COVID-19 business aviation downturn versus the Global Financial Crisis
Spoiler alert: It is pretty clear that the world is now in global economic downturn. And that means that business aviation is too. The human cost of the Covid-19 Coronavirus is already being felt. The economic one is also becoming more visible.
A few weeks ago, most companies outside Asia were concerned about supply issues. Now it is demand. Business jet charter brokers may have seen a flurry of requests as countries shut down, but once borders close or people are asked to stay at home, demand quickly dries up.
It is natural to look at what lessons we can remember from the 2008 downturn. One key lesson is how quickly panic can spread. The other is that aircraft values can fall quickly.
But each downturn is different and bad generals fight the last war.
While it is way too early to say how long or how bad this downturn will be (and it could be very tough), it is worth looking at what is different for the industry this time.
It is not just how deep the river is, it is also how high you jump from
This sounds a bit counter-intuitive, but one advantage now is that many business aviation companies – manufacturers, fuel suppliers, airports, operators and others, have already cut costs. In 2008 the market was coming down from a record high. As the saying goes: “the bigger the party, the worse the hangover.”
Manufacturers now have much more reactive supply chains allowing them to cut production faster than in 2009. Dealers do not have as much inventory or are as leveraged as before the Global Financial Crisis.
Although business aviation companies may have less cash, they are much better placed to weather what could be an even worse storm.
Money, money, money
Unlike in late 2008, money is still available. Well for now. We have seen companies draw down corporate facilities – Anheuser-Busch InBev, the world’s largest brewer, took $9bn from its corporate facility despite holding $6.6 billion of cash; Boeing drew down $14bn – but there are no signs of banks running out of liquidity.
This could of course happen if key economies are shut for many months. There is a lot of corporate debt that needs refinancing but many governments have already said they will step in. The Bank of England has already pledged “unlimited loans” to large companies (although pessimists would add that central banks are running out of options).
For now, at least, business jet finance is available. Even if very few deals are happening and credit committees working from home.
While we are looking at money, it is also worth highlighting the strength of the dollar. Although it fell back slightly this morning, the greenback has been getting even stronger as investors look for safe havens (far more than in 2008). This week the Australian dollar, British sterling, South Korean won and Norwegian krone all hit 18-year lows against the dollar.
The same is true for many emerging market currencies which are now at their weakest since the Russian and Asian crisis of the late 1990s. This will hit aircraft values. As an example, if a South African business jet was put on the market for $10m in December, the seller would now get the same amount of Rand if they sold it for $8.2m today (if they could find a buyer). Although a lot of business jets have moved from international markets to the US in recent years, there are still enough in countries with weak currencies to depress prices when the market reopens.
Low commodity prices are not good news for business aviation. Jet A may be cheaper, but as the Global Financial Crisis showed, demand from end users who make money from commodities is a bigger issue.
Perception: Can’t fly but want to
In 2009, owning a business jet was an embarrassment to many companies. Just remember the auto makers.
With countries cutting borders, airlines cutting services and a global pandemic, it is very different now. Using a business jet now looks sensible. When restrictions end, business jets should be recognised as the amazing business tool they are.
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