The Original Index: Guns to Caviar
“Defense budgets rise with threats and perception of threats, and cash filters down, with planes typically delivered two years after they are ordered,” he said. And business jet orders tend to rise in tandem with profits, with deliveries typically coming a year after the profit surge.” — Richard Aboulafia, December 2006
When Richard Aboulafia (Vice President, Analysis at Teal Group) developed his “Guns to Caviar” index he was able to show how business jet sales recovered when confidence returned to an economy once the instability and uncertain times were over. This was reflected in the ratio of sales of fighter jets to business jets. Business jets really are the caviar of the sky – delicious, but rare, and expensive.
When you care about such things, the ratio of weapons to luxury items is an insightful thing to look at. It can tell you a lot about a society’s collective mind, vibe and direction. But when it comes to transportation, my thought was to look closer at how we pay to get around. Are there more of us in luxury cars per city bus today, or fewer? And what would this mean to the jet owner, the banker or anyone with a big business jet portfolio?
Bentley to Bus Index?
Since imitation is a form of flattery, I figured a little mimicry was the way to go, and I came up with the “Bentley to Bus” index. It would be an index for jet owners that would be as meaningful in my mind to Richard’s war and peace index. Sadly for me, this was old territory for him and he not only thought of it, but had documented it fully as the foundation for his more famous index. But luckily for us, he not only shared the data, but also corroborated what we were seeing contextually – business jets are back, and they are coming back big time.
But business jet owners typically don’t follow much of what is going on in the fighter jet sales world and would be hard pressed to see how it could affect their jet’s value. But something that is very relevant to the jet owner is the number of corporations and individuals promoting themselves out of airline travel into business jet travel as well as the reciprocal.
This number and the according ratio tells us something very helpful relative to major recent milestones and demarcation points:
2000 to 2003: Even though it was a period of contraction, the relative slopes are worth looking at. Airlines kept flying whatever they had, with shrinking orders of new planes, but business jet contraction of new unit sales was not as steep. Despite rough economic times, business jet deliveries contracted at a lower rate than that of their big airliner cousins.
2008 to 2009: A recent period most significantly impacted by the big three automaker CEO’s using private jets to go to DC to plead for public funds. Clearly bad timing and shareholder policing of who gets to use the magic carpet ride and for what purpose. Not only were times bad, but the optics were terrible.
2013-today: In speaking with Richard recently, I wanted to get a sense from him about where he thought we were in the curve and the notes in the upper right part of the chart are perhaps the most important. At the most recent peak of the Bentley to Bus index in 2008, business jets comprised 32.6% of the combined transport market. An amazing number if you think about it in raw dollar terms – nearly 1/3 of all dollars buying aircraft were buying Bentleys.
Given that we sat at 21.9% in 2009 and are on a gradual upward slope, the short to mid term future is bright for the late model or older model current production business jet owner, bank portfolio or cash hungry fractional operator.
A big inescapable caveat that is all around us is the inevitability of automation and the role that computers, increased redundancy and the exodus of big analog systems play in aircraft development. What would have amazed you in the cockpit in 2005, you’d now find barely marketable at 5% of its original value today, assuming someone wanted it – which is another problem – it is hard to sell an abacus to a kid that loves his iPad. The early inventors and users of radio, radar, and other innovations would be amazed to see how fast a networked aircraft and national airspace changes everything.
The primary caveats to the trends on the graph above (when thinking about your own aircraft exposure) is carefully evaluating three key elements in pre-owned aircraft as part of your appraisal process:
Avionics: While the future will boast more modularity of swap in and swap out, the big questions will always be your aircraft’s certification and compatibility with the latest and greatest thing.
Maintenance: With the advent of MSG 3 aircraft (aircraft that are on airliner like continuous maintenance schedules) how many hours your private chariot spends in the hangar relative to each hour it flies becomes a very big feature at resale time. Older Hawkers or any aircraft that isn’t following Embraer’s lead with quantum leaps in maintenance efficiency will suffer steeper discounts when he lean times of Guns and the City Bus return on the indexes mentioned above.
Engines: Engine efficiency has been improving steadily over the past decades to the point where squeezing more thermodynamic juice or secrets out of our existing alloys and fully digital controls is approaching a smaller amount of annual change. However, the airline and defense world are showing us what is coming – geared, high by-pass, turbo fans that are amazingly quiet, efficient, etc. To the extent you are upgradable at overhaul time this bodes well.
Ultimately the index is a fun but general guide. It may not give every jet owner the confidence or ability to read the tea leaves on what they their equity position is, but it certainly can help the regional bank business jet portfolio manager think about where their exposure is headed and how to better plan for the future.
The value is knowing where you are relative to high tide and low tide. If we’re reading it right all the data would point towards the fact that the tide is still coming in and a rising tide, theoretically, lifts all boats.
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