The Affluent Page Features: Aeronomics

By Author: Samantha Dale
Total Articles: 610
Comment this article

Avjet explains the “new normal” of the private aviation industry.

Private luxury jets have long been an important part of the American landscape. Americans demand the very best in everything, particularly when it comes to safety, comfort and efficiency. We simply will not settle for less.

Like almost every other industry in the U.S., the private jet industry was decimated during the latter half of 2008. Flight departments shut down and long standing U.S. companies went under. Even private owners, who were not restricted by shareholder scrutiny, withdrew from flying their aircraft for fear of public backlash. Private aircraft values plummeted and supply of pre-owned aircraft skyrocketed.

With the financial disaster 24 months behind us, it is important to discern where we stand today. Thorough analysis of previous market cycles suggests we should have been fully recovered by now. Historically the private jet industry has flown in close formation with U.S. corporate profits. Since 1950 there have been eight official recessions lasting an average of 10 months, prior to the 2008 crisis. True to form, the ...
... private jet market mirrored every one of these recessions with a close parallel between recovery and corporate profits. This time around, we face a greater uncertainty leading many to question, is this the “new normal”?

The term, the “new normal,” gained worldwide recognition during the depths of the crisis in April 2009. Mohamed El-Erian, the CEO of PIMCO, used the term on CNBC to describe a new world of lowered growth expectations. PIMCO is the world’s largest bond investor with over $1 trillion under management.

Overnight, a man most people outside of financial circles had never even heard of was appearing on evening talk shows and newscasts. El-Erian argued that the return on any asset, whether a business, a financial investment or an aircraft, would be significantly lower for the next five to 10 years. Suddenly, everyone was using the term including President Barack Obama during a prime-time speech to the nation just three months ago. With the recent encouraging signs in the U.S. economy, the 4 to 5 percent returns on all assets for years to come proved unfounded in most instances.

Since El-Erian coined the term, the S&P rose 45 percent, longer term bonds have returned 9 percent and medium term treasury bonds returned 15 percent. GDP growth returned and corporate profits are up 44 percent during the same time frame. However, at this point, the “new normal” has not yet departed the private jet market. Unlike recessions past, the huge run up in corporate profits has not thrown the private jet market into take-off mode. There are a few indicators that suggest some sectors may be showing signs of promise.

The prevailing theme seems to be that “new” is good and “large” is better. More specifically this refers to aircraft that are five years or newer and of the large cabin variety. These would include the Gulfstream G450 and G550, Bombardier’s Global Express, Boeing’s Business Jet, Dassault’s 900 Series and its newest model, the 7X.

Across some of these model lines prices have actually begun to rise as evidenced by recent price increases for delivery positions of the G450, G550, XRS and Boeing Business Jet. Bombardier, buoyed by the recent strength in large cabin markets, announced a new line of long range jets, including the Global 7000 and 8000 to compete against Gulfstream’s forthcoming $60 million G650. Gulfstream also recently announced a $500 million expansion of its manufacturing facility in Savannah, Ga.

Select segments of the market are seeing an increase more than others. Some factors can be exclusively tied to who the buyers are for large cabin aircraft. It’s no surprise that much of the recent demand has come from Asia, more specifically China. Brazil, in stark contrast to much of Latin America, has also seen strong activity. Not far behind is the U.S., followed by the UAE and Europe to a much lesser extent.

Uncharacteristically, Asian buyers are mostly “first-time” buyers rather than “move-up” buyers. With consistent double digit growth rates, Asia is becoming the savior of private aviation much as it has become the driving force to pull the global economy out of trouble. Asian demand is clearly focused on new or near-new (2008 and up) large cabin aircraft.

The second defining element is more specifically tied to credit liquidity. Both U.S. and foreign financial institutions are still struggling with toxic loans on their balance sheets and are reluctant to offer financing for aircraft. Only the most credit-worthy have access to the lending market, and many financial institutions are hesitant to lend against any aircraft that is older than 10 years. In the fourth quarter of last year, it seemed credit markets for aircraft financing were opening up, but we have a long way to go. Newer large cabin aircraft in the $25 to $50 million price range have shown signs of recovery. However, midsize and smaller cabin aircraft are still struggling with oversupply and declining prices. These markets include Bombardier’s Learjet family, similar offerings from such OEMs as Cessna’s popular Citation family of jets, Hawker Beechcraft’s 900XP, and Gulfstream’s smaller cabin aircraft such as the G150 and G200, to name just a few. Typical buyers of these classes of aircraft have not returned to the market. Perhaps it remains to be seen if 2011 heralds in a return of these buyers and some stability in the medium-size market.

The last category spans all sizes of aircraft, but with one defining characteristic. It encompasses anything older than 15 years and especially anything built prior to the early 1990s. As previously noted, financial institutions have little desire to house an asset on their balance sheet that may have a default risk and zero chance of price appreciation. These would include stalwarts of the 80s such as the Gulfstream GIII, Bombardier’s Challenger 600/601 series, Dassault’s popular Falcon 50 aircraft and other such similar aircraft. As these aircraft approach 20 to 25 years old, they are well past their “sell by” date. Current owners will likely have to dispose of these aircraft for salvage value. Many will require maintenance equivalent to half or more than the value of the aircraft. A GIII that cost $6 million just four years ago may seem attractive at $1 million now, but maintenance costs can quickly negate these price discounts.

Is this the “new normal”? Although the recovery has not run according to plan, there is room for optimism. As it relates to corporate aviation, “the new normal” may end up being just another overused cliché.

Avjet, 818.841.6190, www.avjet.com

The Affluent Page is the global resource for luxury products and services.http://www.affluentpageluxuryindex.com/