Why Aircraft Sales Are So Grim


In aviation, we are often steadfastly parochial in the way we try to understand the waning fortunes of the industry. We are stubbornly revanchist in viewing past glories as a template for tomorrow and we’re happy to blame FAA regulations and manufacturers who just don’t know to how to sell airplanes. While I’m sure those influences are factors, I’ve always believed there are larger forces afoot.

In this podcast with Teal Group’s Richard Aboulafia, you can hear a long-form discussion on the topic as it relates to business aircraft. But he agrees that some of the same forces affect piston sales. His deep dive into the data was done for a presentation to the National Air Transport Association this week, an organization that represents FBOs, MROs and support companies.

I found his findings illuminating. The data shows that if there ever was a recovery, it wasn’t much of one and it’s over by now. In AVweb, I’ve made it an official rule that we don’t use the word recovery. Doing so is denial of the fact that we may be in the midst of sea change in which the aircraft market takes on new characteristics that may involve lower volume.

One of those is already obvious. Aboulafia calls it the “great bifurcation” and it occurred in 2008. The bizjet market split dramatically, with aircraft costing more than $26 million showing strong growth and those under $26 million dropping off a cliff. The reasons for this are hard to know for sure, but Aboulafia thinks it’s a combination of low-end aircraft buyers—if a $26 million airplane can be called that—being discretionary users more subject to third-party financing and sensitive to business cycle changes. Less expensive airplanes also have more fractional exposure; more users, fewer airplanes. The top half tends to sell in offshore markets that remained intact and many may be head-of-state or high net worth individual airplanes.

This trend is clearly visible in light piston sales, too, albeit probably for different reasons. Repeatedly, we see that cheap airplanes don’t sell. It’s true of certified pistons and LSAs alike. There’s a value consideration related to features and cost and less expensive airplanes don’t qualify. So we should drop the futile insistence that cheaper airplanes will expand the market. If it was ever true, it’s not true now.

And anyway, bizjets are getting steadily more expensive. Aboulafia’s data shows that the value of new business aircraft is closely tied to corporate profits. But units aren’t. In 2008, profits plummeted, but the dollar value of total aircraft shipped did the opposite. Since 2010, they’ve come back into alignment. I’ve written about this perverse distortion of supply and demand previously, but it continues to be true.

Aircraft sales also reliably track global GDP. As it rises, so does the value—not the number of units—of aircraft sold. Here, the news is not good. The IMF has consistently overestimated global GDP rise and is expecting 3.5 percent into 2017. We’ll see. In the U.S., growth has averaged an anemic 2 percent or less for the past five years and the rest of the industrialized world is doing little better. During the recently concluded election cycle, some debate—or what little meaningful debate there was—centered on reducing the corporate tax to stimulate the economy. Whether this happens or not, it’s unlikely to affect aircraft sales, Aboulafia believes. Corporate profits are at record highs and many companies are swimming in cash. So for whatever reasons they aren’t buying more airplanes, lack of money is not one of them. Aboulafia thinks one possibility is that we’re simply in a lost decade and companies are trying to get over the trauma of 2008, to resume a bullish outlook at the end of the decade. This is supported by plummeting used aircraft transactions; owners and operators are keeping what they’ve got, not replacing.

But there’s another possibility. The data shows that aircraft utilization is down; companies have the airplanes, but they’re not using them as much as they once did, despite the lowest fuel costs this decade. For 2015, aircraft usage was down 11.2 percent from the 2007 peak and was similar to usage in 2002. Does this portend a shift in business culture and practices? Have businesses found some efficiencies that encourage them to travel less? Have stockholders and boards cautioned CEOs to ease up on bizjet travel?

We don’t have the information to know this. As noted, the hot part of the market is jets costing more than $26 million, but these aren’t necessarily business aircraft, but high net worth owners. And there’s some erosion there too, caused by, of all things, persistently low oil prices.

The manufacturers seem to be betting on the top half of the market. The three leaders—Gulfstream, Bombardier and Dassault—are envisioning models even beyond the super-size large cabins they’re selling now. Cessna has the Citation Hemisphere, its largest jet ever. If it sustains, this trend has implications. It means fewer overall units, fewer jobs in the companies that build them and less business for the FBOs and MROs that service them. Lower aircraft use may also figure into the equation.

With the IMF hardly bullish on world economic growth, I wonder where aircraft fit into a popular current economic theory called secular stagnation. Basically, it posits that current slow growth is beyond the normal business cycle but rather the effect of slow population growth and lack of propelling technology, such as automobiles in the 1920s, jet aircraft and interstate highways in the 1960s and the rise of the internet in the 1990s. In the U.S., population growth is at a 65-year low.

Rising productivity has reached a temporary peak, but modern businesses have lower capital requirements and need fewer employees because of the integration of digital technology and automation. Higher productivity means many goods are cheaper than they ever have been, but take fewer jobs to produce. In this landscape, airplanes are exactly the reverse. Across the board and adjusted for inflation, they are more expensive than they have ever been, not having benefitted to the same degree in productivity gains that other products have. Manufacturers appear to sustain themselves on a higher-cost/lower-unit strategy.

If overall growth remains low, aircraft sales are likely to do the same. The next big animator in the general economy is almost certain to be increased automation and integration in everything. Unknown is what effect this will have on how companies use airplanes, but it suggests the kind of insourcing that’s been accelerating for the last five years. At some point in the not-that-distant future, autonomous vehicles of all kinds will begin to influence the equation.

With the backdrop of all this uncertainty, Aboulafia says at least the jet side of GA is still a growth industry, even if the growth is modest. He thinks there may be an uptick in orders in 2018 or 2019 as the normal replacement cycle kicks in. If there still is such a thing as normal.