AIN Special Reports

Aircraft Finance Report: Cash Still King

 - November 15, 2017, 9:58 AM

While the United States has spent the last year virtually mired in political turmoil, the financial markets have appeared relatively insulated from the chaos. But that prosperity has not spilled over to the business aviation industry. Those who finance business jets and other elements of the private air-transportation business sector are grappling with new dynamics, trying to make sense of why record profits and a steadily growing stock market have not led to more people and companies buying and using aircraft.

Over the past year, the Dow Jones Industrial Average grew by nearly 30 percent, rising from 18,000 in November 2016 to more than 23,500 last month, while the S&P 500 rose from 2,100 to better than 2,500 in the same span. The Nasdaq Composite Index saw even better performance, with a more than 30 percent increase year-over-year, reaching a peak of more than 6,750.

“Record stock prices in 2017 are based on expectations for higher corporate profits,” explained Gus Faucher, chief economist with PNC Financial Services Group. “Markets are forward looking, and they have largely discounted political volatility, expecting this to pass. Instead, investors think corporate profits will continue to rise thanks to improving demand from solid U.S. and global economic growth, rising prices, reduced regulation, the weaker U.S. dollar, and corporate income tax cuts.”

Likewise, the U.S. unemployment rate in October was 4.1 percent, the lowest since December 2000, while the Federal Reserve Bank of Atlanta estimates that the U.S. gross domestic product (GDP) could finish out the year with a surge at a 4.5 percent annualized growth pace. “The current economic expansion began in June of 2009, and is now the third longest in U.S. history,” Faucher told AIN. “With few imbalances in the economy, the expansion will continue well into 2018, and possibly longer. U.S. economic growth slowed slightly in the third quarter because of Hurricanes Harvey and Irma but will receive a boost in late 2017 and early 2018 from rebuilding that is funded by federal aid and insurance payments; job growth will pick up as businesses rehire after the storms.”

Against this backdrop, the business jet industry is set to deliver its lowest yearly total of new aircraft since 2004, at approximately 620 units. While many experts in the business aviation finance community believe that such financial indicators are still valid, they are clearly no longer the bellwethers they once were for the industry. “Those indicators are still relevant, but it used to be that we could look at USD, GDP and U.S. corporate profits and that would tell us where the new business jet sales were going,” said Kirsten Bartok Touw, managing partner of Virginia-based AirFinance. “Today, while the U.S. is still the largest component of new aircraft sales, it is no longer so dominant that U.S. GDP or financial markets correlate with the new aircraft sales, or the percentage of used aircraft for sale.” 

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2017 Aviation Finance Report (234K)

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