Lessons from the latest Global Jet Capital report - In a market of change expect more of the same

By now, it's become clear to almost anyone in the world of airplane sales that we have entered a period of correction in the wake of the post-pandemic boom. Supply has started to solidify as demand-driven valuation has calmed. With more data in our hands, we are getting a clearer picture that the second half of 2023 will likely end a little better than the first half, but questions remain about how far the momentum will carry us into next year.In the wake of the robust expansion during the prior two years, the business jet market is still gliding, but with flaps extended. According to the recently released third-quarter 2023 report from Global Jet Capital, the private aviation industry remains resilient, with signs of recovery on the horizon, despite the challenges within the immediate business climate. "Flight operations remain above pre-COVID levels, as many new users who entered the market in the COVID-19 era continued to utilize business aircraft," the report states. "In addition, OEM backlogs and lead times remained high and pre-owned inventory remained below historical averages." Dynamic? Turmoil? Call it what you want, but it's still a hot market The Global Jet Capital report expects aircraft transactions to pick up in the final weeks of 2023 and into 2024 as aircraft makers further resolve supply issues and labor challenges, as a "new equilibrium" is reached in the preowned aircraft market. The third quarter of 2023 saw growth in the business jet market slow down, according to the report, attributed to macroeconomic headwinds. Global economic uncertainties, including warfare in Ukraine and Israel, supply chain disruptions, and central banks tightening money supply, contributed to a decline in flight operations and aircraft transactions. A Wells Fargo analysis cited by the Global Jet Capital report shows evidence of increased credit card delinquencies, declining excess savings and waning consumer confidence. All of that signals even more potential challenges ahead. However, positive indicators such as unexpected job creation in the U.S. and strong retail spending in China, provide a counterbalance. "As of the date of this market brief, most economists expect that the chance of an economic 'hard landing' has declined," the report explains. "But economic growth will remain slow, and a modest recession is still possible."RELATED STORIES:With leaves falling, jets are flying - but not as much as had been expected OGARA Report on business jets shows a market worth studying closely Major business jet makers post strong earnings with stable backlogs - Is it time to consider the 2024 aircraft market? Even as flight operations and transactions decline, there are signs of a bounce-backIn the third quarter of this year, flight operations dipped by 2.8% compared to last year. However, they were up 2% compared to the prior quarter. Both the U.S. and Europe experienced declines from the strong growth seen in the immediate post-COVID recovery. Despite the dip, departures remained 13.9% higher than in the third quarter of 2019, so the "new normal" for business aviation to come after the pandemic appears as if it has started to become baked in, despite the short-term challenges and slowdown. New users who entered the market during the pandemic era continue to leverage the advantages of business aviation, including personal safety, flexibility, productivity and comfort, according to the report.Aircraft makers face backlogs as the preowned market changes Orders for new aircraft remained steady in the third quarter of 2023, with a 5.9% year-over-year jump in OEM backlogs, now valued at $46.1 billion, according to the report. However, supply chain and labor challenges constrained these substantial production increases, leading to a 1.2-to-1 industry-wide book-to-bill ratio. Aircraft makers expect these backlogs and lead times to remain elevated in the coming years. Both new and pre-owned markets saw a year-to-year decline in the number of aircraft changing hands in the third quarter. Supply chain and labor constraints kept new aircraft production on the lower end of the spectrum, while the slowing economic pace, driven by rate hikes and market declines, impacted pre-owned transactions. "In addition, inertia between sellers looking to maintain post-pandemic value gains and buyers waiting for values to return to historical depreciation levels slowed transaction volume," the report states. Older planes are making waves in the market The number of listings increased during the quarter, driven by older-model aircraft purchased in 2021 and 2022 going back onto the market. Preowned aircraft inventory reached 6.6% of the total fleet by the end of the quarter, remaining below historical averages, but well above the 3.1% at the end of the first quarter in 2022. Despite the shift, average business jet bluebook values increased by 4.8% year over year in the third quarter. Interestingly, the valuation of older aircraft outpaced the younger planes up for sale, according to the report. "Older aircraft outperformed younger aircraft throughout the post-COVID period as many buyers chose to acquire older aircraft during the peak of the market, reducing supply," the report explains. "At the peak in Q3 2022, bluebook values for older aircraft were up 67.6% year-over-year, compared to only 28.7% for younger aircraft." As aircraft inventory gradually increases, many in the bizjet world anticipate a return to a stable pricing environment as demand and supply reach equilibrium. But exactly how and when that plays out, with the OEM backlog and a resilient economy chugging along, is still a bit of a high-stakes bet."It's worth noting that business jets are depreciating assets and a steady decline in the price of an aircraft over its lifespan is to be expected," the report states. "The consensus among industry players is that a stable pricing environment will reemerge as demand and supply come into balance."