Daniel Hall, Business and Commercial Aviation Senior Analyst and Chris Seymour, Head of Market Analysis, discuss a business jet recovery and important changes in Market, Base and Future Values.
The business jet community has been asking if the industry is finally in recovery for three or four years now, but each new year seems to bring a false dawn. So will 2015 finally be the year with a sustained recovery from the post-2008 downturn?
The scale of the problems which have faced the business jet market have been severe. In the 2004-2008 period, new deliveries more than doubled to a peak of 1,300 (the previous peak was 800 in 2001). In retrospect, the market was overheated, with the availability of many new models and the growth of the very light jet market stimulating a large increase in supply.
The 2008 global financial crisis, subsequent downturn and negative publicity about business jets resulted in a delivery fall of 50% in three years. The main impact has been on the smaller sizes, with new demand impacted by high levels of used availability, especially of young or nearly-new aircraft. Owners also held on to their new aircraft for longer, an average of seven years in 2014 compared with three to four years pre-recession, thus reducing replacement by newer models.
The main OEMs impacted were Cessna and Hawker Beechcraft, which focused on the smaller sizes, with the latter now taken over by Cessna’s parent Textron. New deliveries have focused on the medium to larger cabin and ultra-long-range sizes, with 2014 seeing a 65% share in value for the large cabin / long range (heavy and bizliner) category. Gulfstream, Bombardier and Dassault lead in these sizes.
There was some positive news in 2014, with a 7% uptick in deliveries to 716 after three flat years, and it marked the first increase since 2008. The number of used transactions dropped to a low in 2009 of just over 2,500, over 1,000 fewer than in 2007. There has been an increase since, albeit flat in 2012-2014 at around 3,500, some 18% of the fleet.
The used inventory has also been declining, below 10%, another positive sign. Asking prices have yet to show any significant improvement, perhaps indicative of a market wary of upsetting a fragile recovery. Market Values will be discussed below.
Utilisation of the fleet has also been improving, with 4-6% improvements year-on-year, but is still lower in absolute terms than in the pre-2008 period.
Most commentators see the US market – the largest for business jets with 61% of the fleet – as being the main driver of a sustained recovery in 2015, especially for used aircraft.
The new aircraft market has been dampened by the slowdown in the Asian market, with China still of concern. The European market has been hit, firstly by the Eurozone crisis and more recently by Russia-Ukraine. These two markets took 195 aircraft in 2014. The lower oil prices of recent months may also impact demand from oil companies for new business jets.
Business jet OEMs have always been proactive in developing new models or improved versions of existing types, as the market is reliant on regular replacement. The Cessna Citation Latitude, Embraer Legacy 450, Bombardier Challenger 650 and HondaJet are to enter service this year. This should help push deliveries towards 800 again in 2015, even though it may be a challenge. Looking further ahead, another 10 new types or models are in development for the next three years, which should stimulate demand to reach over 1,000 annual deliveries by 2021. Ascend’s Global Business Jet Forecast predicts 9,475 deliveries worth $260 billion in the next decade.
Business Jet Values Update
Aircraft Market Values are one of the biggest drivers (and indicators) of a recovery. Since 2008 there has been greater focus on the value of the asset, particularly residual values. As noted during our Q1 2015 edition of Inside Track on Business Jet Values, we are beginning to see better Market Value performance and stability among business jet types, with declines of an average of 9.6% from Q1 2014 to Q1 2015, compared with 18% in the previous 12-month period.
As expected, in-production types fared better, showing an average 8% year-on-year decline in Market Values, while out-of-production models fell by an average of 11%. There remains a weak outlook for these types. Encouragingly, many types are now increasingly showing value stability. However, a lot has happened to Market Value performance over the recent years.
The chart on the left showing constant age 10-year-old values for popular midsize and large cabin types identifies a clear market shift in value performance, pre- and post-2008. Most of the fleet was valued between $15 million and $35 million, pre-2008, at 10 years of age, however today it is grouped in the $5 million to $20 million band for similar-aged aircraft. Some models (Bombardier Challenger 604, Dassault Falcon 2000, Global Express) have 10-year values of over 50% below their peak. There is also clearly the impact of greater competition, with this impact only likely to worsen. There is no recovery in sight for many of these models.
The chart below also shows a story of two halves. Many market participants once claimed that business jets showed excellent value retention – this was indeed true to a high degree. An index of original new Market Values shows how in many cases, values would climb over time. However, most recently in the past six years, we have seen consistent depreciation. Business jets now need to be looked at as depreciating assets.
New Base Values
The above analysis is part of a whole host of research which recently led Ascend to make major changes to Current Base Values and Future Value forecasts. These are detailed fully in an April 2015 edition of Inside Track on Business Jet Values.
As the market recovers, we are entering a phase of the cycle where supply and demand are increasingly approaching equilibrium for many models, which means that Market Values should be approaching Base Values, or be within a 10% margin away from Base. This makes it now an ideal time for review and recalibration of our Base Values. During the six-and-a-half years since the recession, we held back from drastically altering Base Values, because the market needed to be given time to recover and re-establish itself post-downturn.
Since the recession began in September 2008, Ascend has made just under 14,000 changes to Current Market Values across the 100+ business jet types and variants that we track and offer in our live appraisal service, the online Ascend Values from Flightglobal (formerly “V1”).
This provides us with substantial historical Market Value performance which crucially informs our Base and Future Value forecasts. Ascend is unique in the market in that it collates comprehensive historical Market Value performance to enable us to derive accurate and relied-upon Future Value curves.
Market Value performance of business jet types clearly shows us that the methods of depreciation pre-2008 categorically do not work in the same manner as in a post-2008 environment. Simply put, the old methods of depreciation at low percentages (typically 3-4%) do not correctly reflect future value performance, and financiers and owners have been, and will continue to be, caught out. Today, this risk is likely to be even higher, particularly regarding aircraft production cycles from the viewpoint of manufacturers. Our Future Value depreciation curves have been steepened.
In addition, we have also clearly distinguished the performance of large cabin business jet models once they move out of production, a status which was not distinguishable pre-2008.
Source: FlightGlobal.com
