The Business Aviation Market Upswing—Will It Stick?
After a decade of stagnation, the pandemic may have fundamentally changed the business aviation industry with virus-driven safety concerns spurring a robust recovery.
The industry had been in a 10-year state of doldrums after the financial crisis of 2009, followed by the beginning of an upturn in 2019. Then COVID-19 hit, and with it came a sharp reduction in flight hours, sales and new aircraft production. But the downturn was shorter than expected.
A year ago, no one expected the market to be as strong as it is today. Instead, the pandemic has acted as an accelerator to business aviation, says Eric Martel, Bombardier president and CEO.
“The market is pretty robust right now,” Martel says. “It slowed down last year, but now it’s accelerating to a place we’ve never seen before.”
Charter companies report 20% and beyond increases in activity, fractional providers are experiencing 30% to 40% and higher increases in memberships, pre-owned inventory is at historic lows, utilization is back to and above 2019 levels, and major manufacturers report a book-to-bill of about 2:1, or two orders for every business jet delivery. That has led to longer backlogs for new aircraft, firming prices and, for the first time in a decade, an appreciation of values for certain pre-owned models, according to Aircraft Bluebook‘s analysis.
Private flight provider Wheels Up says it has seen a 146% surge in flight legs and 47% increase in memberships. The boost in business has led NetJets to pause all fractional sales and leases of Embraer Phenom jets, as well as Cessna Citation XLS and Citation Latitude aircraft. “The waitlist for card purchases is well over 1,000 now and we are actively taking deposits for shares of future Phenom and Latitude deliveries well into 2022,” Patrick Gallagher, NetJets president of sales, marketing and service, said Oct. 6.
A strong economy, healthy stock market and low interest rates have buoyed the industry. But the largest driver has been COVID-related health concerns of first-time users of private aviation, those who previously could afford to use private aviation but did not, Cai von Rumohr, Cowen senior aerospace research analyst, wrote in a note to investors. The new entrants are seeking alternatives to commercial airlines to keep their families or executives safe and better schedules with the pullback of airline service.
The pre-owned market is especially robust, with inventory at record lows and many aircraft selling before they officially hit the market, brokers say. In some cases, owners of pre-owned aircraft are getting multiple offers.
The decline in inventory is a global issue, led by the U.S., which kept state borders open and was less affected by international border closures. Owners also have been hanging onto their aircraft as they struggle to find a replacement with few pre-owned choices available, especially of the newer, lower-time aircraft, experts say.
In September, 1,154 business jets were for sale, or only 5% of the business jet fleet.
“I’ve never seen anything like this,” says Rolland Vincent, a consultant with Plano, Texas-based Rolland Vincent Associates. “This is a bit of a challenge. This is not like the recession of 10 years ago. This is the tightest inventory we’ve seen in 33 years.”
For new business aircraft purchases, first-time buyers historically made up 10% to 20% of sales. Now, the figure has risen to more than 30%. Embraer reports a 34% increase in new buyers, while Bombardier and Textron Aviation report similar increases.
“We see a lot of new people coming our way for the first time,” says Martel.
Working with new buyers means a change in the purchase process.
“You have to introduce them to tax advisors and broker dealers and bring them along with that process,” says Michael Amalfitano, Embraer Executive Jets president and CEO. “And it’s much more engaging and you have to be much more patient with that process.” It also means brand awareness.
“So, use others to tell a story because this generation that’s coming up with younger wealth, they care what other people say,” Amalfitano said during a panel discussion at a JetNet conference in September. They want to know about other customers’ experiences, the service and the aircraft’s features, such as whether the connectivity works when flying from New York to London.
“All of those are important questions for distinguishing your brand,” he says. “We have to take the time and work with those customers.”
Besides an upswing in the business jet market, the turboprop market has been robust as well, Ron Draper, Textron Aviation president and CEO, said in September, although it’s not as strong as the jet market.
That overall upswing suggests an extended upcycle through 2023, and longer should the Delta variant of the virus stick around, Cowen’s von Rumohr says.
At the same time, experts are not predicting a return to the highs of 2007 and 2008, when the industry delivered 1,300 business jets in a year.
Analysts aren’t expecting deliveries to exceed 2019 levels until 2023 or 2024.
In the first half of 2021, deliveries of piston, turboprop and business jet aircraft rose 16.8% over 2020 levels but declined in every category compared to the first half of 2019, with deliveries overall down 8% for the same period, according to a General Aviation Manufacturers Association report.
So far, the upturn in activity has not led to an increase in production by the manufacturers, who say they are waiting to see whether the demand will last. They also want to build backlogs and firm pricing.
“An increase in price will not only just help all OEMs, it [also] would help the industry to get a little healthier financially and build up backlogs, [and] provide more certainty going forward,” Draper says..
The top question on everyone’s minds is whether new entrants will stay or return to the airlines post-COVID.
Ron Epstein, senior equity analyst at Bank of America Merrill Lynch, believes new entrants may not stay, saying that the “power of reversion to the mean” is strong.
Others are more optimistic.
“Somebody buying a brand-new airplane? That sticks,” says Don Dwyer, Guardian Jet co-managing partner. “They’re probably going to buy another one in their lifetime. The entry-level charter person who’s calling around to get the cheapest rate? I don’t know how sticky that is.”
“Maybe some people will go back to commercial [airlines], but I think a lot will stay with us, which is a good thing,” Bombardier’s Martel says.
The growth in the number of high-net-worth individuals will also boost the industry, experts say. The number has risen dramatically with new creation of wealth. Case in point: The number of new initial public offerings (IPOs) has risen dramatically. New IPOs through August 2021 totaled 4,844, up 232% compared to the full year in 2020 and up 130% from 2019, says Sheila Kahyaoglu, Jefferies equity research analyst.
“That’s 4,800 new customers for you guys to reach and potentially get to buy a jet,” Kahyaoglu said during a panel discussion at a JetNet Summit in New York City, nodding to the manufacturers in the room.
The biggest challenges for the business aircraft industry are twofold: the supplier network and a shortage of skilled labor. The two are related.
The fundamental problem comes down to the availability of skilled labor and skilled technicians, Draper says. The supply chain will limit how much manufacturers will be able to increase production. When manufacturers call suppliers to increase production rates, suppliers often say they need skilled workers. It is a problem that isn’t going away soon, he says.
The manufacturers also are hiring and having similar issues.
“We simply don’t have as many skilled technicians coming into the workforce,” Draper says.