COVID-19 and The Business Aviation Market

Tony Kioussis (00:33):
Welcome to another Asset Insight podcast covering the aircraft ownership life cycle. I am Tony Kioussis, President of Asset Insight, and your host. Joining me today is Richard Aboulafia, Vice President of Analysis at Teal Group, a corporation that provides numerous analysis and consulting services to the aerospace industry. Richard manages consulting projects in the commercial and military aircraft field and has advised numerous aerospace companies and financial institutions in the US, Europe and Asia.

Tony Kioussis (01:05):
In addition to writing and editing Teal Group’s world military and civil aircraft briefing, a forecasting tool covering over 135 aircraft programs in markets, he writes publicly about aviation and defense, and his articles have appeared in the Wall Street Journal, the Financial Times, Professional Pilot and other publications. Frequently cited as an aviation industry authority by trade and news publications, Richard has appeared on numerous television and news programs and he joins us today to discuss the impact of COVID-19 on the business aviation market.

Tony Kioussis (01:41):
Welcome Richard. It’s been a while since we last spoke face-to-face, a sign of the times. From your perspective, what effect has the pandemic had on business aviation during the past year and how does that compare with other impactful global events?

Richard Aboulafia (01:57):
It’s all relative, isn’t it? So the best way to understand, I think, the status of bizav today is to look at a horizontal and vertical, and the vertical aspect, compare it back to 2008, better. And the horizontal compared to the other commercial aero segment or civil aero segment, which of course is jetliners, better, much better. In so many ways, I look at bizav right now, and I just can’t help but feel we’re in a much better place. You look at ultimately flight and activity is what matters so much, looking at demand for a given product, and commercial jetliner flying is down still about 60% and it hit a low of about down by 95%. i.

Richard Aboulafia (02:39):
In bizav, we never hit anything like that, and of course, we’re down to a few percent, 10%, 15%, something like that. And in some forms, like charter and fracks, not bad at all, even slightly ahead in some cases. So there’s that horizontal comparison we’re doing just fine. Vertical, oh boy, I remember all the indicators back in 2007, 2008, just being completely unrecognizable in historical terms. 21% of the fleet available for sale, if memory serves, that was what we were hit with back then. Here, it’s just a little bit up 9%, 10%, something like that. This is so much of a better, happier story and I hope it stays that way.

Tony Kioussis (03:22):
What are some of the present tailwinds and headwinds that you see either positively or negatively affecting business aviation?

Richard Aboulafia (03:30):
Yeah, this is a much more mixed story, right? Utilization, of course, being what really matters and not looking bad at all but you look at the traditional macro indicators for business aircraft market health, you get a little academic at some point. It works in reality, it doesn’t work in theory. In theory, at least, bizav demand is determined by a couple of key econometric indicators. One is corporate profits. They are of course way down, but another one is equities markets, which are doing great, DOW 30,000 plus, just fantastic. So that’s completely mixed.

Richard Aboulafia (04:10):
Traditionally, high end business jets, the big iron at the top, has a close correlation with the price of oil and that, of course, fell way to record lows back in April. It’s recovered a little bit, brent crude is now above 50 bucks a barrel, that’s good. But still, the numbers tell us we should be in for a high end downturn based upon that historical relationship between fuel prices and large cap and bizav demand. But we don’t know yet, past isn’t always prologue. So the theoretical indicators are telling us very mixed stories here.

Richard Aboulafia (04:42):
Again, the only thing you can come back on is people are fine, prices haven’t dropped very much and basically the availability of jets on the market hasn’t gone up very much. So the immediate indicators are still in pretty healthy territory.

Tony Kioussis (04:58):
How do you see new aircraft delivery shaping up during 2021 and say over the next few years?

Richard Aboulafia (05:05):
Well, one big question is, to what extent the fall off and deliveries in 2020, which of course until GAMA gives us our official stamp, we won’t be able to declare with any certainty, but it looks like it was down an unpleasant double digit percent. We don’t know to what extent that was due to the exigencies of the pandemic, production disruptions, people not able to travel and take delivery of their jet, whatever else, and to what extent it was a market problem. It looks a bit more like it was related to the pandemic. The market problem doesn’t appear to be anywhere near as significant again, as 2008, when you had a lot more bankruptcies and a lot more companies that just simply canceled their orders or simply ceased to exist.

Richard Aboulafia (05:52):
So we’re expecting a flat year in 2021. It should be about the same as 2020, but then a recovery beginning, probably to the tune of about a 5% growth in 2022. As you know, the market is kind of split, kind of bifurcated, with the stuff at the top. Generally in the past few years, holding up a lot better than the stuff at the bottom but what we’re really going to be looking for, and I hope it happens, is more of a broader based recovery this time with small and mid cabins performing as well as large. But of course, a lot can happen over the next one or two years.

Tony Kioussis (06:26):
How do you see business aviation recovering compared to the airlines?

Richard Aboulafia (06:32):
Well, it’s going to be a long slog back with the airlines and I tend to be a bit of a vaccine fundamentalists there. You’ve got good news on that front, but it’s still going to take a solid six or seven months to distribute and basically jab a bunch of people and probably a little longer before you get the majority of the traveling public. We’re not expecting a full air travel recovery back to the 2019 air travel peak until late 2022. We’re actually on the optimistic side with that. IATA, no I ought to, but IOTA, the International Air Transport Association, believes it’s not going to take place until early 2024.

Richard Aboulafia (07:11):
All of this means that deliveries of jetliners, which of course have fallen precipitously, aren’t going to get back to peak until the mid 2020s. By contrast, we’ve got a recovery in bizav deliveries, basically around 2023, somewhere in that zone, and it’s quite possible that there’s more upside than not. If it turns out that the drop-off last year was largely due to the pandemic and nothing at all to do with the market, you could see a swifter recovery.

Tony Kioussis (07:42):
An aside Richard, I was thinking about all of the parked airliners, and who’s the one taking the penalty for that iron sitting around? Is it leasing companies? Is it the airlines themselves?

Richard Aboulafia (07:55):
I can confidently tell you Tony, that the answer is yes.

Tony Kioussis (08:01):
I was thinking you were going to tell me that.

Richard Aboulafia (08:03):
It’s all over the place. Obviously it depends on who holds the note. There are going to be an awful lot of third party financiers in the jetliner business who are disappointed when it comes to the value of their jet that was coming up for a third lease period. So you got a lot of planes in their late teens that might be meeting their maker before expectations and that means right-offs for a lot of those guys. It’s always been a funny thing about third-party financing jetliners, there was always a bit of fat. I don’t mean fat, I mean healthy profit, but unfortunately in tough times like these, that represents basically a kind of cushion.

Richard Aboulafia (08:43):
You look back at jetliner finance, going back to the creation of the industry with Steve [inaudible 00:08:47] back in the mid-1980s. For the first 30 something years, I think total returns were on the tune of 15%, 16%, 17% per year, higher than any other segments, certainly higher than airlines or building jets or anything like that.

Richard Aboulafia (09:01):
So there was some cushion that could absorb and that’s probably the answer to your question. A lot of the pain will be focused on people who finance these things.

Tony Kioussis (09:11):
I’m curious what your views are actually on the supersonic business jet. How do you view that market? And is there room for more than a couple of OEMs at most?

Richard Aboulafia (09:23):
Yeah, I remember following that for the first time when I just got into this business, it was the late eighties and Gulfstream of all things had a joint venture with [inaudible 00:09:32], it was one of those post-Cold War, this seems like a great idea moment. And since then, of course, the supersonic business jet concepts have come and gone. I remember back in the mid to late nineties, Dassault had a really cool design. The most persistent, and I think in many ways, most impressive, has been Aerion. They of course, were stood up about, if my memory serves 16, 17 years ago. They have undergone a number of iterations and a number of partners. We’ll see, I still regard them as the one that’s likely to succeed.

Richard Aboulafia (10:05):
The big question with supersonics is about the trades. It’s not just the very high price tag. I regard Aerion as being very honest. They’ve said, “Here is our supersonic business jet. It costs $120 million and you get a tube that does not resemble a high-end business jet. You get a tube that resembles a business yet that costs about $35 million new. Basically, think somewhere between a G280 and a G450. Are there people out there who will make that call that say, “Yeah, I could pay $`75 million or so for a G700 and get trans-Pacific range, an amazing tube, or I could get a much less capable machine with a smaller tube and less range for about 60% more money.

Richard Aboulafia (10:54):
That’s a huge series of trades, right? But I’m pretty confident that some of that high end market is going to say, “I don’t care. Mach 1.6 or bust. I just want to do it.” That’s going to be fascinating. I suspect that there’s room for one and they’ll probably get to sell, I don’t know, somewhere around 300 or something? There’s a niche of people who are willing to make that trade.

Tony Kioussis (11:16):
I’m always curious about the supersonic business shit. I can remember having conversations with numerous OEMs and their comment has universally been, “Who’s going to be the first one to build it, because you’re taking a huge risk.” And I don’t disagree with that. I’m not sure how big the market is. Of course I haven’t studied it either. We had a podcast with Aerion and I have to tell you, it was absolutely fascinating. If you haven’t listened to it, you really should. It was with their chief sustainability officer and the approach that Aerion and is taking for this aircraft is really nothing short of fascinating. But how big that market is? I don’t know. It’s going to be interesting to see how far they can take it.

Richard Aboulafia (11:57):
Yeah, that’s exactly right. That’s exactly right and I find that fascinating too, absolutely.

Tony Kioussis (12:03):
Is there any advice relative to the business aviation market that you would give to say an OEM or an aircraft finance institution or an aircraft service facility for the near term, and then perhaps the next five years?

Richard Aboulafia (12:17):
Well, obviously big is better in this business. That’s one universal theme in aviation, and of course, that means the ability to pool resources for new product development. That means greater networks in terms of product support, in terms of R and D and whatever else. And most of all, the ability to survive a downturn. Right now, this looks like a relatively mild downturn, both by comparison with jetliners and by historical experience in the bizav world, but it could be worse and we could see future downturns that are bad.

Richard Aboulafia (12:51):
So in other words, be conservative, make yourself survivable, and also never forget that this is more than any other segment of the aero business, a segment that heavily depends upon new product development, new offerings. You can stimulate the market by doing something newer, bigger, better, and whether you’re an OEM or a service provider, a lot of it comes down to your ability to impress people with your latest invest. You can’t just rest on your laurels.

Tony Kioussis (13:20):
What do you see from a consolidation standpoint? Do you see any more consolidations relative to the OEMs? I’m thinking airframe OEMs right now, but you see any more consolidation on that side?

Richard Aboulafia (13:32):
Yeah, great question, and we’re about to test the proposition of whether or not a pure play, standalone, publicly traded business jet OEM can survive. And that of course is Bombardier. We’ve never seen that before, not for any extended period of time. So they’re floating on the market. They’re standalone, they’re pure play. Let’s see where this goes. It could be that they’re forced to ally with somebody else. Gulfstream, they’re just in their own world.

Richard Aboulafia (14:04):
It’s kind of weird, you look back at the last year, it was absolute carnage for everybody in the industry. I believe they’re the only single large airframer that was actually profitable. You just can’t touch Gulfstream. Dassault is also Dassault. The business jet part of the company isn’t terribly healthy right now because of slumping orders and the fact that they don’t have high end market exposure, or really high-end market exposure, but their military side’s doing fantastically well, so there’ll be fine.

Richard Aboulafia (14:32):
Textron’s probably going to be okay. In other words, the only big question mark is Bombardier. I guess I should also mention Embraer in the aftermath of the failed joint venture with Boeing, what’s going to happen. I tend to think there’ll be fine, I really do. But there were all sorts of possibilities out there. Do they spin off their bizav unit? Ironically, after years of them hating each other Embraer and Bombardier would fit very nicely together. It’s unlikely that they would have much in common and the ability to sit down and talk, but it is interesting to note that they’d be a pretty good fit.

Richard Aboulafia (15:05):
So lots of theoreticals, lots of potential, but I can’t tell you if there’s anything definite happening. You look back at 2008 and the only single casualty of the entire downturn in the entire aerospace world was Hawker Beechcraft. Nobody wants to repeat that experience and I don’t think we have to this time.

Tony Kioussis (15:24):
Any thoughts on where things might go compliments of the new administration?

Richard Aboulafia (15:30):
Well so far, they’ve presented a fairly business-friendly sort of approach. Mayor Pete Buttigieg, I think, has been very pro-infrastructure in what he’s been saying, that certainly implies good things from the standpoint of, well, infrastructure, which does matter. So far, I guess the only big uncertainty is whether there are going to be any tax changes that impact the industry. And here’s where the NBAA and GAMA and all the other great organizations have to get out there and do what they do best, which is to explain why this is such an important economic engine and shouldn’t be regarded as merely the play things of rich people, but rather something that employs a lot of people.

Richard Aboulafia (16:09):
And they’re good at that. No matter what the administration is, people in the administration come to understand that this is an important economic engine and should not be regarded as something to be milked.

Tony Kioussis (16:23):
What do you think might be the long-term effects of the pandemic on the business aviation community?

Richard Aboulafia (16:30):
Obviously it’s never too early in a crisis to think about the longterm implications. I think the big and intriguing possibility is an upside, quite frankly, from this tragedy. Maybe there’ll be something good that comes out of it. One of it might be people deciding that bizav is the way to go for a variety of reasons and you look at the number of people coming into charter and fractional without the full commitment to having a flight department or their own jet, or what have you, but kind of intrigued by the possibilities.

Richard Aboulafia (16:57):
And if those numbers keep going, and they’ve been really solid so far, it’s going to be a big question about how sticky that is. And history says that when people experiment with bizav, they tend to stick with it. It’s very appealing from a value proposition standpoint. So in a couple of years, are we going to have a bunch of new entrants in terms of participants to this industry, new flyers, basically sticking with it for some or all of their business travel needs? I certainly hope so.

Tony Kioussis (17:25):
And I want to tell you the statistics associated with new buyers coming into the industry, not new aircraft, but new buyers to the industry, are pretty amazing. In fact, corporate buyers kind of disappeared in 2020, whereas the new blood coming into the industry spiked. So it’s really interesting to see that change.

Richard Aboulafia (17:47):
Exactly, exactly and it sure beats the whole, let’s beat up on the auto company CEOs who fly to Washington in their business jets atmosphere, that prevailed back in 2008. Thankfully that’s lacking this time around, delighted to see that. Yeah, I think this time around is it’s also very different because you don’t have the ability to fly the airlines to a number of places you used to be able to fly to and those were limited as well, compared to where business aviation normally goes.

Richard Aboulafia (18:16):
So it really does increase the value, if you will, of business aviation usage and therefore, more people getting into it. So it’s an interesting dynamic, isn’t it?

Tony Kioussis (18:27):
It really is, it really is. I know from the standpoint of a Washingtonian, I still consider it just remarkable. I can’t fly to Wichita, aero capital of the world, without going through a hub and basically taking all day. And there are stories like that from all over, and they’re not getting any easier because of the service cutbacks associated with the pandemic.

Richard Aboulafia (18:45):
Yeah. I agree. I mean, Wichita has always been a problem, right? But it’s not just Wichita now, it’s a lot of other cities, and I don’t anticipate that getting any better anytime soon. And there are some markets where, I guess I’m focused on most of California at this point, but you might have service to Los Angeles, but if you want to go to Orange County, it’s an additional couple of hours to get from LAX. Wouldn’t it be great to have a private plane take you to John Wayne or what have you, and certainly the entire Bay Area is like that.

Richard Aboulafia (19:16):
It becomes so much more compelling when you look at those small airports and the tactical access they give you.

Tony Kioussis (19:23):
Now, I’m wondering if Santa Monica is actually rethinking their plan.

Richard Aboulafia (19:28):
One would hope, right?

Tony Kioussis (19:32):
This has been another asset insight podcast covering the aircraft ownership life cycle. Please visit our ever-growing podcast library at assetinsightpodcast.com and select from any number of topics discussed with business aviation industry experts.

Tony Kioussis (19:48):
This is Tony Kioussis and as always, thank you for listening.