What are the short- and long-term effects of the COVID-19 pandemic on business aviation? Are there lessons to be learned from the 2008 recession that may help the industry weather this crisis? Business aviation leaders weigh in. (Part 1 of two parts)
How do you project the COVID-19 pandemic will affect business aviation in the next 6-12 months?
Richard Aboulafia, Teal Group vice president of analysis: In the short term, there are two big drivers behind our industry. One is fuel prices for the larger cabin equipment, and they’ve collapsed. The other is corporate profits and the equities markets, and they’re not looking so hot. I think we’re going to be in better shape than commercial jets, which are just absolutely a catastrophe. I think we’ll be more resilient because we’re less dependent upon the broader public and its wherewithal to travel. But as long as fuel prices are low and equity markets stay depressed, we’re going to be down, too. It typically takes about three years to work out of a bust cycle. I can’t think of a reason this is going to be worse than that. Fuel prices seems like a two-year story, maybe three. The recession that’s going to follow? I think it’s important to note it hasn’t really started in earnest and when it does, it will be at least half a year. To quote Dr. (Anthony) Fauci, ‘You don’t make the timeline. The virus makes the timeline.’ (Fauci is director of the National Institute of Allergy and Infectious Diseases and an advisor to President Donald Trump.)
Ed Bolen, NBAA president and CEO: I think some of the most significant impacts on business aviation have been felt over the last month as states across the country have put in place widespread lockdowns. We’ve also seen international travel curtailed from a huge number of companies. So, if you look back over the last 4-6 weeks, I see some of the most significant travel restrictions, both domestic and international, that we’ve ever seen. It has, as you would expect, caused very significant drops in everything from hours flown, fuel sales and so forth. The travel restrictions have been very significant, and their impact has been very significant. Obviously, there’s a lot of conversation about when the restrictions will be eased and what that will mean. None of us knows what the dates will be and what the rebound will be. Over the next 6-12 months, we’ll be working through some of the recovery from what has been a very difficult but probably necessary restriction on travel.
Pete Bunce, General Aviation Manufacturers Association president and CEO: The biggest concern for our member companies is the safety and health of their employees. This pandemic is causing a slowdown in manufacturing and maintenance, and we are beginning to hear about supply chain issues. These short-term issues can be overcome once a sense of normalcy has returned.
Brant Dahlfors, JetTransactions co-founder: The next 6-12 months will be very unpredictable. OEMs will face significantly lower delivery levels than projected for the year. Opportunistic buyers will be looking for the bottom. The question will be how many current owners will be pressured to reduce or eliminate aircraft and how fast will that drive up inventory for sale. Common sense says values have dropped at least 10-15% now and will drop further in the second half of the year as buyers will be slow to return until they have their own businesses back up and running.
Brian Foley, Brian Foley Associates consultant: Six months from now: Operations activity will be slowly returning, primarily from personal travel; aircraft production will be back online, and supply kinks largely will be worked out. Twelve months from now, [there will be] additional flight activity as select international destinations become practical.
Tim Obitts, National Air Transportation Association president and CEO: Sadly, we are seeing a number of small businesses working hard to get the financial relief they so desperately require and having difficulty finding answers to critical questions throughout this process. To help, NATA has been diligently communicating with the Treasury and other agencies to obtain and disseminate all important information to members and nonmembers alike. We anticipate more regulatory provisions will be needed over the next year to continue operations for many of our members. . . . Our member companies are becoming even more creative in responding to the health emergency by pivoting operations to deliver and even manufacture vital medical equipment and providing desperately needed food delivery services. We’ll see additional innovation from these businesses in the future.
Shawn Vick, Global Jet Capital chairman and CEO: We are already seeing it. The OEMs are significantly scaling back in terms of what they are going to produce. I think it could be down as much as 40% relative to what was planned for 2020. The reality is that it’s going to decrease the number of transaction opportunities that Global Jet Capital will participate in. We’re watching that. We’re also participating in the broad spectrum of the pre-owned market. Interesting enough, in times of economic stress, the lowest number of pre-owned transactions was about 1,400 in a year. We’re watching the number carefully.We know the OEMs are prudently watching their production rates. The difference between now and then is that during the Great Recession pure demand was cut in half, but the suppliers continued to produce. That led to an oversupply and depression in values. Candidly, we’ve struggled with pricing since. Right now, instead of just a demand-side falloff, we’ve had a supply-side hiatus. They’re both happening at the same time. This environment might be different from the Great Recession in fundamental ways. People are going to exercise tremendous caution. We’re an industry on pause for the foreseeable future, meaning two months, three months, four months. We’ll see the economy begin to surge back. I want to use the word ‘surge’ very, very carefully. We’re facing an unemployment rate that’s unprecedented. When the economy comes back, a significant portion of those people are going to go back to work immediately. The employers need that labor force.
What about in the next 2-5 years?
Aboulafia: Fuel prices will take two years, the economic downturn may take longer—maybe three years [to recover]. Sometime after that, we’ll see an upturn again. I can’t see any reason we can’t get back to where we were and, hopefully, we’ll have some growth. But this is going to be painful. The large-cabin business-jet segment wasn’t hit at all in 2009; it just kept going. But this fuel price thing is going to provide its first downturn in decades. By contrast, small and midsize business jets never really recovered. Paradoxically, that might protect it a bit. I guess I’m a little more worried about the top-end stuff.
Bolen: Longer term, the open question is what will it mean to the economy? What we’ve seen is aviation, including business aviation, largely follows the economy. That’s not just true for aviation, that’s true for all modes of transportation. When you see times of economic contraction, the demand for transportation goes down. My expectation is the U.S. economy and the world economy will move forward from this and certainly at that point, we presumably will be in more of a recovery mode or have recovered. In the long term, the economy will be strong. I think the need to continue to be able to go with a lot of flexibility—all the things that business aviation is known for, such as the ability to get people and products where they need to go when they need to get there—will continue to be the hallmark of our industry.
Bunce: It is still too early to project any long-term effects, but I have confidence in the resilience of our industry.
Dahlfors: Failing a COVID relapse or other external factors, we’re going to be in a recession for a while. Hard work and time will get GDP back up and running again in 2-3 years. I do not see a long-term reset to significantly lower demand like we had from 2008 to 2018, if the economy is restarted smartly over the next 60 days and we do not have a significant relapse.
Foley: In two years, assuming a vaccine becomes available, business use will have accelerated as group meetings resume more widely. In five years, business aviation will have stabilized and be growing with an additional, powerful argument added to its business justification case: the ability to distance from others while traveling.
Obitts: Aviation businesses will be in the same situation as countless other industries in figuring out the safest, most expedient path forward for their employees and customers as restrictions are lifted. NATA and our team of experts and volunteers will be there every step of the way to assist.
Vick: I do think it’s going to be different than the last recession, in taking six or seven or eight years to get through this. I think it’s going to take 18-24 months, and we’ll be back to some steady state of economic GDP. When I think about aircraft financing, we’re preparing to see a reduction in transactions and volume as a result of the moves the OEMs have been forced to make. So far, with all the clients, unless the airplane’s delivery has been delayed by the manufacturer, each has committed to taking their airplanes and putting them into service. Those are large Fortune 500 companies and ultra-high-net worth individuals.
Are there any lessons learned from the 2008 recession that may help the business aviation industry through this crisis?
Aboulafia: Work with customers, that’s got to be the most important one. Listen to and work with customers when they need timing changed or when they need any kind of flexibility in terms. Be there for them. The more you lean into this crisis, the better the results will be. Stay committed to projects. We all remember Jack Pelton (then Cessna Aircraft CEO, now Experimental Aircraft Association chairman and CEO). The company should have been allowed to persist with that large-cabin concept (the Citation Columbus) during the 2008 recession. It would have been better. Of course, they got rid of Pelton because he was good. They did the opposite. Work with clients, stick to the product development. Last time around, it was the top-end stuff that held up better, so it’s where you want to be in the long run. Regard this as an opportunity to show how committed you are in the market in terms of working with customers and doubling down on new products.
Bolen: I think the overall message from the downturn in 2008 and 2009 was that our industry continued to invest in the future. I think that was important. So, what you saw is when the recovery happened, there were new products coming to the market, and that really helped as the economy was recovering. The idea that there were new products and services being offered in our industry was certainly very helpful. This is difficult because we don’t know the duration and the longer-term impact, but the reality is there will be a future and it’s presumably something we’re going to see people invest in.
Bunce: The 2008 recession taught us to be nimble and responsive when faced with possible economic downturn. You are seeing companies acting quickly to protect their employees and make economic decisions so they are prepared to resume business and start the recovery process once we make it through to the other side of this pandemic.
Dahlfors: No doubt we suffered tremendous economic and financial damage following the 2008 crash. The industry was producing at a very high rate, and backlogs were long and healthy. From 2009 to 2016, the industry over-forecasted the future demand and built to those forecasts all while the economic return was slower than anticipated and external factors [China corruption investigations, Russian sanctions and European QE] further drove down demand and significantly increased supply. We are entering post-COVID-19 with lower backlogs and significantly lower numbers of aircraft for sale, especially later-model aircraft.
Foley: Fortunately, those lessons were already in effect before the crisis such as sensible aircraft production rates, responsible lending practices and speculator discouragement.
Obitts: The economy was in a better place going into this health crisis, but there are too many unknowns right now, including when the entire supply chain for aviation will be closer to being fully operational and what that will look like. The main lesson we learned from the 2008 recession, and other challenging times, is that our industry is resilient.
Vick: Liquidity is King. Move quickly in the face of these adverse conditions to preserve liquidity, manage one’s banking relationships and manage across the credit markets. The lessons learned from that recession that you see inside industry today were that people were exceptionally quick to move toward preservation of liquidity. If we have 3-6 months of economic interruption, a great many businesses will be able to weather that and come out on the other side. We will hire the employees furloughed or released and move toward growth. In the recession, the demand side and the credit market seized but the supply side sat there and hummed along before the credit market seized up to undermine the capability to sustain what they were doing in this market. This time, everybody is on hold. That’s one of the reasons I think the recovery will be swifter and more aggressive coming out of this.
