What will 2018 be like for the aviation industry? For many years, we have heard that next year is the start of the recovery and then it was the next and so on. Remember 2010, 2011, 2012 as predicted turn around years?
Have we finally reached a point that we can talk about a trend upward? I think we are at a point in the market that we will see a small uptick. At the recent Corporate Jet Investor Miami conference a majority of the 250 or so participants felt the same way.
The world economy, and specifically the North American market which still drives over 70% of the world activity, is doing well. New models are providing a reason to upgrade. Late model used planes are less plentiful. 2009 and after the production rates were slowed. Most all of the OEM’s had to adjust production levels lower again to market conditions in 2014-2016.
We are now starting to see the effects of reduced production. A few models are relatively scarce and in a few models we have seen a slight positive pricing trend. Add a new tax plan, and we could see money that has been sitting on the sidelines be put into play.
What could rain on this parade of good news? World conflict could make a serious impact on the aviation economy. That threat exists at any time in history or in the future. The bigger concern is, we are entering a time period for the longest economic stretch without a recession in modern times. The cycle of recovery and recession has now been upset. Will that continue? Even if we suffer a minor recession, will it have as large of impact on our industry as in the past?
I suggest that a minor set back will not see big results in our industry simply because the typical replacement cycles were disrupted in the previous recession. Many people who were in the upgrade cycle delayed these upgrades. Now they have much older aircraft and facing major upgrades or maintenance with large down times. They also have become accustomed to resale values in a low inflation market. The residual values do not have the same shock value.
A consideration that many overlook when thinking about upgrades and major maintenance, is the down time. While the money analysis might not look so bad versus an upgrade, there is an opportunity cost of not having an aircraft. After all, if there wasn’t an opportunity cost why would you own one.
Bottom line, I think we are entering an aviation market that will start trending up in 2018, 2019 and be close to a new normal in 2020. Note the notation of a new normal. Until we have a big increase in demand, the aircraft deliveries for new planes will only increase slightly. I think we will see resale values continue to stabilize and increase in certain popular market segments. Another point of optimism is the new models provide greater performance, cabin comfort and other amenities that buyers are wanting. This provides both a practical and an emotional reason to upgrade. The rising costs of maintaining older aircraft will continue as there are more of them in the fleet and the major MRO’s stay at capacity.
The down turn forced many departments to cut back. One less aircraft to still do what 2-4 previously accomplished results in resources needing to be available. Older aircraft might be reliable, but their availability suffers and if you are going to be lean and mean, you better be able to use the resources you have to their maximum potential. We believe tracking and understanding the impact of downtime and the real associated cost is going to become a much bigger decision tool in the future.
Again, at the recent Corporate Jet Investor Miami conference we had two days of industry experts discussing these issues. There are plenty of new ideas floating around to try and grow the user pyramid. The thought process is even at the lowest, least expensive shared ownership/charter experience will allow more people to see the value in travelling privately. Some of those will move from charter, to cards, to shared ownership and a few to owning their own aircraft. In a market with low volumes, only a few new owners make a difference. Anything that can increase demand is a good thing.
As they say in sports, the computers may make predictions with all of the data points, but that is the reason we play the game because the outcome does not always match the predicted results.