NAFA member, Alasdair Whyte, Editor, Corporate Jet Investor, discusses the last 10 years in business aviation.
Are you an optimist or a pessimist? Is your glass half full or half empty? Or, worse, is it lying on its side with the liquid soaking into your laptop, as you watch that spreadsheet you have been working on for hours, but not saved, go blank.
Your answer to this question will be a good guide to whether you think business aviation is about to see another industry downturn in 2019.
By most measures, 2018 was a good year for business aviation. More people flew than ever before (although total flight hours slowed in the second half of the year), deliveries rose, and the number of pre-owned aircraft for sale fell to the lowest level for 10 years. Margins were lower than many businesses would like (although that is true for most businesses every year), but compared to some of the past 10 years, 2018 was a good one.
Now many people are wondering if we are about to see another downturn?
Asking the question itself is healthy. Business aviation, like most sectors, is a cyclical industry. It always has been and it always will be. On the whole people and companies buy or fly in jets when they are feeling confident about their businesses getting better. When times are tough, it is easy to forfeit a deposit and cancel an order or switch from charter to an airline (just not as pleasant). People forgetting that the market is cyclical or arguing that new fundamentals mean that it is no longer volatile are signs that the downturn is definitely coming – or has already started.
One problem is that it is actually really hard to define a downturn. There are lots of different indicators – new aircraft orders, deliveries, the number of flights, the numbers or percentages of pre-owned aircraft for sale, industry confidence – and no set rules such as one of these declining for two consecutive quarters (which economists use for recessions). This is something for the International Business Aviation Analysts Association (I-BAAA) to debate at its next meeting. It also depends on the downturn. If you worked in business aviation in 2009 you know what it felt like. For now, let’s go with the woolly definition of things generally feeling worse than they did when they were at their strongest.
The odds of 2019 or 2020 seeing some economic slowdowns are high. But the chances of a genuine global downturn are much, much lower.
There is a chance that 2018 was the top of the cycle. Many markets are already in downturns. There are clear signs that China’s economy is slowing – due both to the trade war and (more importantly) to falling consumer demand. Anecdotally, brokers are also seeing some Chinese owners looking to sell aircraft and a few repossessions.
European confidence is pretty low and there are signs that the Eurozone economy is slowing. Business investment in the UK is down because of uncertainty about leaving the European Union. Demand in Russia, Latin America, the Middle East and Africa is low. “At the beginning of 2018 the global economy was firing on all cylinders, but it lost speed during the year and the ride could get even bumpier in the year ahead,” said Kristalina Georgieva, CEO of the World Bank in the Bank’s January 2019 Global Economic Prospects forecast. In the US – which still accounts for more than 65% of all business aircraft – the market is holding up well. But nothing lasts for ever. Hopefully demand will remain firm in 2019, but we should not be too worried if it slows slightly. Some 45% of the more than 300 people at Corporate Jet Investor Miami believe the next downturn will hit in 2020. One in four people went for 2019 with a similar number going for 2021.
But they key issue is that things are not going to be as bad as last time.
Forget 2008
While it is good to remember the lessons from the last downmarket, we are not going to see a repeat of it. In 2007 and 2008 business aviation was completely different, dominated by people desperate to acquire aircraft and hyped up by market speculators.
Faced with that record demand, OEMs took what was then the completely logical decision to raise production. In 2007 1,136 business jets were delivered, rising to 1,313 aircraft in 2008.
The 2007/2008 Global Financial Crisis meant that all of the major economies and business jet markets went from hot to frozen in lock step. In 2006 Hawker Beechcraft had a backlog of $4 billion, by 2008 it rose to more than $7 billion. One year later, as customers cancelled orders, the backlog had more than halved to just above $3 billion. By the end of 2011 it was $1.13 billion. The company filed for Chapter 11 in 2012.
This will not happen again. The odds of 2019 or 2020 seeing some economic slowdowns are high. But the chances of a genuine global downturn are much lower. Global recessions are relatively rare. The collapse of confidence in 2008 was faster and more widespread than during the Great Depression (1929-1939) – although thankfully the effects were not as bad. Since World War Two, the global economy has only failed to grow by 2% in four years – 1975, 1981, 1982 and 2009 (the first three were caused by oil shocks).
It is highly likely that the world as a whole will experience a mild economic slowdown in 2019 and 2020. Economies are cyclical and many have been rising for a long time now. But this does not imply that we are going to see a severe business jet downmarket. Instead, we are more likely to see a series of mild downturns. This has already started.
Look international
At the moment the US economy is still pretty strong – and this could be enough to keep the US business aviation market healthy throughout 2019.
Hopefully, when the American economy starts slowing, other markets will have started to recover (perhaps helped by a weaker dollar that makes aircraft more affordable). There is still a lot of pent-up demand in international markets and people who want to fly and own business aircraft again (once you have realised the benefits of business aviation it is hard to look back). Brazil could be one of these highlights in 2019.
For many this downturn will feel a lot like the market in 2012-2017. Everyone will have to fight hard for new clients and things will still be very competitive. The growth in utilisation may fall, but traffic will not suddenly collapse as it did after the 2008 global financial crisis.
The same is true for new aircraft orders. We may see a small drop in demand, but manufacturers can manage this. As a group, they have not delivered more than 800 jets a year since 2009.
If we see a mild slowdown and the numbers of previously owned aircraft for sale rise, we may see price drops or residual value decreases, but nothing like the massive falls of 2012 when some types were losing 10% a quarter. In any event, as a rule anyone who owns an aircraft should still expect it to depreciate by around 12% a year.
So, the bad news is that we may have hit the top of the cycle. But the good news is that for the majority of people, things are going to be nowhere near as bad as the last downturn. The market did not rise anywhere near as high in 2018 as it did in 2008, so it does not have anywhere near as far to fall.
If you are focused on a domestic market that falls hard and stays in recession for longer, this may not be much comfort. Time to refill your glass.
This article was originally published in Corporate Jet Investor's CJIQ Edition 1 Q1 2019, p.5.
