Are Private Jets and Lessors Coming Out of the Storm?
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Through the COVID-19 pandemic, many industries like aerospace have struggled to either survive or innovate enough to adapt to new conditions, changing the rules of the market. I have written here about how the crisis impacted passenger trends, commercial airlines, maintenance, and manufacturing operations. These changing market conditions and travel adjustments have also impacted two more segments related to the aerospace industry: lessors and private jets.
Aircraft leasing companies are the backbone of modern commercial aviation. Lessors now account for an estimated 60 percent of new passenger jet deliveries. This is the biggest percentage in the last 50 years. The story shows the number increasing from approximately 45 percent on the eve of the pandemic and just 10 percent in the mid-1980s. Although the pandemic did help the trend, this is also thanks in part to the ability of leasing companies to access cheaper financing than airlines. The ascendency of aircraft leasing companies has accelerated during the COVID-19 crisis.
I firmly believe this happened due to the flexibility demonstrated by lessors throughout the pandemic: A recent study from White & Case found that 86 percent agreed to defer aircraft lease rentals with their airline customers during the COVID-19 crisis, with a little over half of respondents expecting these deferrals to be a short-term measure. This trend shows again that a more flexible financial structure was reflected in a more flexible response to a new market need. In Mexico, many lessors had to either adjust rates and renegotiate the terms and validity of contracts to keep aircraft leased at airlines. Margins decreased, certainly, but it was a short-term emergency measure that, now that the pandemic is becoming endemic, is showing good results. There is still the option of repossession but that is really the last resort. Reduced demand during the pandemic, particularly for wide-body aircraft, has encouraged lessors to work with troubled airlines rather than taking aircraft back. Approximately 30 percent of the lessors repossessed less than 5 percent (or none) of their fleet during the COVID-19 pandemic. But there is another 30 percent, with bigger fleets most likely, that had to take back more than a 10th of their fleet. Financials struggled but, at the end of the day, I am sure that the worst has passed. From now on, markets should trend toward the figures seen before the crisis.
A characteristic of the way COVID impacted different regions is that it was asynchronous. For some things like supply chains, it meant a big operational disruption. For lessors, this was a blessing. Despite suppressed demand during the pandemic, lessors have been able to re-market aircraft. This requires patience and deep pockets. While some regions were shutting down, others were operating; when those went off, others were rebooting operations. For most lessors, it took three to six months to re-market aircraft, although we need to keep in mind that it took six to 12 months for others. Only one in five found a new taker within three months of return or repossession, which was either a lucky strike or really a high speed and flexibility to adapt to market conditions regionally.
Talking about private jets, while the commercial aviation market struggled amid the COVID-19 pandemic, use of business jets rose by 42 percent in the US and 33 percent in Europe in 2021, according to the US Federal Aviation Administration and Eurocontrol. We know that many people were afraid to travel and the ideal solution was private business jets. You might think this would not impact the private flights market as not many people have access to that level of income and opportunity to fly like that. However, we are wrong. The world’s 2,755 billionaires have seen their combined wealth rise by US$5 trillion since March 2021, according to a January 2022 report from Oxfam International. In other words, there are way more wealthy people than you and I thought and even when the economies of the world are struggling to stay afloat after the pandemic, they got richer. Add to the equation flight cancellations, wariness of exposure to the virus, long, demanding, and time-consuming airport and in-flight measures and checks, and the result is greater demand for private aircraft. The taste for luxury has seen buyers snap up used business jets as well, leaving the total number for sale at 3.6 percent of the worldwide fleet, its lowest level since 1989, according to market data firms Jetnet IQ and Ascend, making new products a very appealing option in the market, which by the way still has limited capacity to cope with demand. Bombardier has the novel Global 7500 and seems to be benefiting from being the only one of its kind in the long-range segment. Gulfstream and Dassault have been late into coming to the segment but if they come soon enough, they will all enjoy a very healthy business jet market with decent demand for everybody. The differentiation will be the service level and geographic location and access to that service. Right now, it is a matter not only of selling the aircraft but clearly of servicing it after sale. But that is a topic for a next article.
Did lessors and business jet manufacturers survive the crisis generated by a global pandemic? Not only did they survive but they are going to see a good increase in business because of market trends and dynamics generated by it. More than survival, it is now a game of how fast companies in both segments can adapt and take advantage of the new post-pandemic conditions that have transformed the market to their benefit.