For those interested in the prospects for growth in business aircraft movements and sales across Asia for 2015 and into 2016, the key factors right now are the slowdown in the Chinese economy and President Xi Jinping’s crackdown on corruption. In the past year, according to the New York Times, some 68 provincial or ministerial-level officials and 71,000 lower-level officials have been caught up in President Xi’s net and punished. The favourite tactic of the investigating teams spearheading the crackdown on graft has been to threaten minor officials with severe penalties, up to and including facing a firing squad, unless they come clean on the misdeeds of their superiors. Every ‘tiger’ or high ranking official is always surrounded by a cloud of ‘flies’, they say. Squeeze the flies and you bag the tiger.
It is working like a charm, apparently. But it is creating an atmosphere of unease across the whole of the upper echelons of the Chinese civil service, party apparatchiks and even among China’s high net worth individuals and top executives. In that atmosphere, no one wants to attract attention to the fact that they are unusually wealthy, so there is some nervousness about owning and using private jets and sales of new jets have slumped. ‘Some nervousness’ is probably a massive understatement. According to recent press reports (Financial Times, New York Times) the Chinese government has just launched a survey trying to tally up the number of civil servants, aka apparatchiks, who have died ‘unnatural’ deaths (a pseudonym for suicide). They don’t know the result yet, but they know the number is worryingly high.
Test crosshead 1
Richard Koe, joint managing director of WINGX Advance, points out that despite the favourable references to business aviation in China’s latest five year plan, private jets now have a taint about them. “They are seen as an indulgence and possibly as being somehow linked to corruption. Anything that smacks of undue wealth at the moment is seen as a negative,” he comments. However, Koe notes that in the medium term this could force a change in the way the industry is perceived in China.
The undue focus on business jets as the exclusive preserve of the wealthy needs to be countered by strong arguments from companies and from within business aviation itself, that business jets are vital tools that help businesses to connect both within Asia and between continents. By sounding the death knell, as it were, for large cabin jets as billionaire status symbols, and replacing this view with the kind of message that the NBAA has been taking to US politicians, namely that the business jet is a business tool, President Xi’s anti-corruption campaign might well be an essential step on the road to a mature business aviation sector in China.
Test crosshead 2
The other ‘headwind’, namely the slowdown in China’s growth, is now a well-documented fact. However, speaking at the World Economic Forum in Davos, Switzerland, in January, the Chinese Premier, Li Keqiang, pointed out that this is not all bad. “It must be noted that the moderation of growth speed in China reflects both profound adjustments in the world economy as well as the laws of economics. The Chinese economy is now the second largest in the world. With a larger base figure, growth, even at 7%, will produce an annual increase (in the economy) of more than 800 billion US dollars, which is larger than (would have been generated by) a 10% rate of growth five years ago,” he noted.
Test crosshead 3
All this additional wealth is also creating ever-increasing numbers of billionaires and multi-millionaires, and while some might have reason to fear President Xi’s crackdown, others will feel their hands are sufficiently clean to enable them to deploy private aviation as a time saving tool for their business affairs. In its most recent forecast for the sector (June 2014) Bombardier noted that the number of China’s billionaires had increased from 157 in 2012 to 186 in 2013, an increase of 18% – far faster than the country’s GDP growth rate. That figure is probably now over 200 and growing. By comparison Europe had just 204 billionaires in 2012 and that number rose to 246 in 2014, an increase of 19%.
Test crosshead 4
Bombardier also cites the World Ultra Wealth Report from Wealth-X, which, in 2012-13 forecast that the world’s Ultra High Net Worth population would grow by an annual average of 3.9%, while the wealth attributable to these deep-pocketed folk would increase at a rate of 5.5% per annum. Why would anyone whose wealth is growing at that rate fly scheduled carrier and put up with the delays, lack of privacy and inflexible scheduling that goes with it?
It is not surprising therefore to find that despite the headwinds caused by President Xi’s anti-corruption campaign and the general slowdown in economic growth, the number of aircraft movements in China grew, year over year, in 2014. Koe says that WingX has very good visibility of aircraft movements from China to Europe and North America, and flight activity has picked up 11% by comparison with 2013 as far as flights to and from Europe are concerned, while the North American routes have seen an increase of 6%.
“For regional travel by private jet, we get the impression from talking to the major Chinese players that increases have been of the order of 10% to 15%,” he comments. While these numbers are impressive, Koe points out that aircraft movements in and from China are still a lot softer than was being projected as little as three years ago. “By comparison with China, the US market has been very active. A lot of people were predicting last year that the North American market was the new ‘emerging market’ as far as business aviation is concerned, and that excitement seems to be being borne out,” Koe adds. New jets are selling in America. In China there is anecdotal evidence that some of the orders for new jets are already up for sale as owners try to get out of their commitments.
“The healthy figure for the inventory of pre-owned versus the active fleet is generally thought to be around 10%. In China right now the figure is nearer 25%. Several of the big companies in China that placed large orders, probably hoping to trade them on into a thriving market, have been caught out by the combination of the slowdown and the anti-corruption campaign. Nevertheless the big operators in China may well end up being in a reasonable position, within the next year or so, to pick up the pieces,” he considers.
On the positive side, Chinese companies are increasingly investing in Africa and Latin America and they are going to need large body, long range private jets to pursue their business interests. So this is bound to generate some sales going forward.
Tom Vosa, an economics commentator, says that while the slowdown might actually play well for the scheduled carriers, who could see corporate executives flying scheduled a lot more over the next year, China’s economy is still generating more than enough wealth to fuel demand for business travel, and any migration to scheduled airlines should reverse over time, he suggests. “I expect that the tougher economic conditions might well encourage a shift from outright purchase to a leasing model for acquiring private jets. This change in the ownership model might start playing well for fractional ownership,” he notes. If it does, that will be good news for EJM, the aircraft management arm of NetJets, which is opening up an aircraft management operation in China as a lead in to that market for NetJets.