Flight Paths Forward: The Future Of Business And General Aviation
Business and general aviation have seen downturns more than once before. As private flying shows the first signs of recovery from the blow struck by COVID-19, many in the industry think this time around could be different.
The forces acting on the market through the novel coronavirus pandemic are complex, but there are reasons to hope that, for some sectors at least, the recovery will be faster and stronger than for commercial aviation.
“Private aviation has always been the first into a recession and the last one out,” says Ian Moore, chief commercial officer of fleet operator VistaJet. “I think what’s happened means we could be the first one out, just due to the unique nature of the virus and the way people will travel in the future.”
Business aviation was an industry in transition as it entered 2020. The sector never fully recovered from its downturn after the 2009 financial crisis. Manufacturers rationalized production and refreshed product lines in response. But for a market that grew giddily in the first years of the new century, only to crash, flat had become the new normal.
COVID-19 has triggered another downturn, but the industry believes the market will recover and may actually benefit in the aftermath of the pandemic. The factors behind the collapse of 2009—irrational exuberance, overproduction, wealth destruction and stigmatization—are not present this time, say market watchers.
Despite that downturn, the industry did not consolidate as many hoped it would. Entering 2020, nine manufacturers were chasing a market for 700-800 aircraft a year with 43 different models. Bombardier was exiting commercial aircraft and selling its rail business to focus on business aviation.
Embraer, meanwhile, was carving out its commercial aircraft business in anticipation of a joint venture with Boeing. But Boeing pulled out of the $4.2 billion deal in April, forcing the Brazilian manufacturer to reintegrate the businesses, focus on conserving cash and put product development on hold until aviation recovers.
Bombardier says its aerospace divestitures remain on track to close this year, shoring up a balance sheet hit by a $600-800 million first-quarter cash drain due to COVID-19. But the sell-off will leave it as the only business jet maker with no countervailing defense business. “That, I think, puts them in a vulnerable place,” says Richard Aboulafia, vice president of analysis at the Teal Group.
The immediate effect of the pandemic was an inability to hand aircraft over to customers because of travel restrictions. Gulfstream was unable to deliver 13 aircraft in the first quarter but pulled forward two from the second quarter to end the period 11 aircraft down at 23, Phebe Novakovic, CEO of parent General Dynamics, told analysts on April 29.
Travel restrictions kept sales teams locked down, so manufacturers also reported a drop in orders for the first quarter. But cancellations were few. Novakovic said Gulfstream saw four customers cancel or default, three of which are expected to come back. Bombardier lost some deliveries but “we haven’t seen much cancellation,” new CEO Eric Martel told analysts on May 7.
Textron Aviation was hit by fractional operator and biggest customer NetJets’ decision to take only 25 aircraft this year, down from 60. “Their sales force saw the same thing we saw, which was people stopped as the pandemic hit,” Textron CEO Scott Donnelly told analysts on May 2. NetJets will continue to take Cessna Citation Latitudes and Longitudes for which it has customer commitments, he said.
Output was also hit by factory closures as COVID-19 spread. Textron announced furloughs starting March 23 and extended them through May 29. Bombardier plants in Canada, Northern Ireland and Mexico shut down in March and began to reopen in early May with new health and safety precautions in place—“a tremendous undertaking,” said Martel.
As production restarts, manufacturers are seeing weaknesses in the supply chain, particularly among suppliers also hurt by the disruption to commercial aircraft OEMs. “Hopefully, we can sort our way through these issues, but some of them are difficult,” Novakovic said. “We are working closely with them to provide on-site mitigation and support where we can and, ultimately, if we have to bring it in-house we will.”
Gulfstream’s reduced output this year will be driven “almost exclusively” by supply-chain issues, she said. “Some of our suppliers entered this crisis somewhat impaired both from exposure to the commercial aviation market and some financial difficulties.” They were having difficulty keeping up with the original production rate and the crisis exacerbated this, she said.
“Many members have reported how government travel and other restrictions have impacted their operations, supply chain and deliveries and how they are responding to these issues,” the General Aviation Manufacturers Association tells Aviation Week, noting the aviation supply chain encompasses tens of thousands of suppliers around the world.
Lost deliveries and sales, production interruptions and supplier issues are expected to cut business-jet deliveries by 30% or more in 2020, analysts at JPMorgan predict. “And while we assume a rebound in 2021, that leaves deliveries only about 15% below 2019,” the JPMorgan analysts add. “We do see downside risk.” That risk includes the impact on the market of the recession following the pandemic.
Anticipating lower demand because of a global economic slowdown, analysts at Jefferies forecast 40% fewer deliveries this year.
Business aviation activity has started to recover as travel restrictions are eased. After a flurry of activity in March flying owners and customers home to safety, flights in April fell by more than 70% from a year earlier. The biggest drops—more than 80%—were in fractional and large jet activity, reports Argus.
By mid-May, business aviation flights were down year-on-year by only 58%, a resilience that contrasts with the 85% drop in global scheduled airline activity, says WingX Advance. But the impact of the crisis has been severe. A survey by the European Business Aviation Association of member company CEOs revealed financial losses of 50-90% during the crisis, says Secretary General Athar Husain Khan.
Plummeting activity also hit fixed-base operators (FBO) and airports. Fuel sales collapsed. “The market just fell off a cliff. FBOs dropped to pumping 2% of what they were doing,” says Ryan Waguespack, senior vice president of the U.S. National Air Transportation Association (NATA). “In the last two weeks, we’ve seen more activity by the Part 135 operators and the FBOs.”
Activity is a key indicator of the health of business aviation, but only one of them. Gross domestic product and corporate profits are also strong signals of demand. The global economy is projected to contract by 3% in 2020, a far worse outcome than during the 2008–9 financial crisis, says the International Monetary Fund. “The global economy is projected to grow by 5.8% in 2021 as economic activity normalizes,” the IMF adds. “The risks for even more severe outcomes, however, are substantial.”
The correlation between corporate profits and aircraft demand is strong, but it has weakened since the 2009 recession for several reasons, say the JPMorgan analysts. Among the reasons is the stigma that became attached to business jets. “We expect corporate profits to remain one determinant of business-jet deliveries. As such, COVID-19 presents a great risk in the foreseeable future, with expected profit decline and reduced wealth, though it is unclear how tight the relationship will be going forward.”
Another indicator of market health is used aircraft. A glut of young, pre-owned jets, almost 20% of the fleet, helped steepen the 2009 downturn by competing with new aircraft for sales. In May 2020, 1,823 pre-owned aircraft were available for sale, up 4% from a year earlier, according to Jeffries analysts. That represented 7.7% of the total worldwide aircraft fleet, well below the historical average of 12%. Average list prices were down 12% year-on-year.
The 2009 recession resulted in a bifurcation of the business-jet market: large-cabin demand continuing to grow while sales of small and medium aircraft fell. Coming out of COVID-19, there is concern it could be the lucrative large-aircraft market that suffers this time round. According to Jeffries analysts, the number of used heavy jets for sale was up 13% in May year-on-year, while light jet inventories were flat.
The reason for the trend is low oil prices. “There is a pretty clear correlation between energy prices and large-cabin business-jet demand, principally because an enormous part of this market is either energy extraction corporations or high-net-worth individuals and businesses dependent on resources for their economy,” the Teal Group’s Aboulafia told an April webinar by the International Aircraft Dealers Association (IADA). “We need a recovery in oil prices.”
One unknown factor in any recovery scenario is the extent, if any, to which post-pandemic health concerns will lead businesses to look at private aviation as a safer way to move executives and employees around—-not only for health reasons but to provide more convenient point-to-point connections as the hard-hit commercial airlines slowly rebuild their networks.
“One of the outcomes that could occur as a result of this particular crisis is that businesses can ill afford to rely on those commercial airline providers who are either financially weak or unpredictable,” said GD’s Novakovic. “So the fundamental case for business aviation remains the same, if not somewhat strengthened by this crisis.”
Any trend in this direction is expected to manifest first in demand for charter flights, then membership programs such as Wheels Up and on through jet cards and fractional shares offered by NetJets and others to used and new whole-aircraft ownership.
Citing discussions with NetJets and Wheels Up, Textron’s Donnelly told analysts: “It’s anecdotal at this point, but there’s reason to have some optimism around the fact that we’re seeing a lot of activity through those channels that are new folks potentially coming into the business-aviation industry.”
Aircraft brokers and charter companies are seeing a jump in inquiries. “Charter operator sales departments are fielding call after call, the same way we’re getting an increase in new buyers that have not owned an airplane but are interested in how much it costs to own and operate one,” says Don Dwyer, co-managing partner at broker Guardian Jet.
“I’ve talked to different companies offering travel cards for charter and their activity is [through] the roof,” Wayne Starling, IADA executive director, tells Aviation Week. “NetJets’ card sales are up tremendously.” NetJets and Wheels Up declined to comment.
“The number of flight inquiries that we’ve received is higher than last year,” Adam Twidell, CEO of UK-based online charter broker PrivateFly, tells Aviation Week. “So we know people are interested in using private aviation. And many of them are doing it for the very first time.”
COVID-19 could also change how existing operators view their aircraft. Asked by a customer whether other companies with large flight departments were considering relaxing policies on personal use to protect executives, Guardian Jet asked around. “No one’s really talking about that, not yet. But the overriding theme was discussions with their company about use of the corporate aircraft going deeper into the corporation,” Dwyer tells Aviation Week.
Interest in charter and other channels is running concurrently, he says. “The common denominator is: ‘I have to travel and I’d like to have more control over it.’ I think charter and fractional could be the big winners but, right now, it is interesting that almost every corporation we talked to said they were considering using their airplanes, more, not less.” Big flight departments have been reducing in size for the last five years. “This could slow that down,” he says.
With charters likely to become the first beneficiary, there comes a challenge. Illegal charters were already a safety issue before the pandemic. With a surplus of furloughed pilots and distressed aircraft owners post-COVID-19, there is an increased risk of questionable flights offered at a fraction of the cost of legal charters, NATA’s Waguespack says. “The FAA has done a good job in tightening up. Some risk might be there, but they have the skills to deal with it,” says IADA’s Starling.
The market is already responding with ways to make private aviation more accessible. MemberJets has launched a software platform making it easier for Part 135 operators to offer public charters on a per-seat basis. The program provides “instant access” to MemberJets’ existing Part 380 approval, allowing the operator to “take a flight, advertise it as a scheduled flight and sell by the seat,” says CEO Ty Carter.
With about 170 aircraft already in its prospectus, MemberJets provides the booking engine, surety bond and escrow account that allow operators to create public charters “on the go” for shuttle services or special-event flights. The program also allows jet-card holders to share flights with other members. “COVID-19 offers an opportunity to step up and fill a new void,” Carter tells Aviation Week.
Funding from the Coronavirus Aid, Relief, and Economic Security Act has helped private aviation weather the pandemic. Few casualties are expected, Waguespack says, although U.S. operator JetSuite filed for bankruptcy protection in April citing slumping charter demand. Consolidation of the fragmented charter market is expected.
“This is a moment when the private jet user will want to rely on someone who’s been there for a while,” Twidell says. “For a smaller player in the industry, it’s going to be increasingly hard.” Twidell describes this as an “excellent time” to be acquired, as PrivateFly was by private-jet travel leader Directional Aviation.
As they emerge from lockdown, operators have introduced health checks and cleaning programs throughout the flight process. NATA is also promulgating standards to ensure pilots and ground staff are safe and that passengers feel comfortable flying. “We have an opportunity to capture more market,” Waguespack says.
Entering 2020, the flight-training industry was in growth mode, with demand for commercial crews fueled by airline growth, pilot retirements and higher flight experience requirements. That growth had helped push deliveries of piston-powered aircraft to 1,324 in 2019 from their recent low of 889 in 2010.
“The flight-training industry in America for sure has been on a growth path,” says Robert Rockmaker, president and CEO of the Flight School Association of North America (FSANA). “The ‘zero to hero’ career training pathway has been serious in its growth over the past several years.”
When COVID-19 struck, a majority of U.S. flight schools shut their doors. But not all of them. “Approximately 35-40% of the flight schools stayed open,” Rockmaker tells Aviation Week. “They were operating at much lower levels, but they were operating.”
There was confusion initially over whether flight schools were considered essential infrastructure, until the Cybersecurity and Infrastructure Security Agency (CISA) specifically listed flight instructors as essential workers supporting air transportation.
“Some schools reopened as they became educated and realized they might be called on as part of the emergency infrastructure for the system,” Rockmaker says. Some state and local governments tried to shut down schools, but reversed their decisions when faced with the CISA guidance, he adds.
By mid-May, more schools were reopening. “By the end of June, I suspect that just about every flight school is going to be back operating,” Rockmaker says. But there will be casualties. “There are some flight schools that are not going to make it.”
The industry last contracted after the terror attacks ofSept. 11, 2001, and the repercussions of the terrorists having trained at U.S. flight schools. “Prior to the terror attacks, we had about 2,400 flight schools in the U.S.,” he says. “After the terror attacks and things settled down, we ended up with 1,600 before COVID.
“After COVID, I’m estimating we’re going to lose anywhere from 25-30 on the low side to [as many as] 100-125. There will also be new schools starting up, but I suspect there will be a net loss over the next 6-12 months. It’s never okay to see somebody close, but it’s about quality, not quantity.”.
Rockmaker thinks demand for training aircraft will remain steady because the average age of the U.S. fleet is over 25 years. “We are seeing more schools thinking about their aircraft fleets: what they need versus what they can justify,” he says, and FSANA is working to bring cheaper light sport aircraft to the training market.
Maintenance training has also been affected, although in the U.S. the FAA moved quickly to allow flexibility to temporarily provide content online, says Crystal Maguire, executive director of the Aviation Technician Training Council (ATEC).
Only a handful of Part 147 maintenance-technician schools provided online training before the crisis. Now 75% of ATEC’s 181 members have approval for online delivery, although content is restricted. Completing hands-on lab work required for certification is still an issue.
But the remainder of ATEC’s member schools have suspended training, which will affect output, Maguire said on a Helicopter Association International (HAI) webinar in mid-May. A survey of members concluded that output of trained mechanics will decrease 25% this year, while enrollment is expected to drop 28%.
Even as the industry restarts, demand for commercial training is expected to decrease. While U.S. airline pilot groups still hope furloughs can be minimized, “there’s not a need for a lot of pilots right now,” acknowledges Rockmaker. “To come back to where it was before COVID, it could take 8-12 months at the earliest. It could go out as far as 24-36 months.”
Continued restrictions on international travel are one reason a recovery may take longer. Up until the pandemic hit, more than 50% of flight students in the U.S. were from overseas. As training resumes, and schools follow guidelines for temperature screening of staff and customers, the issue arises of what happens if a foreign student tests positive. “I don’t have that answer,” Rockmaker admits.
The commercial helicopter industry was locked in a downturn even before the COVID-19 crisis. Deliveries fell again in 2019, to a low of 640 turbine helicopters from the high of 1,111 in 2013. Deliveries of piston helicopters, which had been boosted by demand for training, also declined in 2019.
The reason for the market’s stubborn stagnation was the price of oil, which fell from highs beyond $100 a barrel in 2012-14 to just above $60 by January 2020 because of overproduction. Energy companies cut back on exploration and production, reducing demand for air transportation and idling helicopter fleets.
Oil prices continued to fall and in April producers agreed to a record cut in global output. But the pandemic lockdown destroyed demand and prices fell to negative numbers for the first time in history in April. The International Energy Agency is forecasting global energy demand will fall 6% in 2020, seven times the decline after the 2009 financial crisis
Manufacturers worry about sales of medium and heavy helicopters when oil falls below $50 a barrel, aviation consultants JSfirm told an April 23 HAI webinar. The U.S. Energy Information Administration forecasts the benchmark Brent crude price will average $34 a barrel in 2020, down from $64 in 2019, and recover to $48 in 2021.
Offshore operator CHC Helicopter expects a 20-30% reduction in flight hours this year. “And that’s going to have a material impact, not only on ourselves, but on the whole supply chain,” President and CEO David Balevic told a Vertical Flight Society (VFS) webinar on May 28. “Everything is going to change as the supply chain starts to contract and focus on its resilience and its liquidity.”
In addition to halting exploration activity because of falling prices, energy companies reduced manning on offshore platforms as COVID-19 hit to keep crews safe. This scaling down is not sustainable, and transport flights are resuming, Tony Cramp, Shell vice president for aviation, told the webinar. But the pandemic keeps spreading. “Brazil is the next big concern for us. It’s almost a tinderbox,” Balevic said.
The immediate impact on manufacturers came from travel restrictions. Leonardo lost seven deliveries in the first quarter, mainly AW139s, because customers did not want to travel to pandemic-striken northern Italy to pick up their machines, CEO Alessandro Profumo told analysts on May 7. Bell delivered 15 commercial helicopters in the first quarter, down from 30 a year earlier, because of customers’ inability to accept aircraft.
Leonardo is shifting to “smart deliveries,” digitally transferring all data to customers from final company testing of the aircraft. “That makes them comfortable that the machine is in good shape, as if their own pilots had tested it,” Profumo said. But Leonardo does not expect any significant speed-up in deliveries into June.
Bell had not seen any cancellations, Donnelly, CEO of Bell’s parent Textron, told analysts on April 30. Parapublic and international sales “are largely holding up” and this diversified set of markets is expected to be more resilient, he said. But private and corporate sales are likely to be “a little softer.”
Airbus expects civil and parapublic helicopter demand to remain soft in 2020, “particularly in oil and gas, mainly due to very low oil prices,” CEO Guillaume Faury told analysts on April 29. But Airbus, like Bell and Leonardo, is being cushioned by continued demand for military helicopters.
Profumo said Leonardo had not seen any major effect from record-low oil prices, but that is largely because it is delivering on an order for 21 AW139s from Saudi Aramco. Bell is less exposed. “We don’t do a lot of the big offshore stuff. It’s the Gulf. It’s nearshore operations, which I think are more likely to hang in there,” said Donnelly.
“I think it’s safe to say you’re not going to see a whole lot of deepwater, big-dollar investments to get at some of the more expensive oil,” Donnelly said. But energy companies put limits on the age of aircraft used, which could backstop demand. “People are still producing, and they are still going to have to run their operations,” he said.
General aviation entered the new decade with several innovations in prospect, ranging from autonomy and electrification to operating delivery drones and air taxis. Many of these advances were being led by startups funded by venture capital. But the COVID-19 pandemic has slowed dealmaking and the booming fundraising market could experience its first serious decline since the 2009 economic crisis, says private equity analyst Pitchbook.
Results so far have been mixed. Deals continue to be announced, but most were closed before COVID-19 hit. Perhaps the biggest impact has been the interruption of flight testing, with developers of technologies ranging from advanced flight controls and unmanned cargo aircraft to electric propulsion unable to fly because of the lockdown.
But many of the new technologies are software-intensive, and several startups report they have been able to continue with software development and simulation testing—work that may speed progress once flying can resume. Skyryse and Xwing, startups developing advanced control and autonomous flight systems for retrofit to general-aviation aircraft and helicopters, say they have been able to maintain good progress in certification discussions with the FAA via web conferencing.
The pandemic may actually have accelerated the market for delivery drones, with several companies stepping up service in response to the COVID-19 crisis. In April, Alphabet subsidiary Wing said the outbreak had driven a significant increase in use of its drone delivery service in Virginia. Also in April, Flytrex began delivering groceries from a Walmart to backyards in Grand Forks, North Dakota.
In May, UPS Flight Forward (UPSFF) began delivering prescription medicines from a pharmacy to a retirement community in Florida using Matternet drones. The North Carolina Department of Transportation also launched three projects to use drones to aid COVID-19 relief efforts: Zipline delivering protective equipment and medical supplies to Novant Health campuses in Charlotte; UPSFF flying equipment and medicine for a hospital in Winston-Salem; and Flytrex carrying food to homes in Holly Springs.
These expanded operations are being conducted under the FAA’s unmanned aircraft Integration Pilot Program. This includes package delivery by drone through Part 135 air carrier certification. So far the FAA has awarded Part 135 certificates for drone operations to Wing and UPSFF, with seven more in the works, the agency says. COVID-19 relief drone flights are also being trialed in the UK and elsewhere.
Another sector that was surging before COVID-19 hit was urban air mobility (UAM). Uber has yet to alter its plans to conduct test flights of an experimental electric vertical-takeoff-and-landing (eVTOL) air taxi over a U.S. city this year, and begin commercial service in 2023, despite announcing cuts after its ride-hailing business took a massive hit because of the pandemic. But most observers expect a delay.
In a survey of the nascent eVTOL market, conducted by VFS, more than half of respondents said COVID-19 had not affected their ability to meet near-term milestones. “It’s too small of a sample size to draw any real conclusions, but it indicates to us that these companies at least are managing the crisis,” says VFS Executive Director Mike Hirschberg.
Startups continue to emerge, but more than a quarter of the respondents to VFS’ survey voiced significant concern about the long-term impact of COVID-19 because of changes to underlying business assumptions. These include the possibility that many people in previously congested cities who were able to work from home will continue to do so even after the pandemic ends.