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Business aircraft environment during Covid-19

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Anthony Kioussis
President & CEO Asset Insight

The official start of the Covid-19 pandemic may be debated for years to come, as will its effect on business aviation. To be sure, 2020 became an increasingly challenging year as uncertainty filled the air, and there’s nothing business managers hate more than to make major financial decisions at such times.

Existing operators put aircraft acquisitions and replacements on hold, while individual 1st-time buyers decided the time had come to avoid airline travel if at all possible.

Table A: During 2020, aircraft availability was a tale of two halves – increasing steadily during the first 6 months and decreasing at a higher monthly rate during the Q3 and Q4.

Availability

What looked like a disaster in the making during the 1st half of 2020 evolved into an amazing buying spree that is still active, and likely to continue during 2021.

Perhaps no better example can demonstrate what has taken place since January 2020 than a review of monthly availability.

As Table A details, pre-owned aircraft inventory was a tale of 2 halves during 2020, at least for the 134 models tracked by Asset Insight.

Availability climbed steadily through the 1st half of the year, then decreased during the second half faster than it had increased.

Interestingly, the 43 large jets tracked by Asset Insight ended 2020 with the exact same number of aircraft listed for sale as were available in December 2019.

In examining preliminary figures for Q1 2021, the period of indecision holding off major buying commitments is no more evident than when we compare the percentage of the active fleet listed for sale, whether by aircraft group or total units, for March 2020 and March 2021. See Table A.

Overall, our tracked fleet’s inventory dropped 25.1%, with all 4 groups posting double-digit decreases: Large Jets –16.6%; Medium Jets –28.4%; Small Jets –32.0%; Turboprops –18.6%.

Table B: The Total Aircraft Sales line covering 2020 is virtually an inverse of the Total Inventory Aircraft line shown in Table A. The correlation exceeds 98%

Transactions

For a slightly different view of the figures between December 31, 2019 and March 31, 2021, Table B details the total number of quarterly transactions for the 134 models we track, and also breaks down sales by aircraft group.

Note that, during 2020, the Total Aircraft Sales line is virtually an inverse of the Total Inventory Aircraft line shown in Table A. The correlation exceeds 98%.

That correlation drops to 69% when Q1 2021 is included, but one can make the argument that the correlation is significant, since unit sales increased by 39% compared to March 2020, while inventory decreased by 25%.

Demand

Table C details Aircraft Demand, computed by Asset Insight utilizing the percentage of each make/model’s active fleet listed for sale and that fleet’s Days on Market, with the scale running from 0.00 (lowest demand) to 5.00 (highest demand).

We elected not to publish Aircraft Demand for Q2 2020, as low sales volume distorted the statistics. Demand has varied by aircraft group, but note how Fleet Average Demand improved during Q3 and Q4 2020, and remained steady during Q1 2021.

Table C: Aircraft Demand based on the percentage of each make/model’s active fleet listed for sale and its Days on Market. The scale runs from 0.00 (lowest demand) to 5.00 (highest demand).

Quality Rating & Maintenance Exposure

Quality Rating calculates the remaining useful life associated with each aircraft component and individual maintenance event, while also accounting for the cost to replace each part and/or complete each maintenance event, compared to the aircraft’s condition the day it came off the OEM’s production line.

Our tracked inventory fleet’s Quality Rating spent 2020 within the “Excellent Range” (5.250 to 5.499), and continued that streak for Q1 2021.

Buyer preference for higher-quality assets lowered the Quality Rating by nearly 1% in March, but it remained slightly above the Quality Rating posted by the fleet in March 2020. See Table D.

Maintenance Exposure measures an aircraft’s embedded/accrued maintenance, and takes into account the cost of each component and maintenance event completion cost. Therefore, if an aircraft is 75% toward an event, and the event averages $1000 to complete, the asset’s Maintenance Exposure for that specific event would be $750.

After decreasing slightly to start the year (due to higher Quality Rated aircraft entering inventory), Maintenance Exposure rose in saw-tooth fashion, as buyers generally opted for lower Quality Rated assets in 2020.

The fleet ended Q1 2021 at a Maintenance Exposure figure 6.6% higher than Q1 2020, with Exposure increasing 16% for the Light jet group. We anticipate the inventory’s Quality Rating to decrease (worsen) further as we move into this year, as we anticipate that buyers will continue to opt for higher Quality Rated assets.

That is likely to keep Maintenance Exposure high, meaning that maintenance for assets remaining listed for sale will carry a higher cost to complete.

Table D: Quality Rating spent 2020 within the “Excellent Range,” while Maintenance Exposure rose, in saw-tooth fashion, as buyers generally opted for lower Quality Rated assets in 2020.

Values

Average Ask Price for our tracked fleet increased 12.2% between Q4 2019 and Q4 2020. However, Q1 2021 posted a year-over-year (YOY) decrease of 5.9%.

In fact, as shown on Table E, all groups lost ground relative to Ask Price during Q1 YOY: Large Jets marked –12.6%; Mid-Size Jets –4.0%; Light Jets –10.2%, and Turboprops –2.1%.

We would not be surprised to see Ask Prices rise for some models, especially those in demand with limited availability of younger, lower-time aircraft.

However, price increases of aging aircraft are unlikely to take hold, partially due to buyer disinterest and partly because of the high percentage of such models’ active fleet listed for sale. See Table E.

Marketability

We measure aircraft Marketability through the Maintenance Exposure to Ask Price (ETP) Ratio, which is calculated by dividing an aircraft’s Maintenance Exposure by the aircraft’s Ask Price. As ETP Ratio decreases, the asset’s value increases in relation to the aircraft’s price.

Analysis of Days on Market has shown that, when the ETP Ratio is greater than 40%, a listed aircraft’s Days on Market increases, in many cases by more than 30%. During Q1 2021, aircraft with ratios of 40% or greater were listed for sale 69% longer than assets with an a ratio below 40% (285 days versus 482 days).

Table E: Average Ask Price for inventory fleet at the end of each quarter.

By way of comparison, the ETP Ratio Marketability differential was 84% in Q4 2019, 60% in Q1 2020, 53% in Q2 2020, 50% in Q3 2020, and 64% in Q4 2020. Turboprops have held the lowest (best) ETP Ratio for many months and posted a ratio of 41.5% in March, after 3 consecutive months below (better than) the 40% demarcation point.

Large jets have maintained 2nd place, and the group’s Ratio was 61.3% in March. Mid-size jets, at 70.5%, have held 3rd place for some time, while Light jets, primarily due to their low price by virtue of the aging inventory fleet, established a new record high (worst) figure by ending Q1 2021 at 113.6%.

Lastly, the average Days on Market have been increasing for the listed fleet from 310 days in Q4 2019 to 362 days in Q4 2020, further increasing to 375 days at the end of March 2021. Regrettably, we expect average Days on Market to continue increasing as many listed assets are believed to be with their final owners.

On the other end of the spectrum, we believe young, low-time aircraft will sell quickly, assuming they are realistically priced.

Market summary

Aircraft operations, at least in North America, are clearly strengthening. We believe corporate aircraft owners, who have taken a wait-and-see attitude for about a year now, will begin to acquire new aircraft once again, increasing the availability of younger, low-time aircraft that 1st-time buyers will find appealing.

We believe inventory fleet figures will continue stabilizing for the remainder of this year, and we predict the number of transactions and pricing will be good.