Rolland Vincent

Exactly 10 years after the onset of the global financial crisis triggered by the bankruptcy filing of subprime mortgage specialist Lehman Brothers, market conditions for business aircraft are continuing to tighten. For buyers interested in a preowned business jet, about 1,900 aircraft are currently listed as “for sale” on the various online marketplaces, representing less than 9 percent of the in-service fleet—the lowest percentage availability in more than 20 years.
Only about 135 of these jets, or 7 percent of the for-sale total, are considered to be young inventory—aircraft delivered new in 2013 or later, many of which are still covered by a factory warranty. Buyers seeking a specific young inventory aircraft—such as a top-of-the-market Gulfstream G550 or Bombardier Global 6000—might be dismayed to know that only a handful of either model is currently listed for sale.
With few “nearly new” aircraft available, and essentially flat production rates, transaction prices have finally begun to firm up, shifting the balance from buyers to sellers and signaling another indication of business aviation’s market recovery.
The worldwide preowned business jet market had a banner year in 2017, with more than 2,700 retail sale and lease transactions. Last year, preowned jet sales on a unit basis outpaced new jet deliveries by a factor of 4.2:1, an impressive achievement. Through the beginning of last month, worldwide preowned sales volumes are exactly on par with last year, despite lower business jet inventory levels and no doubt fueled by attractive new tax and depreciation laws that took effect in the U.S. at the end of last year. Talk with an aircraft broker/dealer these days, and you will inevitably learn that they are busy, especially trying to locate the right airplane for eager buyers.
A tighter preowned jet market is driving buyers to make faster decisions and is beginning to put upward&nbsp;pressure on prices. Manufacturers are also beginning to report better results, whether in the form of firmer pricing, stronger margins, or increased new orders.
For the first time in 10 years, new business jet orders outpaced factory deliveries in the first half of the year, driving a book-to-bill above 1:1 for the “Big 5” OEMs: Bombardier, Dassault, Embraer, Gulfstream, and Textron.
This is a fundamentally different marketplace than just 12 to 18 months ago, when buyers were still blessed with the luxury of time and a variety of good inventory from which to choose.&nbsp; What a difference a year and a half makes, or does it?
While most market and industry indicators have shifted into recovery territory, there are several key metrics that I have on “high watch.” Shipments of 296 new business jets in the first half of this year, as reported by GAMA, were identical to the prior year, implying steady production rates.
Peeling the onion a few layers, however, and removing the single-engine Cirrus Vision Jet (which entered service in 2017 and is still in production ramp-up), first-half 2018 shipments of twin-engine business jets were down 8 percent year-over-year (YOY). Ironically, this delivery performance shortfall actually buoyed the industry’s book-to-bill results, the ratio of new orders to factory deliveries.
Stronger second-half factory deliveries are a characteristic of the business jet industry and should result in a book-to-bill for the entire year to be near or more likely just above 1:1.&nbsp; While this will represent an impressive turnaround from results from each of the last 10 years, a 1:1 book-to-bill ratio is generally considered to be insufficient to warrant increases in production rates.
Although manufacturers are expected to have a solid second half, JetNet iQ’s current forecast is that twin-engine business jet shipments for all of 2018 will be down about 2 percent YOY on a unit basis, which is hardly a clarion call for higher production rates nor a signal of a fully recovered market. Demand for light jets in particular has still not recovered, in what has been one of the lingering puzzles confounding several OEMs and their key suppliers in the post-2008 period.
OEMs are in daily battles for market share, with most having at least some unsold production positions for delivery this year. While this may be an opportunity to capture the signature of an eager buyer in the waning months and weeks of 2018, so-called white tails are known to put a few grey hairs (or is that white hairs?) onto the heads of CFOs, CEOs, and other stakeholders across the industry.
Whether they are in the hunt for a single aircraft or an entire fleet, end-of-year buyers have by now been exceptionally well trained to play the fourth-quarter price game with OEMs, and 2018 looks to be no exception. This will dilute at least some of the pricing gains that have been made year-to-date and keep a lid on the recovery of business jet residual values, which are one of the lingering aftermaths of the 2008 crisis.
With the industry already feeling the effects of the worldwide shortage of pilots and technicians, other factors are also complicating business aviation in the short term. This includes a strengthening U.S. dollar, escalating trade tariffs, higher U.S. inflation, the prospect of higher interest rates, and slower economic expansion in 2019.
Although no one likes to use the “R” word if only for fear of triggering a domino effect, any student of economics will recognize that, like an airplane, economies and markets that go up also come down, hopefully softly and safely. With the U.S. now entering its ninth year of economic expansion (a lengthy period based on historical patterns), the probability of a U.S. recession as soon as 2019 or 2020 has increased, although it is still not considered likely.
From my perspective, I am looking for a strong finish to the year for new aircraft orders and preowned aircraft sales, with sales concentrated among U.S. and European customers. The service-entry advent of several highly anticipated new models—including the Gulfstream G500/G600, Cessna Citation Longitude, and Bombardier Global 7500—should otherwise help to further bolster pricing, but competition for each sale will be fierce.
In this environment, OEMs are wise to examine how they can remain relevant and essential to customers throughout their lifecycle of ownership, regardless of the ups and downs of the inevitable business cycle.
Rolland “Rollie” Vincent is president of Rolland Vincent Associates, a Plano, Texas-based aviation consultancy with a focus on market research, strategy, and forecasting.&nbsp;He can be reached by <a href="mailto:rvincent@rollandvincent.com">email</a> or telephone at (972) 439-2069.

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