On The Fly

On the fly

The new mediocre

It’s that time of the year – January. Some of us are probably still committed to our New Year resolutions and, at the very least, remain optimistic about the immediate future. And as in life, so too in business aviation, where the industry closed the books on a year that flirted with the positive and provided a hint of some much needed optimism – although constrained by the realities of today’s ‘new economy’.

For starters, Honeywell’s 23rd Annual Business Aviation Outlook is forecasting up to 9,450 new business jet deliveries – worth $280 billion – over the course of the next decade. This isn’t too shabby, especially when you consider it represents a 7 to 8% increase in what they had originally forecasted back in 2013.

“Slightly higher unit deliveries are coupled with modest list price increases and the continued strong showing of larger business jet models in the delivery mix are generating the growth,” says Honeywell President Business and General Aviation Brian Sill. “2015 industry deliveries are anticipated to be up modestly again, reflecting momentum from several new model introductions and some gains linked to incremental global economic growth.” 

Also read: Building confidence.

Much of this increase in purchases is driven by operator plans to update their fleets. According to the Honeywell survey, interviewed operators plan to make new jet purchases equivalent to about 23% of their fleets over the course of the next five years. These purchases will be either as replacement or in addition to their current aircraft fleet. Of the planned purchases, 19% are intended to occur by the close of this year, while 14% and 22% are planned for 2016 and 2017 respectively.

Meanwhile, Bombardier, who released their 20 year forecast during the Farnborough Airshow last July, anticipates the delivery of 22,000 business jets through 2033. This represents approximately $617 billion in industry revenue. To break this down by decade, the OEM expects 9,200 aircraft deliveries valued at $264 billion between 2014 and 2023 and 12,800 aircraft valued at $353 billion from 2024 to 2033.

Must-read: The business of Farnborough.

“The market for business aviation continues to show promising signs of recovery,” says the report. “While current macroeconomic indicators are mixed, the overall trend for the world economy is stable to positive.”

Last year, world GDP was expected to grow by 2.9%, with high growth expected starting this year onward. Industry order intake saw incremental improvements in 2013 over 2012, allowing the industry to record a book-to-bill ratio of one for the second consecutive year. Industry deliveries are expected to increase slightly in 2014 over last year, based on the delivery guidance of manufacturers and new aircraft programs.  

But perhaps WINGX Advance summarizes the current state of business aviation best in its just-off-the-press 2015 Outlook. Here it notes that although North America has been in recovery mode since 2013, Europe remains in a rut – but is “coming off the floor”. It also reigns in our expectations by noting that combined activity in 2014 was 12% less than the 2007 peak.

“Overall there is a positive outlook for 2015, determined by US economic growth, but clouded by economic weakness and geopolitical disruption in other parts of the world,” says WINGX Advance Managing Director Richard Koe. “In other words, we can say the market is improving, but not as much as previously hoped, meaning we might best characterize the year as setting ´a new mediocre´.”

Where in the world?

When it comes to where these new jet purchases are happening, according to ACASS, there is a clear shift underway in terms of the international markets generating aircraft buyers and sellers. “The most recent global recession led brokers to shift their focus from the US to emerging markets like the BRICs (Brazil, Russia, India, and China ) and MINT (Mexico, Indonesia, Nigeria, and Turkey)— and they have remained in the spotlight for some time now,” says ACASS President and CEO Andre Khury. “But while these markets continue to garner and warrant attention, we see the focus shifting back to the US, and likely to accelerate in that direction as the market continues to strengthen.”

Khury notes that much of this change has to do with the US dollar gaining strength and slumping oil prices in many emerging markets, such as Russia and Nigeria, which are taking a toll on key industries and national economies. “Consequently, we believe we will see a significant rise in the US market for transactions, charter, and in flying hours as a whole,” he says.

Honeywell, meanwhile, notes that 2015 will see a realignment of near-term regional market shares. This is in part due to the fact that forecasted demand from North America fell this year following an increase last year (the first since 2010). About 59% of projected demand comes from the North American market: “New aircraft acquisition plans in North America are still significant given the region’s overall size,” says Honeywell’s Sill. “Coupled with projected gains in fractional fleet deliveries, North American demand should still support industry volumes as some of the traditional higher-growth regions work through another year of reduced growth rates.”

Bombardier says orders are expected to remain challenging across the industry, but are projected to improve starting this year. It anticipates demand for business jets to shift towards emerging markets, with the fleet of large and medium category aircraft growing, with the large aircraft category showing the fastest growth. However, like Honeywell, Bombardier sees the majority of growth occurring in the North American market. Its report predicts that this market will receive the greatest number of new business jet deliveries within the covered 20 year period, followed by Europe.

In Asia Pacific, Honeywell reports new jet acquisition plans for 12% of the current fleet – lower than the 24% reported last year. This is a result of relatively disappointing growth figures and various austerity initiatives. As a result, Honeywell pegs the region’s total share of global demand for the next five years at 3%, two points lower than 2013 levels.

That being said, Honeywell does note that the region’s fleets have been growing at double digit rates recently, and this trend is expected to continue. Bombardier backs this belief, stating that China is forecasted to become the world’s third largest region in terms of deliveries over the next 20 years, where 950 deliveries are expected between 2014 and 2023, and 1,275 between 2024 and 2033.

The Middle East and Africa are telling a similar story, with projected five year global demand moving below its historical 4 to 7% range. According to Honeywell, 18% of the region’s fleets are projected to be replaced or added to with a new jet purchase – down from last year’s surveyed 26%. “The level of purchase plans is under the world average and unsurprising in that it has been a year of significant political upheaval and ongoing conflict in the region, as well as a year in which oil prices have drifted lower and health crises have emerged in Africa,” explains Sill. “Regional distress has taken a toll, with operations scheduling their purchases later in the next five year window than was expected last year, with only 21% of purchases planned before 2017.”

In Latin America, Honeywell’s survey results indicate 28% of the sample fleet will be replaced or added to with new jet purchases – 11 points lower than last year. However, 2014 results remain above the global average, with planned purchases being heavily front loaded (47% of projected purchases look to happen in the next two years).

Last but not least, Europe. Following a jump in purchase expectations last year, Honeywell sees things falling back in line with the typical 30 – 33% forecasted in previous surveys. The region’s estimated global five year demand is at 18% as operators continue to contend with sluggish growth and, in some areas, increased political tension.

“The long-term macro trends that support demand for business jets are still in place, notwithstanding the topical issues we find coloring responses to the 2014 Operator Survey,” says Sill. “We believe global business aviation growth will be aided by structural and regulatory reforms, longer-term economic growth and aircraft innovation.”

Go big or go home

When walking the aircraft showrooms, operators continue to be charmed by the large-cabin aircraft, ranging from the super midsize to the ultra-long-range and airliner conversions. In fact, Honeywell expects this sector to account for more than 75% of all expenditures on new business jets in the near term.

This is especially true in the Middle East market. “What we are seeing, particularly in Dubai, is a move away from midsize business jets to the super large and ultra-long range categories,” says ExecuJet Aviation Group Operations Director/AOC Accountable Middle East Mark Hardman. “Elsewhere in the region the BBJ and ACJ remain popular with a number of deliveries in Saudi Arabia and Qatar.”

Looking ahead, Hardman foresees Bombardier's Global 7000, 8000 and Gulfstream's G650 dominating the market in terms of future new deliveries.

However, this doesn’t mean it’s End of Days for the mid and small size aircraft. In fact, Honeywell also notes another trend being an increasing interest in the midsize and small cabin aircraft. “While large-cabin models still garner the largest share of specific buying plans, the midsize and smaller models recovered some share for the first time in several years – reflecting improved prospects for popular production models as well as stronger interest in newer models just now available or soon to enter service,” adds Sill.

Flight activity and charters

As to flight activity, things are starting to takeoff, albeit slowly. Honeywell notes that “although much of the ground lost by operations during the 2009 recession still remains to be recaptured, moderate improvements in international flight activity and in US operations in general continue.” The company goes on to report modest prospects for improved levels of flight activity, expecting 2015 to show growth in the low single digits. In Europe, modest growth is expected in 2015, driven in part by improved economic prospects in Western and Central Europe, but remaining exposed to further drags imposed by the ongoing political tensions with Russia. 

In terms of aircraft segment from which flight activity is expected, we turn to Avinode, an online marketplace for buying and selling air charter. According to their forecast, in the light jet category, US flights are expected to grow by 2.6% in 2015, driven mainly by a 12.5% increase in entry-level jet activity. In Europe, the light jet category will grow by only 0.5%, reflecting market share losses in light jets offset by 3.3% growth in entry-level jets.

Also read: Breaking the technology barrier.

In the midsize jet category, flights will see US and European growth of 3.1% and 2.2% respectively. In the heavy jet category, flight numbers are predicted to rise by 5.8% in the US and 3.5% in Europe. This expansion will be driven mainly by ultra-long-range jet flights, which will grow by 8.4% in the US and 8.1% in Europe.

On the pre-owned side, Honeywell notes that the number of pre-owned jets on the market has fallen, with approximately 10% of today’s fleet up for resale – down from the 16% high of 2009. This number is in line with pre-recession numbers, although asking prices continue to decrease.

For the charter market, things are looking up – particularly in the US. According to Avinode, the US business jet charter market will continue to grow in 2015, with a 3.5% increase in flights over last year. “In 2014 the US charter market has performed extraordinarily well, demonstrating its strongest figures since the financial crisis,” says Avinode Group CEO Niklas Berg. “We expect that by the end of 2014, the US will see its highest annual levels of business jet travel for at least six years. New business models are emerging, more aircraft are being purchased, and venture capital is flowing back into the market. This trend will only continue in 2015, when we are predicting market growth of 3.5%.”

Even Europe looks set to show some growth, with flight volumes growing by 1.6%. “After six years of decline, we expect the European market to finally move back into the black in 2015,” notes Berg. “This aggregate figure reflects a clear divide between improving conditions in the North and ongoing challenges in the South, plus ongoing uncertainty caused by geopolitical issues between Russia and the Ukraine. While we expect the European market to improve next year, the region will take longer than the US to return to its pre-recession levels.”

For this year Avinode forecasts Northern Europe, where demand is more related to business travel, to experience 2.8% market growth. In contrast, Southern Europe, where flight activity is more leisure-related and the impact of Russia/Ukraine developments more apparent, flight activity is expected to increase by only 0.8%.

So that’s what the numbers are predicting for 2015. But as we learned in 2014, global events can quickly impact the math. In other words, we’ll just have to wait and see …

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