Business Aviation In The COVID-19 Market Environment - December 2020 Update
By Daniel Hall, Senior Valuations Analyst, Ascend by Cirium
COVID-19’s impact on aviation is widespread; and while the business aviation sector is not coming off the back of record market peaks and the success of the commercial aviation sector, it is not inexperienced in adapting to challenging conditions. The 2008-2009 global financial crisis impacted the market in unprecedented ways.
We are well into this pandemic now, and with a US election behind us it is a timely moment to look at the data as we head towards year-end.
It should come as no surprise to read that new deliveries are down year-on-year. We expect the year to close at 25-30% lower volumes compared to 2019. Many OEMs initiated production shutdowns as their facilities entered into lockdowns – but even if we just look at Q3 data, there has not been a material improvement – and it is important to note that deliveries are down across all segments. Make no mistake, it will be difficult for OEMs to take new orders in the short-term and we expect there to be some pressure on price. Many have stated that there will be production rate cuts which should maintain some discipline against over-supply. This did not happen with the post 2008 crisis. Furthermore, some commenters have suggested the order backlogs themselves are stronger with more genuine customers, albeit at lower volume compared to the start of the global financial crisis.
We can add to pandemic market conditions in a US election year. Many find that this disrupter can delay purchase decisions, and/or cause an end-of-year rush, which we may now see with owners wishing to take advantage of bonus depreciation rules supported by the outgoing administration. Overall second-hand sales are likely to be down by 10-20% year-on-year, but as of mid-November it is difficult to say exactly, (but it looks certain to be a busy year-end for the broker community). Another difference to the 2008 crisis has been the lack of a notable increase in the inventory for sale. This is a leading indicator of impending value change, which is why there was little change to values until we approached mid-year, of which more later.
Flight activity trends have been fascinating. While of course overall levels did initially decline, it quickly became apparent that business aviation was staring at an opportunity with health and safety conscious new users wishing to avoid commercial airlines or airports. Bringing new users to private aviation is difficult, and many of those charter or fractional providers will be hoping they remain. Analysis supported the fact that much of the activity was in fact for leisure purposes, with traditional business aviation corridors such as northeast USA remaining at far depleted levels. The question is, when will we see a recovery in usage for business purposes, and what will Q4 look like? Is this a genuine opportunity or simply false optimism for business aviation?
COVID-19 market conditions have now made a notable mark on business aircraft Market Values (MV), much like the financial crisis did. For context, we are moving off the back of a handful of good years – steady depreciation rates and some examples of value increases. In the below analysis, we’ve looked at Ascend by Cirium’s Market Value changes since mid-January 2020 (after the new year change). We have provided a range of percentage changes given for all years of build. We have also presented the weighted average of change based on fleet size for every year of build.
Y-o-Y MV Change by Size Segment (fleet-weighted)
In the above chart we can see a summary of the extent of change divided by size segment. The Heavy segment has seen changes to Market Values impacting 21 out of the 33 variants we track; and it is this category that has also seen the highest average change (-11%) when looked at on a fleet-weighted basis. The Medium category has also seen a large share change (15/26). Overall when fleet-weighted, change has not been too drastic – it is typically just one or two individual types which have seen larger reductions to value, and these are now detailed in the below chart. Some of these types are admittedly more niche but have seen large shifts in their market conditions caused by a handful of transaction points (e.g. the Citation X+ and CL850).
Market Value changes – 20 worst affected business aircraft types, since Jan 2020
Over half of the above types are found within the Heavy segment – and this will be of concern to financiers and investors. The same data is presented below, focusing on the core types that this community would have interests in. Noteworthy for some types is the sheer range of change. For example, young Global 6000 aircraft have seen relatively low rates of change (4-10%) but overall, the type has seen three reductions in Market Values since January and on a fleet-weighted basis is down by 17%. Some vintages of the G650/G650ER have seen almost no change since the start of the year, while others have fallen by 20%. Above all, any mid-year reduction in Market Value by greater than 10 – 15% is noteworthy. By segment, changes to Heavy are somewhat unsurprising – with continued international border shutdowns, these aircraft are in less need, however many types continued to see buoyant buyer/seller activity, so it isn’t necessarily a demand/supply problem.
Heavy and Medium segment Market Value changes – most relevant to financiers, sorted by magnitude
The chart below illustrates the spread of Market Value change across the entire business aviation fleet (each vertical gridline represents one variant). Approximately half of the 135 variants which we track have seen change between January–October 2020; just one type has an overall fleet-weighted value increase. Half of the reductions have been less than 10%; but over 20 variants have seen an average fleet-weighed cut of 10-20%.
Market Value changes – whole fleet
- Balanced markets see little mid-year
Market Values change, but approximately half of variants we
track have been affected by COVID-19 market
— This is despite no significant (or notable) increases in inventory.
- We are constantly reviewing the market and values; we expect further change by year-end.
- Perhaps concerningly, there is no obvious indicator of when we will see the bottom, or if values will increase in the near-term.
- We have understood from previous downturns that values are unlikely to return to pre-downturn levels.
- One area with little change so far is new-build pricing and values. As OEM backlogs get pressured, this may change.
- Despite excitement with new entrants to charter and fractional, Medium category types have also seen large reductions in value.
- Residual (Base) Values are largely unchanged – but we are watching closely.