Industry Blog: Bizav Market Poised for Takeoff

Mar 16, 2018 - 1:00 PM

Clear indications of a tightened preowned business aircraft market are as welcome as flowers in spring. For-sale inventory levels now represent 9.4 percent of the in-service business jet fleet and just 6.9 percent of business turboprops, their lowest levels in more than 10 years.

Savvy buyers have had a field day recently, snapping up most of the young and most desirable inventory. There are currently just 130 business jets on the market that were delivered new in the last five years.

Fully 46 percent of the for-sale jet fleet is now more than 20 years old, with few buyers—and even fewer financiers and lessors—interested in these aging assets. Just 77 business turboprops delivered new in the past five years are currently listed for sale, with 62 percent of the for-sale fleet now older than 20 years.

With a looming ADS-B Out implementation deadline of Dec. 31, 2019, the business aircraft marketplace is facing a long-overdue pruning over the next two to three years, barring any sudden arrival of a very-low-cost ADS-B upgrade solution. Business aircraft manufacturers, lenders, and lessors—as well as investors, brokers/dealers, and other stakeholders—are taking note of the preowned-market conditions, which bode well for a return to the stronger residual values and lower concession levels needed to close deals.

Based on investor guidance and my own analysis, new business jet deliveries should be similar and probably just slightly higher for the market as a whole in 2018, another welcome development that should support stronger aircraft valuations and somewhat less discounting. Coming onstream in 2018 and beyond, new business jet models in the light, super-midsize, and large-cabin segments should stimulate buyers to return to the negotiating table across a wide swath of the market.

Buyers interested in the recently certified Pilatus PC-24 light jet will have to literally take a number, as the company has already sold out the first three years of production slots. Fleet buyers, including fractional program holder PlaneSense in the U.S. and Royal Flying Doctors Service in Australia, are soon to put into service the first of their new PC-24s, while making no secret of their interest in purchasing many more than their initial allotment of the Pilatus jets.

Textron Aviation, Gulfstream, and Bombardier are each in the advanced stage of achieving certification of new models, including the super-midsize Citation Longitude; large-cabin G500 and G600; and Global 7000, respectively. Along with the recently launched Falcon 6X, with expected entry in service in 2022, and the Cessna Citation Hemisphere, the level of new product investment is at an unprecedented level today.

While all of this R&D is in welcome contrast to the industry’s pullback in the long, slow recovery of the mid- to late-1980s, we should not expect these investments to provide much upside to the new jet delivery numbers this year.

Common challenges—including managing problematic suppliers, bringing new production tooling online, managing a modification line, recruiting and training skilled employees, ramping up production, and tackling costs of poor quality—whether they're foreseen or not, all need to be factored into the equation. Not to be forgotten are the many buyers who are reluctant to take delivery of an early-serial-number aircraft or an end-of-line production model, which are classic examples of the ancient principle of caveat emptor.

While welcome and warm tailwinds are expected from the new U.S. tax laws, business aircraft sales are not exempt from the vagaries of an uncertain international trade environment. Protectionist rhetoric from the Trump Administration, culminating in new tariffs on imported steel and aluminum, could be the opening volley in a tit-for-tat trade conflict that already has U.S. allies scrambling.

Although higher tariffs on imported steel and aluminum will not likely have a material impact on the total production cost of a new business aircraft, a greater concern is how unilateral measures can quickly spiral into countermeasures that disrupt long-established international trade flows. Most economists recognize this as a zero-sum game and one that the World Trade Organization was specifically established to avoid.

In my ongoing work with business aircraft owners and operators, they consistently indicate that economic and regulatory uncertainty is at or near the top of their lists of aircraft-purchase inhibitors. After the U.S. economy–stimulating tax cuts signed into law just a few months ago, the stage is now being set for a dangerous escalation of tariffs and counter-tariffs that will—at best—further delay the recovery of business aircraft markets.

Here’s hoping that intergovernmental rhetoric is replaced by reason, sooner rather than later, so we can all get on with the business of business aviation.

Rolland “Rollie” Vincent is president of Rolland Vincent Associates, a Plano, Texas–based aviation consultancy with a focus on market research, strategy, and forecasting. Vincent is also managing director at JetNet iQ. He can be reached via email or by telephone at (972) 439-2069.