It is May, not September or October, but I'm starting to have scary thoughts about where the global economy and business aviation in particular are headed. There is mixed negative news out there. Here are some things that have me wondering what is to come.
The US Standard & Poor's listing is close to all all-time high for its P/E Ratio. A stock's P/E ratio is equal to the stock's market capitalization (or simply, value of its shares) divided by its after-tax earnings over a 12-month period (think about profitability). Companies with high P/E Ratios are generally considers as more risky investments as investors are will to pay more for the company's profitability. Right now, the Standard & Poor's index P/E ratio is very high relative to the average. This could indicate an overheated market and foretell a coming downtown in stock prices. If high net worth individuals fear a downturn, they are not as likely to be buying aircraft. Similarly companies fearing a downturn will also spend less, thus be less likely to purchase business aircraft.
There are business aviation reports that support this. Jim Donath of Donath Aircraft Sales puts out a very well researched quarterly report on the pre-owned business jet market. From the first quarter of 2015, news isn't good. Flying activity is higher than in 2014 in the US, but down in the EU. Pre-owned business jet inventories are up for the second consecutive quarter. Donath reports 465 aircraft listed in inventory, the highest since the last recession. Transactions are not keeping pace relative to the growth in inventory. Many of these are older business jets and thus, values and selling prices are low, and the time it takes to sell them is increasing.
Asset Insight's quarterly market report supports Donath. They state:
Quality assets are readily available, but increasing maintenance costs are accelerating financial obsolescence for many aircraft. With nearly 47% of the models we track averaging an ETP Ratio in excess of forty percent, as much as half the “for sale” fleet may be resting with the aircraft’s final owner.
As mentioned earlier, flight activity in the EU is down 2.7% from 2014 with very light jet activity down 11% in April. Emerging markets for business jet sales, like China, although still growing, are not showing the strenth as in the past.
All of this is at a US or global level and may have a lot or little impact on your business aircraft operations. Still, be cautious and look for warning signs within your own organization. What is the business climate for your industry? What is your flying schedule looking like for the rest of the year. Are you flying more trips or more hours than you forecast? Ask your customers what they are anticipating for their air travel needs in the next 12 to 18 months. This can impact your expected maintenance budget for the year.
How are your actual costs compared with your budgeted costs? I bet your fuel expenses are down, but what about overall? I know your flight operation is operating pretty lean, but are there more cost savings to be had without sacrificing safety or service?
If you are looking at selling your aircraft soon, look at the comparable models for sale. How does your aircraft fit in? Do you have a prime example or just an average aircraft? Are your turbine engines on a guaranteed hourly maintenance plan? If you want your aircraft to sell, you may wish to accelerate upcoming major maintenance to offer the buyer 12 to 24 months without having to do any heavy maintenance. Same thought with avionics upgrades - plan on them before offering your aircraft for sale in order to better define your aircraft as the one to buy.
For us as a company, we are having a good year so far. But we are watching our expenses and being watchful with our cash flow. My question y=to you is this:
Will 2015 end up as a better or worse year for your flying activity than 2014 was?