Pain and gain

Couples with this, the influential US business aviation market has become somewhat demonised as a symbol of executive excess, and many large firms seeking government bailouts came under pressure to close their flight departments, while others such as Citigroup were forced to cancel orders on new aircraft, leaving some manufacturers with excess stock.

As a result, companies such as Cessna and Hawker Beechcraft have dramatically scaled back production of both jet and turboprop business aircraft, and in some cases laying off hundreds of workers. The same has been true of other manufacturers in Europe and elsewhere.

Nevertheless, industry associations such as the influential National Business Aviation Association and the General Aviation Manufacturers Association have been fighting back. Earlier this year, the two Associations joined together to launch their ‘No plane, no gain’ campaign, which sought to address some of the Public relations issues the industry has faced.

Locally though, it appears that the business aviation sector appears to have been largely untouched. “As far as Australia is concerned, it’s really steady as she goes. There’s been a couple of aeroplanes leave the country, but there’s still new aircraft arriving and business aviation activity is very much alive and well,” David Bell, CEO of the Australian Business Aviation Association told Australian Aviation.

Bell says that the evidence of this is best shown in the ABAA membership, which has grown by four members compared to the same time last year. As such, the Association now represents approximately 60 per cent of the business jets operated in Australia, and plays a particular role in looking after the interests of a number of corporate flight departments.

Interestingly, Bell notes that even with a number of corporations tightening their belts, there have not been any closures that he has been aware of, nor major consolidation of aircraft.

One of the reasons that the industry appears to not have been as affected as elsewhere is Australia’s relatively strong economic performance through the financial crisis. In some cases, those entrepreneurs which have been able to make the most of the downturn are now creating a case to buy and operate their own aircraft.

“The other situation is that there are still a lot of people with those middle-level businesses which are still doing quite well, and they’re often the people that buy aeroplanes,” said Steve Padgett, executive chairman of Aeromil Pacific, Cessna’s Australasian agent.

Still, Bell notes that the strong levels of acquisition and interest in business aircraft experienced in recent years, is now well behind it. “Certainly there has been a slowdown in the new order intake, but most of them in Australia did well from 2000 to 2007, and I think they view the last 18 months or so as a period of consolidation.”

Execujet Aviation Group’s managing director, Asia Pacific Alastair Creighton-Jones notes that his company has experienced some interesting dynamics over the last year. “I think the market literally switched off in November 2008 until about May 2009. Since May we’ve seen strong buying activity and a true reflection of the bottom of the market,” he said.

Critically, there have been no reports of cancellations, with customers who have placed orders in previous years still taking delivery of their aircraft. “If I look at it within our region in Australia and New Zealand, we’ve been through quite a boom over the last five years leading up to the downturn, so that’s really generated a lot of aircraft sales to 2014,” said Creighton-Jones.

Similarly, Cessna agent Aeromil Pacific’s executive chairman Steve Padgett reported that business over the past year has not been as challenging as had been expected, and in some cases it has opened up new opportunities. “It’s really been holding up quite well. Markets that weren’t there before the recession such as the used market are doing better than before.”

Somewhat surprisingly, a number of dealers have reported that they are once again taking orders, albeit not at the rates experienced during the economic boom times. As such, a number of manufacturers have been turning their attention to the Asia-Pacific region, with Embraer this year appointing a Sydney based sales representative. Sales tours through the region also appear to be on the rise, with tours planned for a number of aircraft.

Interestingly, the international pain appears to have been a gain for the local industry, particularly in relation to aircraft values. With many business jet owners in the US and Europe disposing of their aircraft or consolidating their fleets, used aircraft values have dropped dramatically, allowing some local buyers to access high quality aircraft at relatively cheap prices. During the boom years, in many cases used aircraft attracted a premium on new ones due to the lack of availability.

“That secondary market which was quite difficult pre-recession because the prices were very high, have now come back and there’s a lot of interest in those,” said Padgett.

Adding to that have been programs from some manufacturers to support the large number of used aircraft now available, including offering factory refurbishments and other promotional offers. “These are programs that wouldn’t be introduced in the previous market. They’re now being done to help sell aeroplanes, and we’re now seeing a good market out there,” said Padgett.

Similarly, a number of companies and individuals have used the low pricing points over the last few years to move into aircraft ownership, particularly of smaller aircraft such as the Citation Mustang and some turboprops.

Others have also used the opportunity to move up in aircraft size. “What we’re also seeing is that people are buying entry-level aircraft and after six months or a year are finding that it’s too small for them. We’ve sold two Mustang owners bigger aeroplanes since they’ve owned them,” said Padgett.

The collapse in values has also seen speculators, who bought up delivery slots for onward sale, largely come out of the market. “I think speculative buying has been a problem in the industry during the boom time, and it’s been a problem for manufacturers because those orders in a downturn don’t materialise,” explained Creighton-Jones. “We’re unlikely to see speculative buying going forward.”

Overall though, indications from dealers Australian Aviation spoke to were that that used business aircraft values are beginning to settle. “We’ve seen 2008 and 2009 aircraft recover in their pricing, but aircraft older than that haven’t shown any signs of recovery,” said Creighton-Jones. “That’s typical because in a downturn environment, buyers tend to focus on the new or as close to new as possible in the pre-owned market as the value equation is so good.”

Also helping to drive the industry is the recent strength of the Australian dollar against the US dollar, which most aircraft and services are denominated in, and historically this has been a major driver of the interest in business aircraft.

“The strong Australian dollar relative to the US dollar is a very important factor in business aviation,” said Creighton-Jones. “It’s going to prevent aircraft in this downturn leaving Australia and its going to aid the acquisition of aircraft.”

Bell agrees with that sentiment, although he notes that it is more likely to push up interest in the smaller business aircraft from savvy buyers now able to enter the market. “I think particularly with the lower end of the market – the entry level turboprops and entry level jets. For the entrepreneurial person who is really tuned into the exchange rate situation and are able to take advantage of it, I think we will see some upturn there.”

However, this is not the sole reason, as Creighton-Jones explains. “If there’s a business case for an aircraft, it’s a great time to buy. It’s an even greater time for people that don’t have aeroplanes at the moment to enter the industry for the first time as there are low acquisition costs.”

Padgett agrees, saying, “I think they’re buying because there’s a whole lot of factors – they need the aeroplane, the cost of the aeroplane, they can get finance, it’s the right sort of product – and the Australian dollar strength is just the icing on the cake.”

Creighton-Jones adds that for buyers of larger aircraft, such as the Bombardier Global Express series, the exchange rate is less of a driver in their decision making process. “With the larger business jets, people tend to buy them on a need basis, regardless of the exchange rate. I don’t think that end of the scale is as exchange rate sensitive.”

Still, Padgett admits that the fast appreciation of the dollar hasn’t yet transformed into a string of orders. “The interest hasn’t been as strong as I would have thought it might be. I think its certainly giving people enthusiasm for buying, but I haven’t seen a whole lot of people rush in because of the Australian dollar,” he said.

That appears to be mostly due to the conservatism picked up by some potential buyers, which is not surprising given the global economy is only just showing signs of recovery.

However, finance for business aircraft – which has been an issue for purchasers over the last year – appears to be coming back.

“The finance companies – particularly those rather than the banks – are very happy. Our finance company is looking for deals,” said Padgett. “There’s no doubt values of business aircraft have been hard hit, but having said that we have not had a knockback on finance for any of the aeroplanes we have sold recently.”

Charter

While aircraft sales and associated management services have largely held up well, business aircraft charter has felt the effects of a number of companies slashing their travel budgets.

As with aircraft sales, the biggest falls in charter activity have been among North American and European operators who have yet to see any recovery and competition among charter companies in those regions remains fierce.

Australia has not been immune from this either. “I think the only real downturn that was noticeable in Australia is in charter,” said Bell. “I had a few reports from a couple of our members that the charter activity has been down in the last few months.”

Creighton-Jones confirms this. “Our charter volumes went down dramatically in the latter part of 2008 to a low point of just over 50 per cent of our usual volumes. That’s recovered substantially to date and we’re down about 30 per cent from our peaks.”

However, signs are that this is starting to come back, albeit led by the demand for bigger aircraft. “It’s primarily been long range charter that has recovered the fastest. The narrowbody market on the charter side has yet to recover as well as the long range flying,” said Creighton-Jones.

As a reflection on this, ExecuJet was expecting to take delivery of a Global Express XRS in November to boost its Sydney based fleet.
At the other end of the scale, the increasing number of narrowbody aircraft available for charter, such as Learjets and Citations and the increasing number of operators has meant that there has been less noticeable recovery in that sector, which is predominately focused on domestic operations. Interestingly, Creighton-Jones noted that some clients are also requesting larger aircraft such as the Global Express for domestic or regional trips due to the extra capacity.

Creighton-Jones also notes that there has been increasing demand through Southeast Asia, which Execujet serves with its range of Australian based aircraft. “The southeast Asian market hasn’t appeared to have suffered as badly either as Europe or North America,” he said.

With the region expected to drive the global economic recovery, Australian charter operators could be well placed to pick up a great deal of work from Asia, where business aviation is still a growing market.

Ongoing battles

Given the small scale of the business aviation sector in Australia, the ABAA has once again been working to manage the interests of the sector with the various bodies involved.

Bell says that one are which the Association has been able to gain some good ground on is in managing airspace access issues. “I think over the last 12 months we’ve become a lot closer with Airservices Australia, and I think Airservices is now very much aware of the role of business aviation in the allocation of airspace and priorities, etc

“We provided comprehensive information on the performance of business jets in Australia and that’s been circulated by Airservices to the air traffic controllers, and in fact their training academy in Melbourne.

However, the long issues regarding airport access – particularly at curfew-affected Adelaide and Sydney airports continues to be a thorn in the side of a number of operators. As part of the Aviation White Paper policy, the ABAA has put forward a case for expanding the types of business aircraft which can be operated during the curfew periods.

“At the moment the weight limit is 34,000kg MTOW and that was set back in the early 1990s when the largest business aircraft was a Gulfstream IV, so we think the weight limits should go up,” said Bell.

As Transport Minister Anthony Albanese has responded firmly against any suggestion that curfew regulations be changed, Bell says that he doesn’t expect the forthcoming White Paper to deliver greater flexibility.

However, the ABAA has not given up on the cause. “We’ll be putting another submission in immediately following the release of the white paper and the Department of Infrastructure has agreed to accept that submission,” said Bell. “That’s a step in the right direction, but it has been a very frustrating few years for our members who operate the latest business jets, some of which are not yet approved for curfew operations from Adelaide and Sydney.”

Bell also notes that the Association has been involved in the revision of Civil Aviatation Safety Regulations, which would establish separate categories for fixed wing and rotary business aviation, although work on this by CASA has recently slowed. “It’s not a priority for them, but I think we’ll be sitting down with them in the next 12 months to discuss these regulations,” said Bell.

Outlook

While the Australian business aviation industry has held up much more strongly than elsewhere, most players know that they will not be returning to the exponential growth experienced prior to the global financial crisis.

“The next 12 months will still be difficult in the sense that we won’t see big growth, but its going to be more of the same,” said Bell. “We’ve talked about when it’s really going to start taking off again worldwide, and we see that in 2012.

“We’re seeing cutbacks in production rates in all of these aircraft so it’s not looking good worldwide for the next couple of years,” he added.

Padgett also notes that he is maintaining a positive outlook. “I have a lot of confidence in the next couple of years. We still have quite a number of outstanding orders and we’re talking with a lot of prospects. The activity at the moment is quite good, and I can only see that improving in time.”

Creighton-Jones says that Execujet is already seeing a major rebound in enquiries, which also bodes well for when the worldwide economy bounces back. “We have probably had more sales related activity in the last three months than towards the end of the boom, so there’s a lot of positive acquisition activity at the moment.”