numbers to show another flat – if not down – year for business aviation.
State of the industry
For the first time in five years, the General Aviation Manufacturers Association’s (GAMA) annual general aviation delivery report indicates a decline in new aircraft sales. Preliminary figures for 2015 show that the industry shipped 2,267 fixed-wing aircraft, representing a 109-unit drop (4.6 percent) over 2014. Although there was a very slight increase in the delivery of business jets, overall dollar volume dropped by 4% to $20.9 billion, with the helicopter sector also recording reduced shipments.
“These numbers reflect a market characterized by plummeting energy sector revenue, economic uncertainty and currency fluctuations in key markets such as Brazil, Europe, Russia and China,” says GAMA President & CEO Peter Bunce.
Looking at regional statistics, the GAMA report shows the US taking 62.6% of the industry’s deliveries in 2015, compared with 53.2% the year before. However, sales to Europe declined from 16.4% to 11.3% of the total, and Latin America, the Middle East and Africa also showed small reductions.
It wasn’t only deliveries that were down, according to recent ARGUS International data, business aviation traffic, in general, also suffered. According to December 2015 statistics, in North America flights were up 2.6% over 2014, with business aviation flights increasing 11 out of 12 months in 2015 and up 2.1% for the year. In fact, one report showed North American business aviation activity at its highest level since 2007. Although it’s easy to get excited about any figure in the plus side of the column, these percentages can be very misleading as one has to keep in mind the extremely low traffic numbers posted since the recession in 2008. Thus, a 5.2% increase in Part 135 charter activity and 4.4% increase in fractional flight data are more indicative of a flat market than a growth-orientated one.
In Europe, the picture is even less encouraging. According to recent EBAA figures, business aviation departures for Q1-2016 were down 3.7% from the same period last year. This change is in line with the overall trend of the past several years. Following a peak of 143,146 Q1 departures in 2011, the number has been steadily decreasing, with 2015 seeing a decrease of 3.5% from 2014. In comparison, the decrease between the first quarters of 2015 and 2016 is slightly less at 3.2%, for a total of 123,038 departures.
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“The problem is that the state of the European, and indeed the global, business aviation industry is not reflecting its value proposition. In short, it has barely recovered at all from its crash in 2009, and business aviation activity in Europe has actually slipped in each of the last two years,” explains WingX Advance Managing Director Richard Koe. “More so, the customer base – whether aircraft buyers or charterers – is not growing. Instead, the industry is reliant on a tiny niche of ultra-rich individuals. Worse still, this cohort now appears to be receding, as their oil incomes dwindle and shareholdings slump.”
Continuing with the theme of declining numbers, in general, OEM backlogs have also been declining. According to JetNet iQ statistics, national GDP is closely related to the health of the business jet market, and the US remains the prime market. Here, both Textron and Gulfstream have seen a small uplift in their outstanding orders, thanks to new models. However, these same statistics show Dassault and Embraer having been playing catch up and rapidly cutting into their backlogs over the past three years. But these companies are not alone in building some ‘white-tails’ to give early delivery dates to new customers. Bombardier has moved to a position where delivery billings are exceeding new sales volume, and as a result, its backlog has fallen to $20.3 million as of late 2015, compared with $24 million in 2014.
Evolving Replacement Plans
Another key market indicator is owner replacement plans. According to JetNet, pre-owned jet owners are keeping their aircraft for 3.2 years, which is about a year longer than in 2005. The length of jet ownership has risen from 3.7 years in 2005 to 5.1 years in 2015. As owners have been holding onto their jets for several years already, in coming years, replacement is expected to account for 70% of business jet demand in the North American market.
Likewise, according to the latest edition of the annual Honeywell business aviation forecast, operators plan to make new jet purchases equivalent to about 22% of their fleets over the next five years, either as replacements or additions to their current fleet. Of these purchase plans, 19% are scheduled to occur by the end of 2016, while 17% are scheduled for 2017 and 20% in 2018.
The Honeywell survey goes on to note that operators who do plan on buying could be delaying their plans in order to wait for new aircraft that will offer greater performance and improved cabin features. This is an ongoing issue for the numerous OEMs with new products in the pipeline. As potential buyers look with great anticipation towards these new, high-tech models, they may ask themselves why buy an existing aircraft lacking the latest bells and whistles if they can just wait a few years for the new model? The result is that some are holding off on any purchase decision – a challenge that OEMs need to manage as they transition from a legacy to a new model.
“While sluggish economic growth and political tensions are driving a more reserved approach to purchasing, we are seeing some operators invest in retrofits and upgrades for their existing aircraft, especially around connectivity, thus boosting aftermarket opportunities,” says Honeywell Business and General Aviation President Brian Sill.
Back to the Light
There is some surprising news when looking at purchase trends based on aircraft size. Whereas the medium and large cabin segments have traditionally been where business is highest, CIT is seeing a double digit decline in value. With this in mind, expect to see a cyclical increase in light jet sales. From a unit perspective, this market has been somewhat of a US phenomenon and, consistent with a rebound or resurgence in the US market, we will likely see an increase in light jet purchases as they tend to be uniquely configured for a US-centric mission.
As we look at the remainder of the year and beyond, what can we expect?
When it comes to the pre-owned market, residual values of business jets are causing owners to delay replacement, and this has an effect on availability of used aircraft. According to a recent Jetnet survey, 59% of those surveyed were influenced by the current used aircraft market. However, OEMs will be encouraged by the fact that available used jets are now down to a ‘normal’ level of 12% of the world aircraft fleet, compared with 17% in 2009. For existing operators, there is no reason for them to add to or replace their existing aircraft.
The Honeywell forecast takes the view that the flow of new models such as the Gulfstream G500/G600, Bombardier Global 7000/8000 and Dassault Falcon 5X/8X will stimulate the market after 2017. According to its most recent forecast, it foresees sales of 9,200 new business jets with a total value of $270 billion during the next decade, with 61% of these going to the North American market, 17% to Latin America and 14% to Europe. However, the report cautions that a significant upturn will not materialize before 2017.
Our conclusion: expect more of the same through to the close of 2016, with better days expected from 2017.