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Third quarter sees brake on rapid growth of post-COVID recovery
In its Q3 business aviation market brief, Global Jet Capital finds that while the global economy remains resilient, headwinds to future growth continue to build although demand persists.

The highlights of Q3 2023 show, according to Global Jet Capital, that while the global economy has remained resilient, higher rates and increasing geopolitical volatility represent ongoing risks to macroeconomic conditions. Within the business jet industry, flight operations were down compared to 2022 but higher than pre-COVID levels, inventory levels climbed but remained below historical averages, and transactions declined from recent high levels. Stable demand for business aviation along with high backlogs at major OEMs and relatively low inventory should enable the industry to weather any potential economic downturns in the foreseeable future, it says.

Flight operations declined three per cent year-over-year in Q3 2023 but were 14 per cent above Q3 2019 levels, demonstrating sustained demand. OEM backlogs increased and book-to-bill ratios remained above 1-to-1, placing OEMs in a position to weather economic downturns. Transactions declined in the first three months of 2023 due to slower-than-expected new deliveries, attributable to supply chain and labor issues, and price-driven inertia between buyers and sellers in the pre-owned market. As more sellers publicly listed their aircraft, business jet inventory levels increased although levels for the overall fleet remained below historical averages. Most aircraft models reverted to historical depreciation profiles, albeit from a higher starting point following a firming in values over 2021-22.

While the global economy has been more resilient than many economists expected in the first three quarters of 2023, headwinds continued to build. Wars in Ukraine and Israel disrupted the flow of natural resources and central banks tightened monetary policy, slowing growth. An analysis by Wells Fargo found that credit card delinquencies increased, excess savings declined and consumer confidence slipped in both the US and Europe. As such, the analysis concluded that a recession at some point in the next 12 months remains likely. Still, there were positive developments in the quarter. The labour market in the US created more jobs than expected, while retail spending and industrial production in China remained strong despite disruptions to the property market.

As the moment, most economists expect that the chance of an economic hard landing has declined, but economic growth will remain slow and a modest recession is still possible. Encouragingly, robust growth experienced over the first half of this year suggests that any recession will likely be mild and short-lived.

In Q3 2023, flight operations declined 2.8 per cent from a year earlier, but were up two per cent from the previous quarter. Both the US and Europe experienced declines following strong growth in the immediate post-COVID recovery. Charter operations also experienced a decline from post-COVID highs.

Even as departures declined year-over-year, demand remained above pre-COVID levels. Q3 2023 departures were 13.9 per cent higher than in Q3 2019. Year-to-date, departures were 13.3 per cent higher than in the first three quarters of 2019. In 2023, some passengers who utilised business jets in the post-COVID recovery period began to return to commercial airlines as health and safety concerns diminished. It was widely expected that many of the new users of business aviation would return to commercial airlines as the world normalised. However, due to the industry’s inherent value proposition - including personal safety, flexibility, productivity, and comfort - a substantial proportion of new users continued to utilise business aviation this quarter. As such, flight operations were lower than the peak witnessed in 2022, but higher than pre-pandemic levels with steady and sustainable growth expected going forward.

OEM backlogs increased 5.9 per cent year-over-year to $46.1 billion. Orders were lower than the high levels seen in late 2021 and early 2022 but were in line with Q3 2022 and pre-COVID levels. Even as buyers continued to order new aircraft, supply chain and labour constraints prevented substantial production increases. As a result, the industrywide book-to-bill ratio was 1.2-to-1. OEMs have indicated that they expect book-to-bill ratios to decline as supply chain and labor issues are resolved and the FAA certifies newly developed models. Even as they decline, backlogs and lead times are expected to remain above pre-COVID levels over the next few years.

Both the new and pre-owned markets declined in terms of units traded in Q3 2023 compared to year-ago levels. In the new aircraft market, manufacturers continued efforts to resolve supply chain and labor constraints that have slowed production increases. They have resolved a broad range of issues, but challenges persist in acquiring key components. OEMs have also struggled to hire enough labour to meet demand. Finally, some manufacturers have delayed deliveries as they await certification of new aircraft models. While these constraints have lowered overall transaction volume, fewer new deliveries 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 normalised following a strong 2021 and 2022. In addition, inertia between sellers looking to maintain post-pandemic value gains and buyers waiting for values to return to historical depreciation levels slowed transaction volume in the pre-owned market. Relatively steep inclines in interest rates also suppressed demand. Many market observers expect activity levels to pick up again in Q4 as the market reaches a new equilibrium, although lower overall volume is expected in 2023 compared to 2022.

Aircraft listings increased in the first three quarters of 2023, continuing a trend that started in the latter half of 2022. The recent increases are, at least in part, attributable to baseline effects. Through September 2022, listings were 15.3 per cent lower than the same period in 2019. After a 22.7 per cent year-over-year increase in Q3 2023, listings remained only 3.9 per cent higher than in Q3 2019. Many aircraft sales in 2021 and the first half of 2022 involved unlisted aircraft. In 2023, sellers resumed publicly listing their aircraft for sale again, contributing to increases. Listings may continue to rise throughout Q4 2023 as new deliveries increase, since owners will likely market their current aircraft after taking delivery of new aircraft.

By the end of Q3 2023, inventory stood at 6.6 per cent of the total fleet. Inventory for the whole fleet is higher than the recent low point of 3.1 per cent at the end of Q1 2022, but still below average levels of around 10 to 11 per cent over the last decade. The inventory of aircraft younger than 13 years old (typically seen as more desirable) stood at 4.7 per cent of the global fleet, an increase from the 1.8 per cent seen at the end of Q1 2022 and the 4.4 per cent seen at the end of Q2 2023. Inventory of aircraft 13 years old or older increased faster than younger models and stood at 7.7 per cent, as many older aircraft purchased in 2021 and 2022 were put back on the market.

Inventory is expected to continue to gradually increase throughout the rest of 2023 as the market returns to more normal conditions, but is not expected to reach the historical average of 10 to 11 per cent in the near future due to limited new deliveries from OEMs.

Average business jet bluebook values climbed 4.8 per cent in Q3 2023 compared to Q3 2022. Values varied on a model-by-model basis, with older aircraft typically performing better than younger aircraft. For example, in Q3 2023 values on 13 year old and older aircraft were up 7.4 per cent compared to a 3.9 per cent increase for younger aircraft. Older aircraft outperformed younger aircraft throughout the post-COVID period as many buyers chose to acquire them during the peak of the market, reducing supply. At the peak in Q3 2022, bluebook values for older aircraft were up 67.6 per cent year-over-year, compared to only 28.7 per cent for younger aircraft.

Even as bluebook values increased, the market returned to a more normal depreciation pattern in Q3. The 4.8 per cent increase in average bluebook values represented a slower increase than the 11.5 per cent experienced in Q2 2023, and a significant slowdown compared to the 37.2 per cent experienced in Q3 2022. Furthermore, the 4.8 per cent increase is a year-over-year figure and includes rapid increases in the second half of 2022. Between Q2 2023 and Q3 2023, bluebook values declined 0.8 per cent. 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.

In conclusion, says GJC, following a rapid industry expansion in 2021 and 2022, growth in the business jet market has slowed. In Q3, macroeconomic headwinds remained (despite resilience so far this year), flight operations and transactions declined, and values softened. Still, flight operations remain above pre-COVID levels, as many new users who entered the market in the COVID-19 era continued to utilise business aircraft. In addition, OEM backlogs and lead times remained high and pre-owned inventory remained below historical averages. Through the remainder of 2023 and into 2024, transactions are expected to pick up as OEMs continue to resolve supply chain and labor challenges while the pre-owned market reaches a new equilibrium.

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