OVERVIEW
The business jet market maintained healthy dynamics during Q2 2022.
Business jet flight operations and transactions increased during the quarter, continuing an upward trend that started in the second half of 2020. OEMs again reported strong order activity that has increased backlogs across the industry and supported a strong pricing environment. While not reflected in the Q2 results, certain data points suggest a more difficult broader economic environment that may impact future quarters. The question remains, to what extent? With a unique value proposition, strong demand, and pragmatic behavior by the OEMs, however, today’s business jet market is quite resilient and should fare well even in an economic downturn.
Q2 2022 HIGHLIGHTS
- The global economy faced persistent inflation and rising interest rates in Q2. Any increased risk of broad economic decline, however, has been mitigated by a strong job market and low debt levels.
- New users entering the business aviation market and established users returning to the market resulted in flight operations 20 percent above Q2 2021.
- Strong orders drove OEM book-to-bill ratios to 1.8:1 in Q2 2022. With backlogs of $46 billion, OEMs have substantial cushion against any potential downturn.
- Business jet transactions increased 14 percent in dollar volume in H1 2022 compared to H1 2021, driven by strong pre-owned activity and steady growth in new deliveries.
- Inventory levels increased slightly in Q2 but remained well below historic levels.
- With demand strong and supply remaining at low levels, business jet bluebook values continued to increase.
The global economy faced headwinds in Q2 2022. Persistently high inflation figuresii – caused by increases in food, energy, and housing prices – drove down stock markets around the worldiii, reduced household wealth, and convinced central banks to raise interest rates, making borrowing more expensive.iv With the loss of stock market wealth and increasing interest rates, some economies contracted in Q2 and some economists see a higher risk of a broad economic downturn.v
On the other hand, there were still positive economic trends that emerged from Q2. An analysis by Wells Fargo found that both households and businesses were well equipped to service their debt loadsvi and the labor market was also strong.vii Furthermore, after peaking on June 8, crude oil prices declined through the end of Q2 and into the first half of July.viii With oil underlying a large part of the current cost increases, oil price declines may slow inflation for much of the world. While some economies contracted in Q2 and the risk of global recession was higher than in Q1, a broad economic decline will be mitigated by a strong job market, low debt levels, and stabilizing inflationary pressure. Recession risks are also regional, and Oxford Economics forecasts growth in the global economy.ix
Flight operations remained a bright spot for the business aviation market in Q2 2022. Flight operations in the quarter were 22.4 percent above levels in Q2 2019 and 19.6 percent above year-ago levels.xi
The entry of new customers into the market who are seeking to avoid crowded airports increased overall demand and benefited both business jet operators and manufacturers. Historical patterns suggest a substantial number of these new users will continue to utilize business aviation over time as they become accustomed to the safety, convenience, and productivity that come with flying aboard a business aircraft. Furthermore, recent surveys of business jet users, including both established and new users, indicate the vast majority will continue to utilize business aviation following the pandemic.xii
Charter and fractional operators led the way early in the COVID-19 recovery. However, many of these operators are nearing full capacity in 2022. At the same time, a return to normalcy is driving an increase in business travel. As such, through the first half of 2022, the largest increase in flight operations was among wholly owned aircraft operated by businesses and high net worth individuals.xiii
With the addition of new users and the return of historical users following the pandemic, flight operations are expected to remain robust. Flight operations should stabilize in the coming quarters, but at a new and higher plateau for the industry.
Business jet manufacturers continued to report strong results in Q2 2022. The pattern of positive quarters started at the end of 2020 and has been driven by new users entering the business jet market, habitual pre-owned buyers electing to order new aircraft due to low pre-owned inventory, typical replacement and trade up orders, and fleet operators experiencing increased demand for their services. Even as manufacturers began to gradually increase production rates, orders have remained high, resulting in an industry-wide book-to-bill ratio of 1.8 to 1. Backlogs increased to $46.4 billion—a 49.1 percent increase from a year earlier. With this backlog, lead times are now extending well into 2024 for most manufacturers, and even longer in some cases. This will reinforce the resilience of an already healthy industry.
Note that Q2 2022 figures are based on preliminary data and may increase as more transactions are reported.
Through the first half of 2022, new and pre-owned transaction dollar volume increased 14.3 percent compared to H1 2021. Continuing a trend seen throughout 2021, the recovery was led by the pre-owned market, which increased 28.1 percent in H1 2022 from a year earlier.
Strong demand drove the number of 2021 pre-owned transactions to the highest level on record and this trend has continued in H1 2022. There are indications, however, that new deliveries later in the year may lead to stability in the market.
While pre-owned transactions remained the strongest market segment, new deliveries also increased in H1 2022, with dollar volume increasing 1 percent as manufacturers worked to meet demand. While new deliveries increased at a slower rate than pre-owned transactions, the new market remains healthy. Higher manufacturer backlogs have added resilience to the transaction market and may lead to further production increases.
After declining throughout 2020 and 2021, aircraft listings stabilized in 2022 and were 2.9 percent above levels seen at the end of June 2021. Reports from industry observers indicate that some aircraft owners may be motivated to sell their aircraft to take advantage of prices. Whatever the cause, if it continues, this trend may provide a healthier level of supply to buyers. Listings will also receive a boost when new deliveries begin to pick up, with owners marketing their current aircraft after taking delivery of new aircraft.
As aircraft listings stabilized in the first half of 2022, inventory levels began to increase slightly. By the end of Q2, inventory stood at 3.6 percent of the total fleet, higher than the 3.1 percent in Q1 2022, but still well below the 6.1 percent seen at the end of Q2 2021. Inventory of aircraft younger than 13 years old (typically seen as more desirable) stood at 2.4 percent of the global fleet, a slight increase from the 1.8 percent seen at the end of Q1.
Going forward, continued strong aircraft listings along with an increase in OEM production rates will likely cause the level of inventory to increase gradually.
The above chart compares the year-over-year percentage change in the bluebook value of like-aged aircraft over time (e.g., the difference between the value of an eight-year-old aircraft from one year to the next). Global Jet Capital analyzes a basket of aircraft as a proxy for the overall market. Observed increases or decreases in value are not necessarily applicable to any specific aircraft make/model. For the value of a specific aircraft, please contact a licensed aircraft appraiser.
With demand high and supply remaining at low levels (despite gradual increases in Q2), business jet bluebook values increased in Q2 2022. Average bluebook values climbed 29.3 percent compared to a year ago, with prices appreciating even more in some cases. On a model-by-model basis, values varied, with some aircraft outperforming others in the market.
Note that the percentage increases are measured against a low point in 2021 and in some cases represent a reversion to long-term norms. Supported by the market dynamics described above around specific models, however, this increase was significant and in many cases may have exceeded pre-COVID-19 levels.
There are signs that the rate of growth seen in Q2 will begin to slow going forward. Inventory levels increased during the quarter, which should provide more balance between buyers and sellers. In addition, some sellers that listed aircraft with “aspirational” asking prices have adjusted the prices closer to market rates. There are no signs, however, of a downtrend in prices and the general outlook among industry players is for a stable pricing environment as demand and supply come into balance.
Global Jet Capital is a leader in the business jet financing market, providing leases and loans for both new and used aircraft. Our customers are diverse but all value flexible financing solutions for their aircraft. Below is a brief overview of a few recent transactions that Global Jet Capital has facilitated.
Global Jet Capital's first deal in Vietnam, this operating lease of a new Falcon 8X reflects our strong commitment to support OEMs in expanding their reach into new markets. We worked with the customer to meet their requirement for local registration of the asset.
Global Jet Capital worked proactively with an existing customer who expects their aircraft needs to expand as their business grows. We met the customer’s need to extend their lease of a Challenger 605 aircraft, allowing them to better plan their future fleet requirements while maintaining their existing lift in a cost-effective manner.
The return of a desirable, large cabin aircraft by one customer at the end of a lease term allowed Global Jet Capital to meet the evolving needs of another customer, who will benefit from the larger capacity and longer range afforded by this aircraft. GJC worked with the customer to fund upgrades to the aircraft while seamlessly transitioning them out of their existing lease prior to its scheduled termination.
\ CONCLUSION
The business jet industry continued to demonstrate healthy market dynamics in Q2 2022.
New business aviation users who decided to forego commercial flights due to the COVID-19 pandemic remained in the market, while historical users have begun to return, leading to increases in flight operations. Demand for aircraft was also strong, driving up OEM backlogs. Despite an increase in aircraft listings, pre-owned inventory levels only increased slightly during the quarter.
Challenges to the broader economy mounted during Q2, including inflation, rising interest rates, and economic contraction in some countries. As a result, economists are forecasting increased risk of a global economic recession. However, strengths in the business jet market, including high OEM backlogs and demand from new and returning users, have increased its resilience against a future downturn.
Notes
iOxford Economics, iiWells Fargo, iiiWells Fargo, ivWells Fargo; Wells Fargo; Wells Fargo;, vWells Fargo, viWells Fargo, viiU.S. Employment and Training Administration, Initial Claims [ICSA], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/ICSA, July 26, 2022., viiiU.S. Energy Information Administration, ixOxford Economics, xWingX and Global Jet Capital Analysis, xiWingX and Global Jet Capital Analysis, xiiPrivate Jet Card Comparisons, xiiiWingX and Global Jet Capital Analysis, xivCompany financial reports., xvJetNet and Global Jet Capital Analysis. Units are in parentheses., xviAmstat and Global Jet Capital Analysis, xviiJetNet and Global Jet Capital Analysis, xviiiAircraft Bluebook and Global Jet Capital analysis
