aircraft market update

NAFA member, Hagerty Jet Group, releases the Q3 2018 Gulfstream Aircraft Quarterly Market Update.

Boundless Timelines

Introducing new aircraft to the market is a difficult gamble. The research and development resources, capital risk, and human demands required to bring a new product to market is a long-term proposition with many near-term unknowns. This makes it all the more interesting when delivery problems extend to contract relationships and budget overruns, rather than technical limitations. Such is the case with Gulfstream’s G500 and G600. Both aircraft continue to experience delays because of issues in their engine supply chain. Meanwhile, Bombardier is forging ahead with lower risk refinements to their existing product line. Let’s look at some of the struggles at Gulfstream and how the delays are creating opportunities for other industry manufacturers.

In 2014 Gulfstream announced that it had selected Pratt & Whitney Canada to supply variants of their PW800 engines to power their all-new G500 and G600 airplanes. (This decision broke 60 years of tradition with Rolls Royce powerplants dating back to the Dart 529 engines on the GI) The supply contract with P&W also included the engine nacelles (aerodynamic covers for the engine) and thrust reversers (movable scoops behind the engine that redirect air forwards during landing to aid stopping). Pratt & Whitney Canada in turn chose to subcontract the nacelles and thrust reversers to the NORDAM group, a Tulsa, Oklahoma based company that supplies a wide range of parts and subassemblies to several OEMs.

As is often the case when developing a newly designed aero engine, Pratt & Whitney Canada had to work to rectify several technical issues that became evident during the G500/G600 test program. While these technical issues are now resolved, the solution drove additional engineering and production costs to NORDAM to accommodate the design changes affecting the nacelles. NORDAM abruptly entered bankruptcy in July 2018 and halted production of PW800 nacelles, naming challenges with Pratt & Whitney Canada as the reason NORDAM claims in bankruptcy filings that over $200M of nonrecurrent engineering and manufacturing cost overruns stemming from design changes made ongoing nacelle production unprofitable within the terms of their existing contract.

With the NORDAM group immersed in bankruptcy, production for the G500/G600 nacelles and thrust reversers remained indefinitely halted. These components are not available from any other manufacturer, so while Gulfstream continued to manufacture airframes, the company would be unable to meet customer deliveries until their sub-supplier produced nacelles. Exercising their best — and frankly only — option, Gulfstream purchased the interest in the PW800 series nacelle program from NORDAM in September 2018 to fix the gap in their supply chain.

Click here to read the full report.

The original market update was published by Hagerty Jet Group in October 2018.

Tinton Falls, NJ – August 9, 2018: According to AMSTAT, 5.0% of the Heavy Jet market group turned over in the first six months of the year, the best first six months in this group since 2007.

The report breaks the market into Heavy Jet (>=40,000 lbs), Medium Jet (20‐40,000 lbs), Light Jet (<20,000 lbs) and Turbo‐Prop groups and then further reviews these groups using the following age segments: Newer (<=10 years), Mid‐Age (11‐20 years) and Older (>20 years). Below we use the abbreviation “H1” to describe the first half of the year.

First Half 2018 Resale Retail Transaction performance was better in Larger and Newer market groups and segments:

• At a macro level, there were modest increases in the number of Jets and Turbo‐props sold in the first half of the year compared to 2017 (see Historical Perspective charts 1 & 2), but the overall active population of these aircraft also increased. A more relevant comparison is to look at the percentage of the active fleet that sold by group and age segments (see Historical Perspective chart 3).

• Resale transaction activity in all Heavy Jet age segments performed better in H1 2018 than in the same period in 2017. In each Heavy Jet age segment the percentage of active fleet sold in H1 2018 increased over H1 2017 from: 4.2% to 5.7% in the Older segment, 5.0% to 6.0% in the Mid‐Age segment, and 3.2% to 3.9% in the Newer segment.

• In the Medium Jet group 5.1% of the fleet sold in H1 2018. This matched transaction activity in the same period in 2017 which itself outperformed the first six months of the previous two years. At a segment level only the Older Medium Jet segment performance in H1 2018 beat the same 2017.

• The Light Jet group did not perform as well with 4.8% of the fleet turning over in H1 2018 versus 5.1% during the first six months of 2017. Despite the overall Light Jet performance, 4.7% of the Newer Light Jet age segment turned over in H1 2018, exceeding 4.2% in H1 2017.

• In the Turbo‐prop group, 3.9% of the fleet turned over in H1 2018, modestly up from 3.8% during the same period the year before. The Newer Turbo‐prop slightly underperformed H1 2017 with 3.7% of the fleet turning over in H1 2018 compared to 3.9% the year before. H1 2018 transaction activity in the Older and Mid‐Age Turbo‐prop groups exceeded transaction activity in these groups in H1 2017.

  Most market groups and age segments are reporting inventories at their lowest in many years:

At a macro level, 9.1% of the Business Jet fleet is for sale, the lowest overall percentage since 1998; and 7.2% of the Turbo‐prop fleet is for sale, a historical low in this market. Historical Perspective chart 3 shows that the gap between major inventory peaks and troughs during the last two industry cycles was approximately 6 years. The contraction since the peak in inventory in 2009 has been running for 9 years so far.

• 6.8% of the Heavy Jet fleet is for sale compared to 9.0% a year ago. This is the lowest percentage of Heavy Jets for sale since 1998. The greatest year‐over‐year contraction has occurred in the Mid‐Age (from 9.0% to 6.3%) and Newer (from 7.6% to 5.2%) Heavy Jet segments.

• 9.2% of the Medium Jet fleet is for sale compared to 10.7% a year ago. This is the lowest percentage in this group since 2000. The greatest year‐over‐year contraction occurred in the Mid‐Age (from 11.6% to 9.6%) and Newer (from 6.2% to 4.8%) Medium Jet segments.

• 10.7% of the Light Jet fleet is for sale compared to 11.7% a year ago. Contraction in the last 12 months has been particularly noticeable in the Newer segment with 5.6% for sale today versus 7.9% a year ago.

• 7.2% of the Turbo‐prop fleet is currently for sale compared to 8.2% a year ago. This is the smallest amount of year‐over‐year contraction at the group level but a historical low for the Turbo‐prop market. The greatest year‐over‐year contraction in this market has been from 7.5% to 5.7% in the Mid‐Age Turbo‐prop segment.

  The Average Asking Price data shows recent increases in the newer aircraft segments:

• The Average Asking Price for Newer Heavy Jets is at $26.5M up 8.1% year‐over‐year and 17.7% year‐to‐date. As always, we caution that this is a very small population of aircraft and so the Average Asking Price metric for this segment can be moved considerably by only a few changes. In this case, the Average Asking Price for Newer Heavy Jets jumped in June / July due to additions to the Gulfstream G650 and G650ER, Dassault Falcon 8X and Boeing Business Jet markets at asking prices that substantially moved the average. In contrast, the Average Asking Prices of Older and Mid‐Age Heavy Jets have remained largely unchanged on a year‐over‐year and year‐to‐date basis.

• The Average Asking Price for Newer Medium Jets is at $7.2M up 4.4% year‐to‐date, although off 3.1% year‐to‐date. In comparison, the Older and Mid‐Age segments are off 16.9% and 9.5% year‐over‐year and 3.0% and 4.2% year‐to‐date.

• The Average Asking Price for Newer Light Jets is at $3.3M off 2.0% year‐over‐year but up 4.8% year‐to‐date. In comparison, the Average Asking Price for Mid‐Age Light Jets is up 5.2% year‐over‐year and up 9.8% year‐to‐date to $1.9M. The Average Asking Price for Older Light Jets is now below $700K.

• The Average Asking Price for Newer Turbo‐props is up 11.1% year‐to‐date to $2.9M and up 5.4% year‐over‐year. The Mid‐Age Turbo‐prop Average Asking Price is flat year‐over‐year but up 4.4% year‐to‐date to $1.7M. Average Asking Prices for Older Light Jets continue to slide.

  Read the full Market Update at AMSTAT.