Owner and Chairman of the Board - JETCRAFT

Towards the end of 2016 Jetcraft produced its second annual 10 year forecast, looking ahead to 2025. By comparison with the company’s initial 10 year view, produced at the end of 2015, this second effort was somewhat less optimistic about how things are likely to turn out for the sector.

The company’ latest market prediction sees 7,879 unit deliveries, worth $248 billion in 2015 money, being achieved over the next decade. This compares to Jetcraft ’s previous 10 year view, which envisaged 8,755 aircraft deliveries worth $271.1 billion.

This amounts to a 10% shrinkage in units and an 8.5% reduction in cash generated, so however you look at it, the future looks somewhat bleaker now to the way things looked a year ago. Many in the industry have now taken up the theme that too many sectors in business aviation have too many players competing for a pot that is not growing fast enough for everyone to be a winner.

The logical outcome this suggests is a continuing consolidation at many levels.

Jetcraft itself has already played a significant part in this consolidation. In April 2013 it snapped up the sales division of Execujet, giving it sufficient scale to claim to be the leading brokerage in the pre-owned market. The company’s growth since 2008 when Fazal-Karim joined the company, has been impressive. When BAM spoke to Fazal-Karim at the end of January 2017, it was already clear that Jetcraft had had a record 2016, in terms of both transaction numbers and total revenue. Moreover, 2017 has started pretty well.

“Right now we have over twenty deals pending, heading for closure, which gives us a very good line-up for the first quarter of the year so I remain optimistic for the prospects for 2017,” he comments.

He points out that one of the big unknowns is how the US economy is going to fare under a Trump Presidency. “There are two sides to what we have seen so far of Trump’s policies. If you look at what he wants to do in terms of reducing taxation rates for individuals and companies, that could be very good for the economy. If he does that, the rich will get richer, and that has to be a boost for private aviation, while corporates will enjoy bigger profits and we may see them refreshing their aircraft and upgrading their fleets.”

“However, it is far from clear how his anti-globalisation views will play out in the international markets. So we can say that it is going to be positive for the US market, in all probability, but internationally, this is much less certain,” he comments. Much depends on how US policies interact with international trade.

Fazal-Karim says that Jetcraft has already seen some negative impact in Mexico, where the peso is faring badly against a strengthened dollar. “What happens with adverse currency movements and increased uncertainty in the market is that it makes many of our clients wait before they decide to act, and this has been particularly true of China, Mexico and Europe,” he notes.

On the other hand, Russia could respond rather more positively, particularly with some talk in the Trump camp about easing the sanctions imposed after Russia’s annexation of Crimea. “If President Trump engineers improved relations with Russia, that would definitely help the Russian side of the business. The reality in Russia right now, however, is that there are still more sellers than buyers, but we are seeing a bit of recovery with some purchasers coming forward and some deals being done. Undoubtedly, though, the dominant trend is still Russian high net worth individuals taking advantage of dollar pricing to cash in their US denominated assets, which has brought a number of high quality, pre-owned business jets onto the market at attractive prices.”

We also see some positives from his energy policies and the potential impact on the oil and gas market. Along with the recent OPEC agreement to impose production limits to try to reduce the global oil supply surplus, this too is a trend that can only help business aviation,” he notes.

What is positive for the industry as a whole, however, is that sellers get a reasonable price for their asset, instead of having to sell at bargain basement prices. “You want good deals for the seller as well, so that they are in a position, in their turn, to shop for future aircraft,” he notes.

The US remains Jetcraft’s dominant market, with approximately 50% of all transactions coming from the North American market. “If you are a US buyer, with dollars, there are undoubtedly some great bargains available, both within the US but particularly where the buyer is prepared to consider aircraft coming from markets outside the US,” he comments.

There is, of course, no reason not to trust the quality of aircraft coming from other markets, because regulatory regimes everywhere set very high standards when it comes to the air-worthiness, maintenance and safety of private jets. “The good thing about our industry is that it is highly regulated, whether you are talking about flying or operating a business jet. This means that there is always a very good, well documented history for every jet, and they are almost always under EASA or FAA rules,” FazalKarim comments.

Any North American buyer who is interested in a non-US based pre-owned aircraft is able to do the same due diligence checks on that aircraft as they would on a US aircraft. “They can see how it has been maintained, how many cycles it has flown, where it has been hangared. We get all the information for them that they need to verify the status of the jet so we really encourage buyers not to limit themselves to the US market. Of course, they have to follow all the usual due diligence processes, but there are some very attractive aircraft that become available as options once you widen your scope to include aircraft based outside the US,” he notes.

Another positive factor that is now impacting the market has to do with the new aircraft models that are headed towards certification. New models have a positive impact because they always stimulate interest and some owners make the decision to upgrade. This in turn puts high quality preowned aircraft onto the market.

Of course, for new models to have the most impact, OEMs have to match their production rates to the level of demand that actually exists in the market at the point at which these new models become available. What makes this difficult is that production capacity has to be planned well in advance and market demand can fall off a cliff at a moment’s notice, as it were. “Basically, you want to deliver new models to a market that has strong demand. The danger for manufacturers is the possibility that they over-produce the new model and bring it to market when demand is not sufficient. That creates excess supply and really hurts the value of pre-owned aircraft as the new models replace existing models. That exacerbates weakness in the market and really ramps up price pressure on older models. So, much as I love seeing new models arriving, manufacturers really have a responsibility to think through their production schedules so that they match to the available levels of demand,” he comments.

Another problem that was particularly evident before the 2008 financial crash was the speculative “flipping” of new jets, where the same jet could be sold on two or three times before it even came off the production line. However, Fazal-Karim believes that the OEMs are now much more assiduous in ensuring that they have a real, final buyer for each sale they chalk up.

There is still a potential problem when an OEM sells a half dozen or so units of a new model to a fleet operator. Operators will generally take delivery if their anticipated levels of demand hold up, but if demand falls away, they will be looking to sell on the jets to fresh buyers. This in turn can lead to oversupply. It remains to be seen how this plays out over the next year or so.

“Outside of absolute boom times in the sector, flipping is a very dangerous strategy and one where the people involved can make significant losses very quickly. The main problem really is the big orders from the fractional players and fleet operators,” he comments.

Fazal-Karim is confident that Jetcraft has now achieved the right scale and global representation required to achieve its revenue targets. “We’re very focused on our core business, which is to advise clients and represent them when they want to buy and sell aircraft. So we are not interested in diversifying into other fields such as MRO or aircraft management and so on. We have grown significantly and with 20 offices worldwide our presence in our key markets is solid.”

“Today there are just a couple of areas where we could still be looking to hire more people. Currently, we handle Africa out of our Dubai office. It is quite clear that there will be some very interesting growth in the African business aviation market over the next few years, so it deserves more attention from us. We probably need someone in South Africa to manage sales across the continent, and we also might need one additional person for the Australian and New Zealand markets. However, overall, in terms of scale, we are sized appropriately to handle many more transactions than we are presently achieving,” he says.

Jetcraft closed 2016 with 82 total transactions, representing $1.8 billion in value, which was a record for the company.

The Asia market continues to perform almost on a level with Europe, with around 18% – 20% of the company’s sales coming from each of the two regions. “The biggest challenge in Asia is political instability. China is clearly the biggest market and we still have some fallout from the ongoing anti-corruption campaign, but all the sales we have made in China have been to high net worth individuals, so they are still buying. What is clear though is that they are now very value conscious and people see real value in the pre-owned market. This represents a heightened level of sophistication in the Chinese market and is very welcome,” he comments. The aircraft that sell well in China, and in Jetcraft’s other main Asian markets, including Indonesia and the Philippines, are all the larger models, such as G650s, Globals, BBJs and ACJs.

“Looking forward we are cautiously optimistic. We’re coming off a record year and we have a very solid pipeline of work, so the challenge now is to keep up the momentum through the rest of the year,” he concludes.