I recently returned from the excellent Corporate Jet Investor CJI-Miami conference. The two-day conference was attend by over 200 financiers, brokers, lawyers, manufacturers, appraisers, consultants and others involved in the transactions of buying and selling corporate aircraft. This includes helicopters, too (see footnote) . There were individual speakers and panel discussions. And way too much good food. Congrats to the CJI team for putting on a great event. Much of the discussion centered around the state of aircraft sales, residual values, and when the "recovery" is coming and where. Here are some things that stood out for me.
Flying is still down. There were three sets of data points supporting this. Jet Support Services (JSSI) has their Business Aviation Index built from the utilization of about 2,000 aircraft flown by their program customers. For third quarter 2016 (2016Q3) flight activity was up 1.4% versus 2015Q3. Sounds good until you see the number, about 29 hours per month, is only 84% of the overall peak utilization. Separating out Part 91 operations showed utilization of 22.5 hours per month - only 270 hours per year. That is not high utilization for the business jet fleet.
Wingx, using FAA data, was not promising either. They show an average of 101 hours per year for all light jets and 159 annual hours for heavy jets. Not sure how accurate the FAA data is, but trends are trends and they are well off peak levels. Promising is that turboprop and light jet activity is on the rise.
JetNet's JetNetIQ report also showed increasing aircraft fleet cycles. But total fleet cycles flown this year are only at about 2003 levels even though we have 50% more aircraft in 2016 versus 2003. So we have more business aircraft flying fewer hours and cycles versus peak periods. But flying is slowly increasing. The utilization trend is positive.
Aircraft sales, new or pre-owned, are still flat and pre-owned values overall show no signs of recovering. Several commentators blamed an over supply of business aircraft and buyers in general just not being all that interested in acquiring aircraft. A couple brokers did note increasing sales activity in turboprops and light jets here in the US.
Here is a tidbit I got from looking at AMSTAT's data. For business jets globally, about 25% of the fleet, 4,140 jets, is aged over 25 years. Heavy jets are the youngest fleet with only 17% of their number aged over 25. For midsize jets, 24% and for light jets, 33% of the fleet are aged 25 years or older. On the surface, I'd say the time is ripe for those older jet owners to upgrade. Why aren't they doing so in big numbers?
Data that we see at Conklin & de Decker suggest that as aircraft age, they require increased maintenance to maintain their reliability. This increased maintenance is in dollars and downtime. As aircraft age, the increase in unscheduled maintenance associated with scheduled inspections also requires a great deal more maintenance down time. Similarly it will take more and more maintenance to achieve any kind of acceptable dispatch reliability. Both detract from the availability of the aircraft for flight operations. Data shows that availability drops from the 95% range for aircraft up to 15 to 20 years of age to an average of 70% at age 25 and 55% at age 30.
Aircraft Age Availability
0 – 20 years up to 95%
25 years up to 70%
30 years up to 55%
By age 30, many aircraft are spending as much time in the shop as being available to fly. Normally this is a big problem and justification enough to acquire younger, more productive, aircraft. But if utilization is low, then maybe this is not such a big deal. The JSSI data are for aircraft under their guaranteed hourly engine maintenance plans. This aircraft are likely to be newer models. Even so, 270 annual hours for a Part 91 business aircraft is not a lot of flying. The Wingsx analysis of the FAA data showing 100-160 annual hours also shows there is plenty of downtime left in the year for scheduled maintenance while meeting g the required flight schedule.
If operators with these older aircraft are able to meet the flying schedule and they realize the residual value of their aircraft is likely close to spare parts' values, maybe they see little need right now to upgrade. What about FAA NextGen? ADS-B is due by 2020, but for many of these older aircraft with analog equipment, the upgrade may only require a new transponder. If they cannot upgrade, then they might as well fly them until December 31, 2019 and park them. If this is the case for these operators, they may see little benefit to upgrading for another year or two.
Overall, the general mood at CJI was that things are very slowly improving. But pay close attention to the US. Europe is moribund for business aircraft. As long as oil prices stay low, along with political instability in the Middle East, sales activity there will be slow. Same for Africa. China and India, although they have the highest rates of GDP growth globally, are growing more slowly than in the past and account for a very small percentage of business aircraft sales. Mexico? Trump, NAFTA, and other trade worries impact there. Brazil's economy isn't promising right now, but Argentina, small a market as they are, is promising. Oceana, another small market for aircraft, is stable. The US has the globe's largest business aircraft fleet. The US, with a pro-business president and Congress combined with the current economic growth that's already underway offers the best hope for the next few years' aircraft sales.
Personally, I think as 2020 approaches, we will see an uptick in aircraft sales for those aircraft with the ADS-B mods already installed. As supply of these aircraft may be limited, that may help with new aircraft sales. But given the supply of pre-owned aircraft, that uptick might not be noticeable for another year, or 2018. Food for thought (as if after both Thanksgiving and the CJI buffets I have any room left).
Footnote 1. Most of the helicopter manufacturers are highly dependent on large multi-turbine helicopter sales. Most of those are in oil & gas. The CJI panel offered little hope for sales unless the price of oil goes up further. However, a recent energy find in West Texas combined the shale oil recovery and fracking technologies getting cheaper point to more land-based oil exploration. Stay tuned.