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Thursday, May 5, 2016

Analyst Q&A On the State of Business Aviation in Asia

Juliet Van Wagenen

ABACE 2016
ABACE 2016. Photo: ABACE

[Avionics Today 05-05-2016] Demand for air travel is on the rise in Asia,  alongside recent volatility in China’s economy, however, this creates a confusing picture for the road ahead for business aviation. While operators, suppliers and airframers don’t seem to be daunted by the state of the Chinese economy, it’s tough to say how everything will pan out for the Asian business aviation market. Avionics Magazine caught up with aviation consultant Rolland Vincent of Rolland Vincent Associates, an analyst firm that has also partnered with Jetnet to develop quarterly forecasts for the aerospace and aviation market, after the 2016 Asian Business Aviation Conference and Exhibition (ABACE) in Shanghai last month to sift out the current state of business aviation in the region, if it’s on the rise, and whether current infrastructure can support growth.

Avionics Magazine: During ABACE, ICAO Secretary General Fang Liu highlighted in her keynote address that business aviation operations are currently expanding at five percent annually in the Asia-Pacific — faster than any other region in the world today — much of which is driven by China. This seems to contradict Honeywell’s Global Business Aviation Outlook released late 2015, which predicted that the slowing economy would cool the business aviation market to a mere 3 percent of demand. Can you speak to the current state of business aviation in Asia and how it compares to previous years?

Vincent: China has been the headline-catching growth driver amongst Asia-Pacific nations for the past six to seven years as new sales of high-end jets and fleet expansion literally took off.  The interesting story in our eyes is that, although Mainland China demand has quickly cooled off (see chart below), deliveries to Hong Kong remain relatively stable. We believe that this reflects its more mature, yet vibrant economy and excellent, albeit limited, business aviation infrastructure.

New business jet deliveries to Mainland China and Hong Kong 1996-2015. Photo: JetNet
New business jet deliveries to Mainland China and Hong Kong 1996-2015. Photo: JetNet

China business jet fleet evolution. Photo: JetNet
China business jet fleet evolution. Photo: JetNet
China, including Hong Kong and Macau, at present rank seventh amongst countries in the size of its business jet fleet, just behind Germany. We think that growth in the China-based fleet will now slow for at least two to three years as the economy transitions toward more services, and government regulations,which currently constrain business aircraft flight operations.

Further dampers on demand are the central government’s drive to cut excess spending on gifts and entertainment, which has encouraged high-network wealth individuals to reconsider their attitudes toward conspicuous consumption and business aviation. 

Despite these constraints, we understand that business aircraft flight operations as a whole are on the increase, with Shanghai Hongqiao and Pudong Airports reporting record numbers of bizav movements in 2015. China is now developing a secondary market for pre-owned aircraft, which is a sign of a maturing and healthy marketplace.

With all the talk of China’s slowdown, this is still the fastest-growth economy of any of the “top 20” business jet markets in the world with the exception of India, which still has just 162 jets based in-country, according to Jetnet records (see chart).

2016 GDP forecasts and Top 20 business jet fleets. Photo: JetNet
2016 GDP forecasts and Top 20 business jet fleets. Photo: JetNet

Avionics Magazine: Several companies, including Boeing, Textron and Airbus, announced business aviation deals in China during ABACE for aircraft that cater to very different markets. What class of aircraft do you believe there will be the most demand for in Asia in the next one to three years?

Vincent: There is very strong demand for commercial aircraft in the 150 to 200 seat category, and this demand will only increase as China builds additional airport capacity and more and more Chinese opt to fly, many for the first time. China is becoming a much more mobile society, and its middle class is growing rapidly.

That said, there is also tremendous opportunity for turboprop utility aircraft such as the Cessna Caravan and Viking Twin Otter, both of which are rugged, proven designs with exceptional utility, low Direct Operating Costs (DOCs), and virtually unmatched short airfield performance. There is strong growth potential in Fixed-Base Operators (FBO), Maintenance, Repair and Overhaul (MRO) facilities and related services — China has far too few hangars and ground facilities that serve business and general aviation. Deer Jet, one of the big players, now operates nine FBOs in China and is building more. With very limited ramp space at the Hong Kong International Airport, business aviation growth is constrained and costs of ground operations naturally favor the larger business jet aircraft. This could/should change when Zhuhai International Airport opens up as an international gateway with customs facilities and a new road/bridge link to Hong Kong slated to be completed in 2018.

Avionics Magazine: How has the current economic situation in China impacted business aviation thus far? And how might that impact reverberate through the industry in the next one to three years?

Vincent: We are very bullish on business and general aviation’s prospects in China in the medium and long term. In the very short term (the next two to three years), we expect a maturing process to take hold, where owners/operators gain experience using their aircraft and taking advantage of the productivity that they can bring to their business and personal lives. After the “gold rush” behavior of 2008 to 2014, we expect buyers to emerge who are different from what has been the early norm — purchasers of only the highest-priced, highest performing aircraft. We understand that average fleet utilization has been below 200 flight hours per year, but this will gradually change. 

One trend that clearly impacts business aviation in China is the relative paucity of trained talent. With strong growth in the commercial aviation sector, pilots and technicians are in strong demand; in China, bigger is not only considered better, it is also apparently considered safer. The pipeline of talent for business aircraft operators, management companies and FBOs is therefore restricted, and this often results in the need for a higher-than-normal proportion of ex-pats. While they may bring deep talent and experience to their roles, they are by nature more globally mobile and are less likely to have the same longevity in the job. 

Avionics Magazine: Are there any other challenges in the Asian market aside from the economy that you can foresee impacting the region significantly in the long term?

Vincent: In China, and across Asia, there continue to be very, very few business aircraft flight operations. Look up in the sky and you may occasionally see a commercial airliner coming or going, or a helicopter taking off or landing. Business aviation is still in its mere infancy in the region. As an industry, business aviation is a tiny voice that strains to be heard above the roar of commercial aircraft.

In Boeing’s latest Commercial Market Outlook, Asia Pacific air carriers are expected to account for 39 percent of new aircraft delivery value over the next 20 years, the largest by far in the world and more than twice the size of Europe and North America. The picture couldn't be more different in business aviation, which is still in its infancy, in our opinion. Business jets remain a largely U.S.-dominated industry, with about 60 percent of the current fleet based there, and order activity once again concentrated stateside.

Avionics Magazine: What do you predict for the business aviation market in the next one to three years? Can we expect to see growth or a decline in the market?

Vincent: Globally, new business jet sales are in a lull as the large cabin segment — one that was relatively unscathed during the post-2008 crisis period — feels the effects of a slowdown in emerging markets, which face the double-whammy of weak currencies relative to the U.S. dollar and low commodity prices for their exports. The U.S. economy remains relatively strong, but prospects for 2016 have been scaled back to 2 percent real Gross Domestic Product (GDP) growth in most economic forecasts that have been recently released. We expect slower pre-owned sales as inventory is on the rise and prices/residual values continue to slide, with sellers outnumbering buyers for the time being. While we expect some modest growth in business jet deliveries in 2017 and 2018, these will be driven by the ramp-up in production of newly certified models, offset by limited demand for legacy production. We expect to see some important announcements about lower production including (unfortunately) some associated layoffs at least one or two of the OEMs that are fighting to sustain market share. 

There are simply too many aircraft and models chasing too few buyers at this time, and the market needs time to absorb all the capacity that was created in the last 8 to 10 years and before. Some large-cabin jet models reportedly lost 20 to 25 percent of their value in 2015 based on mark-to-market adjustments, which is a constraint to new aircraft sales and trade-in activity.
Business jets and turboprops for sale between April 2007 and April 2016
Business jets and turboprops for sale between April 2007 and April 2016. Photo: JetNet

In the U.S., business jet cycles have only now returned to 2003 levels, despite underlying fleet growth in the ensuing 12-year period, representing significant underutilized capacity. Comparing 2007 to today, the falloff in-flight operations per aircraft reflects the capacity of about 3,700 jets, about 30 percent of the fleet in operation in the U.S. at the end of 2015.
U.S. GDP vs. U.S. business jet cycles
U.S. GDP vs. U.S. business jet cycles. Photo: JetNet

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