Business Aviation Faces ‘More Headwinds Than Tailwinds’ – Doug Gollan
As vacation goers trickled through the lobby of the Fontainebleau Miami Beach in their bathing suits on the way to the pool and beach, an adjacent conference room was filled with suits and ties, including a long list of aviation CEOs, bankers, tax attorneys and consultants. Like several of the other business aviation conferences I’ve attended in the past year, it was hard to get a solid read on how good business really is during Corporate Jet Investor Miami 2018. While it’s certainly not bad – and in fact, 90% of attendees in a live online poll said they were fairly or very optimistic, it’s not clear there should be any dancing in the aisles, or how long the current momentum will carry on.
Brian Foley of Brian Foley Associates said over the past seven years deliveries of new jets have annually had a statistical deviation of just 28, meaning they were either up or down moderately, hovering around 700 per year, perhaps the definition of ebb and flow. New aircraft deliveries are still more than 40% lower than the peak the peak in 2008 when they topped out at 1,317, and delegates fretted that the next downturn may be just over the horizon. Foley noted the U.S. is currently in the eighth year of the second longest expansion in the past century, the period starting in 1991 and ending in 2001 the only that stretched longer.
“Were in a cyclical industry. There will be a downturn,” said Foley who also told the attendees he didn’t think the economy “will fall off a cliff.” He believes there is still some runway left, although other panelists think there will be a downturn in the U.S. economy by as early as next October. “I hope it doesn’t happen, but it’s out there somewhere,” said Don Haloburdo, vice president at Jet Aviation.
Mark Burns, president of Gulfstream Aerospace, which like Jet Aviation is a subsidiary of General Dynamics, said, “This is a cyclical business. It’s about how disciplined you are in managing your business.” He urged the audience to be pied pipers for the industry. “We get a bad rap quite often. It’s very well known that companies that use business aviation are more financially successful. There is no doubt that business aviation has created global commerce on the grand scale we see today. You don’t build a business waiting for the next commercial flight to Akron,” he said.
In terms of the current situation, Chris Brenner, sales director of Jetcraft, a broker of used private jets said, on one hand, the inventory of top line used aircraft is dwindling making it a seller’s market while on the other hand, he’s “expecting a leveling or downturn next year.” Used jets with a foreign registry, those that are mispriced and others with non-standard interiors sit around longer. Burns said, “Only about 5% of the (Gulfstream) 550 and 650 fleets are for sale.” At the depths of the recession close to 20% of the business aviation fleet was on the market.
Brian Proctor, president and CEO of Mente Group, forecast 2019 will continue to see mergers and acquisitions as privately held business aviation companies attempt to take money off the table before the next downturn. He said, “2019 won’t be a bad year…but a slowdown.” Over the past two months, VistaJet’s parent said it has made an agreement to purchase XOJET while Directional Aviation added U.K.-based charter broker PrivateFly to its portfolio of Flexjet, Sentient Jet and Skyjet. Charter broker Victor announced at the beginning of the year it had raised funds with the goal of making acquisitions, although none have been announced. Earlier this year JetSuite received a major investmentfrom JetBlue (its second) and from Qatar Airways.
Two CEOs with management companies, Brian Kirkdorfer of Clay Lacy Aviation, and Dan Drohan, CEO of Solairus Aviation, warned that in the relationship-driven areas of dealing with UHNW jet owners, charter brokers and finicky charter customers, successful mergers need to be based on like corporate cultures. Jonah Adler, chief revenue officer of Jet Edge noted aircraft owners while all wealthy are different, ranging from entrepreneurs that just sold a business to Fortune 10 CEOs, all of whom have very specific desires and needs.
For business aviation, Proctor said there is promise in the corporate sector after years of companies keeping existing aircraft instead of buying new jets. Burns said starting in 2015 the tone of conversations with corporate buyers started to improve. However, in business aviation there always seems to be a counter force tugging at any positive vibes. Publicly traded businesses are choosing stock buybacks over capital investments, including lining up to order hot new aircraft as they did before the Great Recession.
While there is a gusty tailwind from the Trump Tax Cuts, which allows for accelerated depreciation from buying a private jet – the ability to write off the full purchase value in the first year (50% of buyers cited it as a reason they made a purchase this year), and the rollback of regulations, the nasty political discourse is a significant mitigating factor. Political worries (53%) were cited by the audience as their biggest concern, nearly double (28%) inventory and six-fold more than those who cited staff shortages (8%). Burns said the clouds from trade wars and vitriol is indeed creating angst among customers.
What’s more, in a panel about tax implications of owning a private jet, Jim Simpson, managing director of aviation and marine finance for First Republic Bank, told the audience, “The hangover is commensurate with the size of the party.” He said many buyers are jumping in without reading the fine print of the tax code. Nel Stubbs of Conklin & de Decker and Michael Kosnitzky, a partner with Pillsbury Winthrop Shaw Pittman LLC, both said aviation specific tax attorneys are often called in after its too late. Simpson said the hangover will begin in 2020 when the IRS starts auditing returns filed in 2019.
In terms of buying new jets, Proctor’s advice to manufacturers is good for consumers if they follow it. He urged OEMs “to build backlog (and) work on margin later.” In other words, slash prices to buy market share. “It has never been a better time to buy,” he said while adding, “After we go through 2019, 2020 is likely going to be a lost year.”
Other negative influences he cited include MRO availability to handle interiors and avionics upgrades and higher maintenance, infrastructure, and crew costs, as well as the strong U.S. dollar, which is dampening the appetite of international buyers for the time being. Still, Gulfstream’s Burns said he expects the North American share of Gulfstream deliveries to eventually fall from the current 64% to 50% with growth coming from China and Asia.
Mammas Don’t Let Your Babies Grow Up To Be Pilots?
An interesting discussion was the pilot shortage. While one attendee said these days there is a waiting list at top aviation colleges of wannabes willing to spend $250,000 in tuition to earn their wings, most want to fly for commercial airlines. At the same time, business aviation is suffering from a shortage. Executives from XOJET and JetSuite each said they have lost on-demand charter business due to lack of qualified pilots to fly the mission.
Bizav bosses talked about a future of pilotless private jets. Michael Amalfitano, the CEO of Embraer Executive Jets, said pilots are already transitioning from actually flying the plane to flight managers and the reality is at some point the flight manager won’t be on the aircraft. It’s a common theme in business aviation these days. One panelist told of how a customer sold his airplane after seeing his crew churn twice in a year. Joe Barber, a vice president at Clay Lacy Aviation, said the reality of giving your flight crew the now standard 20% raise is only a 3% bump in operating costs.
The question was raised, is the industry making its pilot crisis worse by talking up pilotless jets? Jet Aviation’s Haloburdo told Forbes.com the industry needs to do a better job of articulating that having one’s pilot license is an entry point into business aviation as a career choice. “If you asked this room how many attendees are pilots, 90% would raise their hand,” he said. Another attendee noted private jets manufactured 30 and even 40 years ago are still flying, meaning from the day the first pilotless jet is certified and flying an owner or charter passengers, it could well take another two or three decades for the industry to make a full transition.
In the meantime, for pilots today, the getting is apparently good. James Henderson, president of XOJET said, when pilots come into its offices, everything stops for some TLC. Others noted that pilots based in low-cost markets instead of having to relocate for a job are now being flown into high-cost bases to make their flights, then flown home, enticed by attractive pay packages.
Jet Edge’s Adler said in recent weeks Global Express pilots have been commanding salaries in the $300,000 range while Solairus’ Drohan said today pilots no longer just say yes to offers. They want to know the flying habits of the owner. If the owner has young children, that means flying on school vacations, something pilots with kids at home don’t necessarily want. Even with a pilotless future somewhere out there, more than six in 10 delegates said they would recommend their babies grow up to be in charge of the flight deck.
And what about all those private jets in production? There are 57 according to Corporate Jet Investor’s editor Alasdair Whyte. Speakers were somewhat divided if it’s too much, but in the end seemed to believe it’s a good thing for the consumer if not the industry, in that there is virtually a jet to match every possible user profile. A word of warning to you, 70% of the folks sitting in the conference said buyers in the business aircraft market don’t act in a rational way. First Republic Bank’s Simpson said in many cases it is part of their lifestyle and they want what they want.
In terms of financial issues, Foley warned attendees that for too long business aviation had gotten a free pass, and should now expect what he termed as a standard depreciation of 50% over five years similar to automobiles while others said the residual value might be even less. At the same time, there are exceptions, with several speakers pointing to Embraer’s Phenom 300.
Another point of interest is WiFi. While Embraer’s Amalfitano said next-generation customers demand connectivity they can use the same way as they do at home or in the office, a panel of suppliers was non-committal when asked if owners who invest up to $250,000 to make their private jet a linked office in the air will be able to see returns from it. In another contradiction, only 11% of attendees said the price of connectivity was a concern, with 89% citing reliability.
One bit of financial news that shouldn’t have an impact is the expected interest rate hikes from the Federal Reserve. Mente Group’s Proctor said since 1990 there has been “zero correlation” between interest rates and private jet orders.
Breaking out from the shade of cynics, Textron vice president Neville Fahy said, “I’d like to think 2019 is going to be very good.” Of course, in every industry, good is often relative to where you are starting. Or as Mente Group’s Proctor put it, “There are more headwinds than tailwinds.”