Business Aviation

“There’s been a lot of growth in Australia over the past five or six years and that’s continued over the last 12 months. It was due to the same factors as was the case over the last five years – a very strong economy, a good exchange rate and the airlines of course are going more and more no frills, plus there’s the issues of security and privacy, and people want to arrive on time to conduct their meetings and so forth,” he added.

That sentiment was echoed by a number of business aircraft dealers who spoke with Australian Aviation, though many also acknowledged that inquiries have been down during the fourth quarter of the year.

“2008 was really another strong year for us. There was a lot of interest in products across the range,” said Tony Jones, senior vice president of the aircraft sales arm of Hawker Pacific, which represents Hawker- Beechcraft, Dassault Falcon and Bell Helicopters in Australia.

Cessna distributor Aeromil’s managing director Steve Padgett agrees, but noted that the economic uncertainty during the second half of the year has affected the behaviour of some potential customers. “Certainly the early part of the year was totally different to this half of the year,” he said.

“The market was very strong, but the last two months have obviously seen a number of people evaluating the current and future market conditions more carefully. ”

Mark Diaz, the Australasian representative for EADS Socata whose turboprop TBM series is aimed at the business segment, made a similar assessment. “If you look at an average over the last 12 months, it’s good. If you look at it in the last six months it’s starting to lose momentum, and in the last three months people are starting to monitor a lot more closely what’s going to be happening on the global scale,” he said.

Nevertheless, all the major dealers in Australia reported a strong backlog of aircraft orders, with a steady delivery stream expected for the year ahead, which is heading off any fears that there will be a protracted downturn in the sector.

The strong times in Australia have been part of a global upswing in business aviation, which has seen the order books of major manufacturers including Cessna, Dassault, Hawker Beechcraft, Gulfstream and Embraer swell to the point where most manufacturers have backlogs stretching for a number of years.

Those strong order books have helped keep resale values on business aircraft high, which in some cases has encouraged companies to buy their own aircraft. “If you know that traditionally if you look after an aeroplane you’re going to basically get your money back or certainly in the worst times not lose a lot, you’re going to be a lot more comfortable putting your money in an aeroplane,” said Padgett.

One of the main drivers of the sector’s growth in recent years has been the greater acceptance of private aircraft ownership in Australia by companies, especially by companies which are branching out into new geographic markets.

For many companies, business aircraft are increasingly viewed as a productivity enabler for their senior management.

“Business aviation helps to make those companies more efficient, productive and more successful, which is why people have these aeroplanes,” said Bell.

As this benefit is gaining greater acceptance, Jones says that more companies are embracing business aviation for the first time. “There are a lot of new people coming to the business and still a lot of our loyal customers upgrading their aeroplanes, butat least half of our customers are new to business aviation. ” And while Bell says that the core ABAA members are still blue-chip industrial companies and business families, Jones says that an increasing number of entrepreneurial companies are making the move into private aviation.

“We’re not seeing any increase in activity from listed companies but we continue to see the private or entrepreneurial driven companies making those decisions about stepping into business aircraft,” he said.

“The business aeroplane just works very well for them. ” Padgett has also found this entrepreneurial market has been driving interest in the smallest of the Citation range, the Mustang.

“We have clients who own small businesses who have 10-15 stores around Australia and the Mustang’s brilliant for that,” he said, noting that there were eight Mustangs awaiting delivery to Australian customers.

The end result is that business aircraft are now viewed as valuable assets rather than ‘rich boys toys’, which Jones says has never really been the case anyway in Australia. “We never really see a huge luxury use of aeroplanes in Australia. The Australian market has been very businesslike in engaging with aeroplanes and I think that’s going to continue. ” Padgett also says that shareholder attitudes to aircraft – which has often been cited as a major reason for not having a private aircraft – has changed. “I don’t think there’s shareholder resistance to that any more. In the last five or six years there are more financiers keen to finance aeroplanes, and shareholders don’t see any problems with companies owning aeroplanes,” he said. “Excellent re-sale values for business aircraft have supported this situation. ” Another factor has been that with the domestic airline market becoming more focused around the low cost carriers, a lack of frequency on some routes and different service standards has also driven the growth in business aviation.

As Diaz explains, more and more Australians are coming to understand the time costs which can arise from putting a senior executive on a scheduled flight. “A lot of people think that transportation costs are just the sum of airfares over a 12 month period year. That’s not the case because you consider the time that’s lost at the terminal, the time that’s lost en route waiting for a flight or a cancelled flight, or the time that is lost by having a manager overnight at an outport,” he said.

With greater acceptance of the value that business aircraft can bring, there has been an increase in the number of aircraft on the register, with strong sales particularly in the midsize segment for aircraft such as the Hawker 850 and 900XP and Citation Sovereign.

Turboprop sales have also been strong, with Jones noting that the King Air range has continued to sell strongly. “They’re always popular for both business use and other applications,” said Jones.

Single engine turboprops, such as the EADS Socata TBM 850 have also gained more interest, particularly from owners and operators of twin piston and turboprop aircraft during the spike in fuel prices in July.

“We had the same situation in 2004 when oil went up to US$60 a barrel. We could not believe how many twin operators were going for the TBM,” said Diaz, who added that the extra flexibility to operate from smaller, unprepared strips has made turboprops more appropriate for some customers who do trips into regional areas.

For Aeromil Pacific, there has been interest across the Cessna Citation range, right from the four-seat Mustang up to the newly launched wide cabin 10-seat Columbus, for which it holds three orders for delivery out to 2017.

Managing The Issues

While the growth in business aviation has been most encouraging, Bell explains that the ABAA has been working with the government to address issues which affect business aviation.

“The ABAA’s goal is to create an environment that fosters business aviation in Australia and around the world,” said Bell, who noted that the ABAA has been most active on a number of changes to various Civil Aviation Safety Regulations regarding business aviation. The ABAA has also been active on a number of issues in relation to the government’s aviation white paper.

One major issue has been access to airports. “Some of our operators have problems at regional airports where there are high parking charges or the business aircraft are not very welcome. That happens at several regional airports around Australia,” said Bell, noting that airports which have seen a major growth in airline activity, such as the Gold Coast, were causing the biggest problems for business operators.

The increased airline activity has also meant that some airports are now having to security screen passengers at more times during the day. “The problem for our operators, if they happen to arrive or depart a regional airport when an airliner is coming or going, then the corporate passengers have to go through security if they’re there half an hour before the arrival of the airliner or the departure of an airliner. So they get caught up in the extra cost to go through security,” said Bell.

One of the biggest issues though has been in relation to access at Sydney Airport, particularly allowing more business aircraft to fly in during the curfew period.

Bell is keen to ensure that the new Labor government understands properly how the curfew functions, although he admits it’s been hard to get the message across. “Our aircraft are very quiet – they’re the quietest aeroplanes flying,” he said. “Turboprops are permitted to fly 24 hours a day at Sydney Airport but business jets have a restricted list of aircraft that are permitted to operate there and we want to add new aircraft to that list from time to time. ”“The market was very strong, but the last two months have obviously seen a number of people evaluating the current and future market conditions more carefully. ”“Most of the operations which are conducted during curfew hours could easily be accommodated over Botany Bay, and there aren’t many of those anyway,” he said, adding that it would only be a limited number of flights – particularly those arriving overnight from the United States – which would need the flexibility of exemption from the curfew.

Access to airspace is another major issue the ABAA has raised as part of the green paper process. “We are towards the back of the queue even though our aircraft operate higher and faster and are very flexible compared to the airliners. We are talking to Airservices about that at the moment. ”

Dollars and Sense

One of the biggest influences on business aviation over the last year has been the movements of the Australian dollar against the US currency.

“These aircraft are a US dollar commodity,” said Bell. “Most companies who have their own aircraft always think about them in US dollars, and most have a trading function in US dollars or they’ve already got US dollars. ” With the Australian dollar peaking at 98 US cents earlier this year, dealers saw a major increase in expressions of interest for new aircraft.

“People were behaving a lot differently when the dollar was at 98 cents and they were willing to take the risk and move right in without waiting for parity,” said Diaz, who noted that interest generally picked up once the dollar was above the 80 cent mark.

Similarly, with the recent sudden decline in the Australian dollar, interest from some potential purchasers has waned. “It’s had a direct impact,” said Diaz. “People who we’ve had long term relationships with are still there, but fresh new information requests are down…There’s still demand out there but it has reduced. ” The consensus among those interviewed by Australian Aviation was that potential customers were waiting to see what would happen to the currency, but that it was unlikely to cause some to abandon their plans to buy aircraft.

“People are being very prudent about what sort of capital expenses they’re committing to at the moment, but there are still a lot of people out there who are well positioned to purchase aircraft and are still considering it for a variety of reasons,” said Jones.

“The caution people are taking is to want to see if the Australian dollar is going to back off,” said Diaz. “People are waiting to get comfortable that it’s reached the bottom.

I think that’s just a good buyer’s behaviour.

If converting to US dollars, a buyer does not want to take a 10-15 per cent loss due to shifts in the exchange rate. ” Given the values of business aircraft always stay in US dollars, Padgett says there are some who actually stand to gain from the fall in the currency. “It’s to the advantage of someone who bought at 93 cents as they now have an aeroplane they can make a lot of money on. ” And, while some potential buyers are holding back to minimise their currency risk, few expect that this will lead to a marked increase in syndicated ownership of aircraft.

“I think syndicated ownership is a very different way of owning an aeroplane and I think if your mindset is not towards syndicated ownership, I don’t think it’s going to drive them to that model of ownership,” said Jones.

But Padgett explains that there has been interest in syndicated ownership at the Mustang end of the product range, which he attributes to those customers wanting to mitigate their risk. “We’re looking at several opportunities at the moment where a client who would normally buy it himself is keen to share ownership and operating costs with an individual with similar operating criteria. ” But most agree that while other assets have been declining in value, business aircraft tend to either hold or appreciate in value slightly, which Padgett says takes a lot of risk out of an aircraft purchase. “Aeroplanes have not traditionally decreased in value at all – a 10 year old Citation, for example, holds its value extremely well. ”

Charter And Fbo

While more businesses have placed orders and are starting to operate their own aircraft, a number of charter operators also reported a strong upswing during the year, while the increased use of business jets has also increased interest in fixed base operations (FBOs).

Tony Jones, who also has responsibility for Hawker Pacific’s charter operations, explains that despite the falling sharemarket and concerns about growth and company profits, his company has experienced an increase in activity. “We’ve been very active in chartering and we had a very strong month in October,” he said. “Whilst indicators point that we should be starting to feel anxious about what’s going to happen in that business, we’ve still been doing a number of quotes. ” For Hawker Pacific, there has also been an encouraging growth in the use of its FBOs throughout Australia, which Jones equates to the increase in business aviation. “We continue to add services within the network and continue to expand our offering,” said Jones.

Nevertheless, for some other companies which have had a strong charter operation over the years, little has changed. As Mike Lester from Melbourne’s Executive Airlines told Australian Aviation, “We’ve always been strong in air charter and we’ve been consistent over the last seven to eight years. ” For Lester, the outlook remains steady, but some operators will need to be more innovative to take advantage of different opportunities in the market. “The chances are probably for everybody in the charter market to look for opportunities that haven’t been there before,” he said. “I’m a firm believer that in tight times you need to look outside the square. ” Interestingly, one of the opportunities which may emerge from the fall in the Australian dollar could be an increase in inbound high wealth tourists, which could help the larger charter operators who have connections with overseas clients.

Whatever happens, Lester believes that there will always be a market for business aircraft charter and FBO services even if there is a pronounced economic downturn.

“One thing that hasn’t changed is the distances in Australia, and it’s getting less and less attractive to travel by the airlines, given that you’ve got to deal with security and their standards are declining.

That makes business aviation an attractive option for those who will still be able to afford it. ”

Outlook

While the economic outlook remains uncertain, those involved in the business aviation sector still remain upbeat thanks largely to the strong backlog, the continuing acceptance of business aviation in Australia, and the strength of those companies who already use aviation.

“I don’t see it contracting necessarily,” said Jones. “We still see evidence of high levels of user activity. We’re still seeing charter enquiries and business through our FBOs, increases in business aviation movements, and we see that continuing as well.

Once you realise the benefit of business aviation, it’s a very difficult thing to go back on. It is incredibly productive and I think people will continue to use it for exactly that reason. ”One area of comfort for all the dealers is the strong order books which have been built up during the last few years, which will ensure that there is still a lot of delivery activity. “Even over the next 12 months we’re still going to see aircraft coming in which were purchased a number of months ago,” said Diaz.

“We look at the coming year with some comfort in the order backlog and the enquiry activity we’re working with at the moment,” said Jones.

But given the tightness in credit markets, as of late October, Jones expected to see some inquirers hold off on purchase decisions until early 2009. “As people are looking at new acquisitions, I think that we need to get through the Christmas period and into the New Year before we start to see that free up and new opportunities and deals put together on the finance side,” he said.

“The aviation industry is changing with the times,” said Padgett. “Acquiring finance may take a little more effort, and I think the distributors will have to work a little harder for their sales. ”For Aeromil Pacific, this will involve taking the business case for buying a business aircraft to the potential customer, and the company expects its new concept store in the Sydney central business district to play a major role. “I believe we’ll have to be more proactive and help people come out, and that’s one of the things the exposure generated by the new Cessna Store ‘Aviation by Aeromil Pacific’ will assist us tremendously,” said Padgett.

Jones also believes that the demand will not fall dramatically over the next year.

“Customers will still be out there and we have to continue to work hard to service their requirements. Good times or bad, it doesn’t change the fact you have to work hard,” said Jones.

For the ABAA, Bell says that the outlook overall remains positive. “Provided Australia continues to grow at a reasonable pace, there will always be a need for business aviation.

The companies that are operating business aircraft now are not in a risky financial situation and I don’t see any reason they will not continue to operate their aircraft and buy new ones from time to time. ”

“Whilst indicators point that we should be starting to feel anxious about what’s going to happen in that business, we’ve still been doing a number of quotes. ”