Predicting the business jet recovery: the old metrics are outdated
As wealth grows outside of the US, demand for corporate jets is expected to do the same.
No one has a crystal ball but everyone wants a prediction. Forecasting is an essential tool for any asset investor. But the model is no longer sturdy for the corporate jet market.
In the wake of the financial crisis, it has become increasingly difficult to use the traditional metrics that predict whether sales of corporate jets are on their way up or down.
Speaking to delegates at the Corporate Jet & Helicopter Finance Americas 2013 conference in Miami last week, Dean Roberts, director of market analysis for Rolls Royce, said predicting the number of corporate jet deliveries is tenuous. Historically, Roberts used the S&P 500 curve to predict jet sales.
“Something profound has happened in this marketplace,” he said. “The old correlations do not hold.” Historically, the relationship between aircraft deliveries and the S&P 500 has been positive, so when the S&P 500 fell dramatically during the financial crisis, business jet deliveries slowed.
But as stocks started to recover, business jet sales remain stagnant. And while, pre-owned jet transactions have returned to a normal rate, price levels have dropped significantly. “The metrics we’re using to measure this industry right now are wrong,” said Ford von Weise, director of global aircraft finance at Citi Private Bank at the same conference in Miami.
Personal and institutional memories of the financial crisis and its aftermath continue to hinder people from purchasing corporate jets. Just considered that business jet traffic peaked in 2007 but then plummeted to an all time low in 2009.
“The money is there, but there is an issue of confidence and customers are risk adverse,” says Roberts.
In his keynote address, Ernest Edwards, president of Embraer Executive Jets, said that the Brazilian manufacturer is predicting a new traffic high in 2018.
Rolland Vincent, director of JETNET IQ, agrees that confidence is impediment to recovery. But according to data gathered by JETNET IQ, consumer confidence is returning in the US, which is also the largest market for corporate jets. Vincent projects that jet sales will start to pick up within the next one to two years.
“Confidence drives velocity of money,” says von Weise. He says that small and medium jets will start to sell when the businesses they would be serving see material improvements.
Data from the JETNET IQ study suggests that uncertainty about economy is getting better and the availability of funding is increasing slowly, but the inability to sell jets remains steady.
“Confidence is just around the corner,” says Edwards. However, he noted that economic and political events, with their unpredictability, continue to drive investors to make more conservative decisions.
Currently the US represents around half the current business jet fleet (although some believe it is as high as 60 per cent), but other regions like Asia and Europe are expanding markets. As wealth grows outside of the US, demand for corporate jets is expected to do the same.
Brian Gonzales, vice president of sales, WealthX says that the US has the most billionaires. But WealthX forecasts that the number of Asian billionaires will exceeded those in the US by 2025.
So, while it might be difficult to predict when sales will pick up, it is probable that they will. And when they do, the US and Asia will be critical markets.