2020 Outlook

FLIGHT SHAMING HITS BUSINESS AVIATION AND OTHER PREDICTIONS FOR Oftentimes industry outlooks tend to be nothing more than an extrapolation of what’s already happening at the end of the year rolled into next. For private aviation however, there are developments that would suggest that 2020 will shape up much differently than 2019. Here are some thoughts, trends and predictions for the year from Brian Foley 2020

JAUNT Prince Harry has recently been slammed for jet-setting around Europe.

Barely in the industry’s vernacular as 2019 rolled in, the term “flight-shaming” from the Swedish word Flygskam was developed by environmentalists to create the perception that one should be ashamed for flying and leaving a carbon footprint. Whereas criticism of corporate executives flying off into the sunset in their private jets had always been a crowd favorite to stick it to “the man” adding the environmental card now brings a nuclear option to activists’ arsenal.

Aircraft owners risk being publicly called out à la Prince Harry for his now infamous Gulfstream jet trip to pal Elton John’s. In 2020, private flyers will gravitate towards ways to evade this kind of judgment and public humiliation, either by voluntarily paying into third-party carbon offset programs to have a good alibi if confronted, or by ditching aircraft ownership altogether by using charter, fractional or other non-ownership models that better protect identities. The latter is not at all helpful to new business jet sales which have been stubbornly anemic for the past decade.

To create favorable corporate identities of being deeply concerned, committed stewards of the environment, companies in the Business Aviation industry will tweak their ad copy and concoct PR stunts to demonstrate commitment, such as one-time flights using Sustainable Aviation Fuel (SAF), by now an overdone skit. Others will offer voluntary access to pay-as-you-go carbon taxes to accommodate those who really care and others who want what is essentially an insurance policy to avoid public shaming.

The only way out of this quagmire would be through the gradual introduction of hybrid-electric propulsion systems which eventually lead to allelectric engines. While the former could take 10 years and the latter 20 to come to limited fruition, it would eventually squelch the criticism even if smoke-belching, coal-fired electric plants are being used to charge the batteries. What to Watch

Follow the money. With the US stock market up around a whopping 30% in 2019 and a repeat performance unlikely, investors are looking to overseas financial markets for better returns in 2020. This will have the effect of stimulating non-North American and emerging markets which have been on hiatus for much of the decade. Back in 2010, emerging markets accounted for 35% of worldwide business jet deliveries. In 2018 that figure had been reduced by half due to a variety of geopolitical and economic reasons.

An inflow of investment due to attractive stock valuations coupled with an improved outlook for global

growth and the probability of a successful Brexit will create a decent uptick in offshore business jet sales. This comes at a good time as the economic cycle of largest purveyor of jets, the US, matures and buyers remain skittish.

The Unconventional Wisdom

A lot has been said of late of the sharing economy’s effect on the industry. It’s been popularized that a younger generation of fliers want nothing to do with aircraft ownership, only wanting access and the experience of private flying. The theory was this would further dent new aircraft sales while benefiting non-ownership models such as charter, fractional and jet cards –essentially a prepaid charter debit card. If that’s the case, it’s certainly not showing up in FAA flight statistics or even notionally. Charter continues to be an oversupplied market with what seems like a race to the bottom on pricing. The number of flight operations, or takeoffs and landings of chartered business jets in the US, barely budges each month, while fractional aircraft providers such as Berkshire Hathaway’s Netjets division is still a shadow of its former self since the worldwide financial crisis.

Feedback from leaders in the charter business suggests that millennials representing the sharing economy are barely moving the needle. While the topic makes for good cocktail

conversation, it cannot be verified either objectively or subjectively. The unpopular and contrarian truth is that the new aircraft sales lull cannot be attributed to the instant gratification crowd, nor are they swarming to any non-ownership means of private air travel.

The Misplaced Assumption

A great economy is no longer a proxy for new business jet sales. US stock markets and corporate profitability have been consistently breaking records. In previous times this would have signaled a booming jet sales environment. Instead, sales have been flat for a decade and much of the stock market run-up can be attributed to artificial government interest rate stimulus rather than fundamentals.

Instead of shelling out money for a jet, companies are deploying capital to areas of higher return instead of a depreciating asset. Profits have been going towards company stock buybacks while jets, which at one point held close to 80% of their value after 5 years, can be worth less than 50% of the new price as supply equals demand and a business jet finally depreciates like any other capital good should.

It could even be argued that sales have remained stable and not fallen any further only because of a good economy. This kind of reasoning would then portend a decrease in sales should economic growth falter in any way.

The Bold Prediction

There are too many business jet models chasing too few buyers and something will likely give. Forty-one models of new business jets from 7 manufacturers vie for just 700 total worldwide industry sales per year. In response to tepid demand, leading makers such as Textron Aviation’s Cessna division and General Dynamics’ Gulfstream unit announced layoffs in late 2019.

With such a relatively small market and workforce cutbacks, it wouldn’t be surprising for a least one of the participants to call it quits. The last culling of the herd hasn’t occurred since Hawker Beechcraft went bankrupt a few years ago. Cessna ended up buying its ruins and four Hawker Beechcraft jet models were permanently removed from the market — hardly enough to make a dent in the cornucopia of business jet models to choose from.

If there were a weak link in the industry it could be the Learjet division of Bombardier, the parent who has been relentlessly shedding business units to remain viable. It surely has been

evaluating its Learjet division which only delivered 9 units through the third quarter of 2019 and is the smallest contributor to the company’s overall business jet sale revenues which include the Challenger and Global Express divisions. Learjet’s recent move to offer a stripped-down, no frills, discounted model called the Liberty could be interpreted as a move to get rid of the last of the inventory rather than a tactical market strategy. With an aging product line, the company cancelled its allnew Learjet 85 a few years ago which further questions its long-term commitment. Epilogue

2020 will hardly be a repeat of 2019 in the Business Aviation industry. The green movement will rise logarithmically creating a widespread move for companies to rebrand themselves as environmentally responsible while their clients seek carbon offset programs or explore non-ownership private flying models to also protect their image.

With barely a detectable pulse the last several years, emerging markets will slowly be resuscitated to become more meaningful purveyors of new business jets. This would be timely as the next generation of millennial flyers aren’t pulling their weight, and the US economy can’t sustain the industry forever as talk of a recession in the next year or two permeates financial conversations.

Lastly, a measly 700 worldwide business jet sales per year will test the resolve of some plane manufacturers, with the possibility of a storied brand being sold or quieted.

In short, 2020 will not be just another cookie-cutter 2019.

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Since 2006 Brian Foley Associates (BRiFO) has helped aerospace firms and investors with strategic research and guidance. www.BRiFO.com Its sister company AvStrategies helps match aviation investors with great companies www.AvStrategies.com COMPETITION There are too many business jet models chasing too few buyers.

WILL BUSINESS AVIATION WILT OR BOUNCE BACK IN 2020? Richard Koe scrutinizes some of the most notable aviation trends of 2019 and shares his sector predictions for 2020

CONTRAST 2019 was marked by stronger sales, but wilting confidence in the sector.

Back in January last year, 2019 was widely expected to deliver the Business Aviation industry a recovery path from its long period of recession and standstill. The preowned market already had impetus from a surge in transactions in 2018 and as excess capacity finally burnt off, industry optimism was at a longtime high that its lost-decade was finally over. In some ways, 2019 has delivered on that promise, with the largest number of new deliveries in a decade – around 10% up on 2018 –and leading OEM order books restored to parity. Yet the year-end forecasts for next decade deliveries were downgraded, as in each of recent years, and current industry confidence surveys, at their high point 12 months ago, show substantial deterioration in the last few months.

The juxtaposition of stronger sales but wilting confidence during 2019 reflects the positive cyclical trends in the industry jarring with an increasingly uncertain macroeconomic environment. On the one hand, with the 2010s’ over-capacity worked out, new higher performance aircraft are well-timed to meet long-delayed customer upgrade requirements. On the other hand, global growth momentum back in 2017 has since withered away, with mature business jet markets like Europe at a standstill, and formerly fast growing emerging markets for the industry, including China, Russia, Brazil, much weaker. The global industry is ever more reliant on the US market, where the economy has maintained a remarkably long growth cycle, but relatively modest. Moreover, business investment in capital assets, especially on private jets, is lagging well behind corporate profitability.

The relative weakness in overall aircraft sales is reflected in the preowned markets. Record activity in 2018 gave way to a much weaker market in 2019, with pre-owned inventory levels again rising towards 10%. Much of the older stock now semi-permanently parked, especially those models which missed the FAA’s ADSB mandate on January 1st.

There is also an increase in younger aircraft for sale, which points to some cannibalization in various OEM categories. In particular, the sales of new Gulfstream and Bombardier ultra-long range jets is pushing their antecedent models onto the pre-owned market. Volatility in business jet residual values, mostly downwards, has been a major restraint on the recovery of the industry after the recession. From 2018 into 2019, there was some welcome stabilization in values. That may well change now we are beyond the FAA ADSB mandate.

The overall effect of new deliveries, transactions and retirements on flight activity came out about neutral, with globally operated flight hours on around 30,000 business jets and turboprops 0.7% up on the aggregate for 2018. Given that the net effect of new deliveries and retirements is estimated at around 2%, overall utilization seems to have flagged.

In terms of business jet traffic, a total of 2.9 million sectors were flown by 20,831 jets worldwide in 2019, by just under 10,000 aircraft, representing a 1.6% increase on 2018. Around two thirds of that activity was recorded in the United States, although activity growth of less than 1% was disappointing given that the US took the lion’s share of new aircraft and also repatriated many aircraft through international transactions on the preowned market. Both Mexico and Canada saw strong growth rates in activity in 2019, boosting the overall North America trend to 2% compared to 2018.

By aircraft segment, the North American region saw by far the strongest growth in Super Midsize aircraft. As shown in Chart 2, 487K sectors were operated in this segment, up by 49K on 2018, more than 10% growth. Primarily this reflects the introduction of new aircraft in these categories into the largest US management, charter and fractional fleets. The Citation Latitude has seen strong sales throughout the year, competing with the evergreen Challenger 350 platform, and the Embraer Praetor 600 is starting to get traction. CHART 1: INDICATIVE BUSINESS JET VOLUMES AND 2019 GROWTH TRENDS IN GLOBAL REGIONS

CHART 2: BUSINESS JET ACTIVITY IN NORTH AMERICA IN 2019, BY AIRCRAFT SEGMENT CHART 3: TREND IN 2019 IN CHARTER (PART 135) ACTIVITY BY AIRCRAFT TYPE

Twenty percent of the Light Jet activity in North America, which has modest growth, has come from the Phenom 300, this one platform seeing 12% growth in hours flown. Across the whole active fleet, the Phenom 300 has a utilization rate of 354 hours per aircraft, compared to an average of 210 hours for the total business jet fleet. Net Jets alone have close to 100 Phenom 300s in operation.

At the top end of the market, the last 2 years have seen an escalation in new competitive products. With the belated arrivals of the Global 7500, Gulfstream lost its long undisputed leadership in the ultra-long range segment. By the end of the year, Gulfstream itself had overshadowed the G600/650 with Gulfstream 700, unveiled at NBAA but not due on the market until 2022. Orders from Qatar Executive and Flexjet have provided some endorsement, but in the next couple of years the market will see if Gulfstream’s G500 and G600 can dent the portfolio gains of Bombardier’s trio of 5500, 6500 and 7500.

The broader question is whether this competition generates a net growth in an already overcrowded market. The flat overall trend in flight activity in North America belies some decent growth in Charter, with flight hours up by 6% last year. Within the United States there were 657K sectors flown by business jet tails with FAA Part 135 certification. Busiest aircraft as well as strongest growth unsurprisingly came from expanding Challenger 350, Citation Latitude, and Phenom 300 fleets, but there was also solid growth for the Citation Sovereign and Citation Excel/XLS. There was a big drop in Part 135 activity on Falcon 2000 and the large to midsize Gulfstream platforms, notably the discontinued G450. At the heavy metal end of the market, the Global 6500 had most growth in Part 135 demand. At the lightest end of the market, the remanufactured Hawker 400 has found a growth niche, and the Honda Jet fleet, with 20 units providing Part 135 services, saw a 50% increase in activity.

Underlying the contrasting trends in private compared to charter – and more broadly, commercial, because fractional activity is also up in North America – may be a shift in customer behavior. Aircraft owners have long been wary of the fat-cat stigma, and the last decade’s slippery slope in aircraft depreciation has highlighted the financial risk of the asset investment. But the rise and rise of the environmental agenda last year could change the game in terms of toxifying business jet ownership. If private jet travel is still essential, the green lobby will encourage users to go to the charter market. Part 135 operators have responded by striving to make rentalaccess as malleable and convenient as possible. Clubs, memberships, fixedprice routes and shuttles have added to the jet cards, fractional schemes and myriad spot-market options and undoubtedly stimulated demand. The overall effect has so far fallen well short of the democratization of private jet travel which is often claimed. The last 12 months have also seen an acceleration in the consolidation of the operator market. Not only are operators dominating the OEM fleet orders, but the biggest beasts have been busy raising capital and making acquisitions. Wheels Up hogged the

POTENTIAL The flat overall trend in flight activity in North America belies growth in charter.

LAG Europe has been treading water since mid-2018.

CHART 4: BUSINESS AVIATION ACTIVITY TRENDS IN EUROPE IN 2019 COMPARED TO 2018

limelight, with its mid-year purchase to Travel Management Company’s Hawker fleet, then its acquisition of Avianis, empowering its digital shopfront, then last month its investment from and fleet merger with Delta Private Jets. The enlarged group now has near 200 Business Aviation aircraft and will hope to prove the complementarity of Delta’s scheduled services with its last mile operations.

At the heavier end of the market, Vista Jet ramped up its access to market with the purchase of Jet Smarter, and saw its investment in a brand new Global 7500 fleet start to materialize during 2019. Vista’s benchmark rival has always been NetJets, which affirmed its market leadership with significant orders for Textron and Bombardier.

Below the radar, still significantly large fleets are being consolidated in the US, with the likes of Jet Linx acquisition of Elliot Aviation, and just in January 2020, Jet Select’s acquisition of Jet Edge. Fleet consolidation still has a long way to go to emulate the domestic airline carriers, with several thousand operators still managing just a couple of units. But clearly the consolidation is not just about fleets, with the market leaders instead looking to control as many possible levers on the customer, from operations to advisory to digital interface.

Outside the Americas, other regional Business Aviation markets saw little significant growth. Whilst China remains potentially the most exciting new market for aircraft, infrastructure, security issues and a slowing economy continued to frustrate growth. There were pockets of strong growth in other parts of Asia, notably Singapore, but still embryonic markets. Across Middle East, Africa and Russia, growth from a small but resilient customer base has faltered on the headwinds of economic and geopolitical crisis.

Europe, the key global market for business jets outside North America, has been treading water since mid2018. The most direct obstacle is the flatlining regional economy, largely due to its exports’ exposure to global trade tariffs. That has affected Germany most. Brexit and the associated Eurozone breakup risk has also been a factor, particularly for the UK. Drawing together the strands of our review of 2019, what can we expect of Business Aviation activity in the 12 months ahead? As always, the political and economic backdrop will dictate demand for business jets. With regards to the industry’s biggest market, forecast GDP growth of around 2% should reassure aircraft owners and users, especially with the tailwind of an exceptionally strong 2019 stock market performance. The doubts will emerge in the 2nd half of the year with the presidential elections, likely to put many investment decisions on hold, with a new Democrat Administration likely to roll back on tax cuts. Assuming macroeconomic stability, new aircraft deliveries and scaled-up operations should bolster activity, especially in the charter market, with the sweet spots retained in the super midsize segment. Other regions will add little to the global industry’s fortunes in 2020. Business Aviation is coming back in Latin America and Africa as these regional economies start to recover. China’s pent-up demand will come, but 2020 is too early. Formerly fast growing Business Aviation markets such as Russia, Turkey and Saudi Arabia will stay on hold, at best. In Europe, ceasefire on global tariffs and Brexit breakthroughs will encourage some economic bounceback. Whilst this might support flight activity, the climate crisis may prove a counterveiling disincentive for Business Aviation demand. As it grows, environmental pressures could accelerate the emergence of a much larger electrified, urban mobility market. But that’s still for the future; in 2020 the global industry outlook is broadly promising as the traditional user base upgrades its fleet whilst economic conditions remain benign.

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R ichard Koe is managing director of WINGX Advance GmbH. WINGX, based in Germany and founded in 2011, provides business intelligence for the global private jet market. WINGX researches and tracks market data, from which they build analytics to assist customers in their decision making. Their customers span the entire industry supply chain, from airports, operators and manufacturers to industry investors and financial analysts. Mr. Koe has a background in sales, business development and strategy, in the Business Aviation sector and previously in telecom and manufacturing industries. He has a Bachelor degree from Oxford University and a Masters from Johns Hopkins University.

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