OVERVIEW
Coming off a very strong 2021 and 2022, the business jet market stabilized in H1 2023.
Flight operations were down compared to 2022, but remained higher than pre-COVID levels, inventory levels continued to climb but remained below historical averages, and transactions declined from high levels over the past few years. While the economy remained resilient in Q2 2023, economists continue to keep a close eye on future macroeconomic conditions. Within the business jet industry, observers continue to monitor rising inventory levels. However, ongoing demand for business jet services, high backlogs at major OEMs, and relatively low inventory should allow the industry to weather any potential downturns.
Q2 2023 HIGHLIGHTS
- The economy continued to be resilient in Q2 2023, but warning signs of slowing growth persist.
- Flight operations declined 7.5 percent year-over-year in Q2 2023, but were 12.1 percent above Q2 2019 levels, demonstrating sustained demand for business aviation.
- OEM backlogs increased and book-to-bill ratio remained above 1-to-1, placing OEMs in a position to weather potential downturns.
- Transactions declined in H1 2023 due to slower-than-expected new deliveries – attributable to supply chain issues – and a slowdown in the pre-owned market as buyers and sellers adjusted to new market conditions
- Business jet inventory levels increased in Q2 2023 as more sellers publicly listed their aircraft, although levels remain well below pre-COVID levels.
- After a steady increase in values throughout 2022, most aircraft exhibited more typical depreciation profiles in Q2 2023.
Amidst warnings of an impending recession, the economy defied expectations by remaining resilient through the first half. In the U.S., the labor and housing markets remained strong, and inflation trended down globally.ii Still, warning signs remain. Data suggests the U.S. labor market will cool down in the second half of the year, accompanied by a decline in consumer sentiment and demand. In addition, while inflation has begun to fall, it remains above targets set by global central banks, meaning interest rates are expected to remain high, which should reduce business spending. For this reason, many economists forecast major economies will enter a recession late this year or early next year. Encouragingly, robust growth experienced in H1 2023 suggests that any recession will likely be mild and short-lived.iii
In Q2 2023, flight operations declined 7.5 percent from a year earlier, but were up 6.1 percent from Q1 2023. Declines were led by the U.S. and Europe, both of which experienced strong growth in the immediate post-COVID recovery. Charter operations also experienced a decline from post-COVID highs.
Demand remains above pre-COVID levels, with Q2 2023 departures 12.1 percent higher than in Q2 2019. In H1 2023, departures were 13.1 percent higher than in H1 2019. As expected, some passengers who utilized business jets during and immediately after the COVID pandemic began to return to commercial airlines (or reduced frequency of use of business aviation) as health and safety concerns diminished.v However, the appeal of business aviation remains strong, due to its inherent value proposition of flexibility, productivity, and comfort. Based on these factors, flight operations stabilized at a level that is lower than the peak witnessed in 2022, but higher than pre-pandemic levels with steady and sustainable growth expected going forward.
OEM backlogs increased 8.6 percent year-over-year in Q2 2023 to $50.4 billion. Orders declined from heights seen in 2022 but remained in line with historical levels and deliveries. Buyers continued to order new aircraft while supply chain constraints prevented rapid production increases. As a result, the industrywide book-to-bill ratio was 1.2-to-1. While backlogs are expected to decline as OEMs certify newly developed models and begin delivery to customers, they should remain at higher-than-average levels even if economic worries slow orders going forward.
Note that Q2 2023 figures reflect preliminary FAA data and may increase as more transactions are reported.
Transaction activity slowed in H1 2023, with both the new and pre-owned markets declining compared to year-ago levels. In the new aircraft market, manufacturers continued their efforts to resolve supply chain constraints that have slowed production increases. Manufacturers made progress restoring supply chains but continued to experience unpredictability across a range of key components. While supply chain issues have lowered overall transaction volume, fewer new aircraft being delivered into the market may help limit inventory growth and support healthier values for the market.
Much of the decline in the pre-owned segment was expected as economic growth slowed and the market continued to normalize following a strong 2021 and 2022. In addition, the market was adjusting to a more typical supply and demand environment. Throughout 2021 and the first half of 2022, above-trend demand led to extremely low inventory levels. As transactions slowed, inventory levels (see below) began to normalize, causing some sellers to hold out for higher prices and some buyers to wait for prices to decline. Activity levels are expected to pick up again later in the year as the market reaches a new equilibrium—although lower overall volume is expected in 2023 compared to 2022.
Aircraft listings increased in H1 2023, continuing a trend that started in the latter half of 2022. The recent increases can, at least in part, be attributed to baseline effects. In H1 2021, listings were 22.1 percent lower than H1 2019 and in H1 2022, listings were 19.9 percent lower than H1 2019. The 24.3 percent year-over-year increase in H1 2023 effectively brought the listings back to equilibrium with levels seen in 2019. Many aircraft sales in 2021 and the first half of 2022 involved unlisted aircraft. Aircraft sellers are now beginning to publicly list their aircraft for sale again, contributing to increases. Listings may continue to rise throughout 2023 as new deliveries increase, since owners will likely market their current aircraft after taking delivery of new aircraft.
After reaching a low point in Q1 2022, aircraft inventory began to rise. By the end of Q2 2023, inventory stood at 6.1 percent of the total fleet. That level of inventory is higher than the 3.1 percent at the end of Q1 2022 but still well below average levels of around 10-11% over the last decade. The inventory of aircraft younger than 13 years old (typically seen as more desirable) stood at 4.4 percent of the global fleet, an increase from the 1.8 percent seen at the end of Q1 2022 and the 3.6 percent seen at the end of Q1 2023. Inventory of aircraft 13 years old or older now stands at 7 percent, as many of those older aircraft that were purchased in 2021 and 2022 were put back on the market.
Inventory is expected to continue to gradually increase throughout 2023 as the market returns to more normal conditions.
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.
Average business jet bluebook values climbed 11.5 percent in Q2 2023 compared to Q2 2022. Values varied on a model-by-model basis, with some aircraft outperforming others in the market. For example, older aircraft appreciated in value faster than newer aircraft as many buyers chose to acquire older aircraft during the peak of the market, reducing supply. Bluebook values for older aircraft were 21.4 percent higher in Q2 2023, while newer aircraft increased 8.1 percent in value during the same time.
Even as bluebook values increased, there were signs in Q2 that values were beginning to normalize. The 11.5 percent increase in average bluebook values represented a slower increase than the 20.9 percent experienced in Q1 2023, and a significant slowdown compared to the 37.2 percent experienced in Q3 2022. Furthermore, the 11.5 percent increase is a year-over-year figure and includes rapid increases in the second half of 2022. Between Q1 2023 and Q2 2023, jet bluebook values returned to a more typical depreciation profile. As inventory increased, price negotiations between buyers and sellers were also more balanced than in 2021 and much of 2022. It’s worth noting that business jets are depreciating assets and a steady decline in the price of an aircraft over its lifespan is to be expected. The consensus among industry players is that a stable pricing environment will reemerge as demand and supply come into balance.
\ CONCLUSION
The business jet market has emerged from a period of rapid growth and is now in a period of stability
Following a recovery after COVID-19-induced disruptions ended, macroeconomic growth has slowed. In the business jet market, flight operations and transactions have declined on a year-over-year basis in H1 2023, and values have softened. Still, flight operations remain above pre-COVID levels, as many new users who entered the market in the COVID-19 era have continued to utilize its services. In addition, OEM backlogs and lead times remain high and pre-owned inventory remains below historical averages. Through the second half of 2023, transactions are expected to pick up as OEMs continue to resolve supply chain issues and the pre-owned market reaches a new equilibrium.
Global Jet Capital is a leader in the business jet financing market, providing leases and loans for both new and used aircraft. Our clients 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.
With its aircraft performing well and continuing to meet its mission profile, our client chose to extend its operating lease of a Citation XLS+. This transaction highlights GJC’s flexibility, one of the many advantages of entering into an operating lease with us. We look forward to continuing to provide our client with exceptional service going forward.
An existing client took advantage of our PDP financing for a new Challenger 3500 aircraft, followed by an operating lease upon delivery. We worked closely with the customer throughout the order, build, and delivery process, including providing flexibility when the delivery was delayed due to mechanical issues. This solution gives the customer the ability to retain its capital, while taking advantage of a high-quality aircraft to drive its business forward.
Global Jet Capital was able to put together a package that included a pre-delivery payment loan that will convert to a term loan, providing a source of capital to the customer to enable them to purchase a new G500. The attractive PDP and loan terms enabled us to win the business of a new customer.
Notes
iOxford Economics, iiWells Fargo, iiiWells Fargo, ivWingX and Global Jet Capital Analysis, vAIN, viCompany financial reports. Dassault does not report its quarterly results therefore data is based on reports from Cessna, Bombardier, Embraer, and Gulfstream. viiJetNet and Global Jet Capital Analysis. Units are in parentheses., viiiAmstat and Global Jet Capital Analysis ixJetNet and Global Jet Capital Analysis xAircraft Bluebook and Global Jet Capital Analysis
