The business aviation industry is as bullish as its been in a decade. So should we have been heading into the final quarter of 2018 with confidence or trepidation?
2018 came to a close with the business aviation sector still talking with the warm glow of its upturn in fortunes last year and in the first half of the year 2018. Those 18 months saw a sustained reduction in excess aircraft capacity, the industry’s fundamental weak spot since the Global Financial Crisis a decade ago. Aircraft brokers have seen their best-ever results in the pre-owned market and commentators have seen this as the prelude to new aircraft orders and deliveries. Excitement has also built around the renewed and long-belated head-to-head competition between Bombardier and Gulfstream aircraft at the top end of the product performance spectrum.
However, the growth narrative has got messier in the second half of the year, reflecting the dislocation of the harmonized global growth we were told to expect of the global economy in 2018.
Chart 1: Long term trends in North American and European market business jet flights
In reality, this optimistic outlook palled for most economies, with the stark exception of the US economy, which saw supercharged growth of close to 4% in the first half. With 65% of the global fleet and three quarters of the flight activity, that was still good news for the business aviation industry. But much of the impetus came from a one-off fiscal stimulus, which is now fading. And even if the rest of the world accommodates a minority of the business aviation market, America’s businesses still depend on external economies to maintain their own economic activity.
Approaching 2019, the macroeconomic outlook is set to deteriorate further. We are likely to see synchronization, but in the negative sense, with economic growth regressing globally. The US economy has already slowed in the last 6 months, with the dollar on course to strengthen progressively, weakening American exports. Global markets, especially emerging markets, are increasingly jumpy of the impact on capital flight from quickly-rising dollar-denominated sovereign debt. Escalating tariff disputes with the US are creating a grave threat to China’s growth path, which is the mainstay of emerging market demand. And then there’s Europe, which faces a panoply of political risks, and has already seen its peak economic recovery in 2017 flatline in the last 6 months.
High demand for quality pre-owned jets
The European market nonetheless took top marks from Honeywell’s global business jet survey in November, with the largest improvement in year-on-year planning for corporate aircraft replacement and upgrade. This positive outlook is echoed by many of the leading brokers, such as Colibri and The Jet Business reporting record performance, with demand for quality pre-owned jets rapidly hoovering up excess capacity. This apparent contrast with the gloomier macro picture is partly down to the lagged effect of the renewal in Eurozone economic growth in 2017, and also reflects the buoyant US buyer importing aircraft back home, purchasing power reinforced through a stronger dollar. In other words, it looks like a short-term good news story.
Aircraft brokers have seen their best-ever results in the pre-owned market and commentators have seen this as the prelude to new aircraft orders and deliveries.
Elsewhere, the industry appears to lack compelling evidence that optimism is translating to results. The improvement in the pre-owned market is indisputable, but the implied benefits for new aircraft orders is not yet convincing. And new business jet deliveries were down in H1 2018, and at best will only slightly improve on 2017 by year-end, noting that last year’s deliveries were the lowest in more than a decade. The aircraft maintenance market has done better, boosted by equipment mandates such as ADSB. The associated aircraft downtime may be one factor, which explains the disappointing slowdown in business aviation flight activity. Stagnating jet cycles in the US in H2 2018 are the first in several years, whereas Europe’s flatline has returned after just an 18 months window of recovery.
European flight activity has flattened to around 1% year-to-date, with the last few months seeing a drag from a number of operators exiting the business. First to go was Blink back in July, at one point the biggest Mustang operator in Europe – in its start-up phase 10 years ago it had an order for 45 aircraft. Then went Waves, the Caravan-operated shuttle provider, which had hoped to use the Channel Islands as a test bed for a European footprint. In October, Birmingham-based AOC operator Cello Jet ceased trading. Towards the end of the year, PrivatAir, the ACMI operator which pioneered business-class only bizliner shuttles 15 years ago, filed for bankruptcy. And Surf Air, which had struggled for 2 years to ramp up its successful US-template for city-to-city shuttles, closed operations in December.
Excitement has also built around the renewed and long-belated head-to-head competition between Bombardier and Gulfstream aircraft at the top end of the product performance spectrum.
There are many specific factors which might explain the demise of these various operators, but the common denominator is the ferociously competitive supply-side, and the softening demand as the broader economic context deteriorates. There is also a change in investment appetite. Two years ago the industry’s up-cycle encouraged excess liquidity to pursue all kinds of high risk but potentially ‘disruptive’ ventures. Now, as QE programs are winding down and borrowing conditions tightening, investors are more demanding. Intermediaries and charter brokers have also been affected, with a number of well-invested online platforms, including Stratajet, Stellar, Jet Smarter, either pulling out of the business or significantly repositioning their model.
The slowdown in Charter demand is a problem for the European market, as the evidence shows (see Chart 2) that Charter has been the principal prop for activity in the last 2 years. As this demand has eroded, it has not been replaced by Private flights, which suggests that Owners, at least on an aggregate basis, are not yet replacing and upgrading aircraft. It has been noted that the current replacement cycle is much longer than in the past, but the hope has been that this year’s delay is only anticipating the entry of brand-new aircraft models, especially the Global 7500 and the Gulfstream 500. So by this argument, we won’t see the benefits until 2019.
The associated aircraft downtime may be one factor, which explains the disappointing slowdown in business aviation flight activity.
A more pessimistic view is that corporations, in particular, are more likely to close flight departments in favour of sourcing aircraft through subscription programs or even ad-hoc charter, as opposed to take on the risk of renewing full aircraft ownership. There has been a string of such examples recently including General Electric, JC Penney and Tesco. There is also the broader concern that disruption to global trade and a downturn in business investment and consumer confidence will see cutbacks in premium travel next year. Reflecting on-going crises, political and economic, the UK and Italy are the obviously fragile markets. Europe’s economic powerhouse, Germany, has also flagged this year, with some indicators showing a technical recession in H2.
In terms of business jet activity, the slump in flights from the UK does appear to reflect the Brexit crisis and associated fall in business confidence. Other top markets have held their own over the year but have started to see substantial weakening in demand towards year-end. For Switzerland, the big drop-off in November may only point to last year’s exceptional ski season. Turkey’s decline is a long-standing reflection of declining business confidence and heightened political instability. In contrast, Greece and Spain continue to shine as they recover from very low points in 2016. The busiest country connection is UK-France, with almost 20,000 business jet flights between the 2 countries, up by 2% for the year but falling 5% and then 11% in the last 2 months.
Looking ahead to 2019, there is no clear resolution in sight to Europe’s various political crises, and with the economy on softer ground, business aviation will undoubtedly face headwinds. Those likely to feel the brunt are the small suppliers, particularly single-dimensional business models, which comprise the larger parts of the market. Suppliers with multiple channels to market, such as operators combining aircraft management, charter, maintenance and sales, will have more options in addressing shifts in demand. Leveraged businesses will feel the heat as investors and lenders put more emphasis on profit than revenue growth. But there will be winners too, particularly those with the right combination of scaled capacity and technology platforms to displace the industry’s historic fragmentation and inefficiency.