Don’t buyback in anger


Despite the high levels of activity in the pre-owned market and some genuinely exciting products – such as Bombardier’s Global 7500 which was certificated by the FAA this week – selling new aircraft is still hard work. Things are a lot better than they were a few years ago but manufacturers are still fighting for every deal. This is not how upturns usually work, so what has happened?

One reason is that international markets are still tough. There are some good signs in Europe but the strong dollar makes new aircraft look very expensive in some places. If a Chinese buyer bought a $25 million jet in November 2015 they would have had to find Rmb159 million (without import taxes). Today they need to pay 8% more. A Nigerian buyer of a similar aircraft in 2015 would have paid NGN 5 billion. Now they would need NGN 9 billion.

Throw in some political risk – such as in Saudi Arabia, Russian sanctions or a concern that owning an aircraft makes you a target in some countries (including China) – and you can see why a lot of pre-owned aircraft are being exported to the US. And why selling new aircraft is harder.

But, the relative, lack of large US company sales is more puzzling. The US economy is strong, last year’s tax changes have led to companies bringing cash back to America, there is a president who owns business jets, and business confidence is strong.

But the problem in the US is that many large listed companies are looking inward.

Rather than invest in new equipment (such as business jets) they are using cash to buy their own shares.

In the second quarter of 2018, S&P companies invested $166 billion in capital projects. At the same time they announced buy-backs worth $437 billion (although not all of this happened in that quarter). Goldman Sachs says that this is only the third time in 25 years that S&P companies have spent more cash on their own shares than on acquisitions and capital investments.

This week alone, NetJet’s owner Berkshire Hathaway announced that it bought back almost $1 billion of its own stock in the the third quarter of 2018 and online music company Spotify said it plans to buy a similar amount. But these are nothing compared to Apple which has has bought an astonishing $73 billion of its own stock in the last 12 months.

Ominously, the last time buy-backs really took off was in 2007 and 2008 (when new aircraft were selling well). Many companies later regretted wasting their cash. GE spent $32 billion on buybacks between 2005 and 2007 – before being forced to issue $15 billion in new equity in 2008. (It did not learn from this: when GE cut its dividend in 2017 – the first time since the Great Depression – it was in the middle of another $50 billion buyback programme.)

There is a lot of academic research showing that share buybacks do not work and it is likely that there will be new rules coming in to restrict them. Robert Jackson, the SEC commissioner, is concerned that executives are using them to cash out their own stock.

But any changes may be too late for this business aviation cycle.

Fitch Ratings is warning that US companies are planning to cut capital expenditure next year. At the same time, Goldman estimates that they will buy back a record $940 billion of their own shares. If this happens, large companies will have been guilty of wasting this upturn.