Page 1

Biz Jet Insights: From China to the West May 2013

QUAESTORQ


About Biz Jet Insights ‘Biz Jet Insights’ are a series of papers that lift the lid on the business jet industry. In each paper we consider a different facet of the industry so whether you are an industry professional, a business jet connoisseur or a tempted buyer, we hope you enjoy today’s journey.

Tyrus Wings Tyrus Wings offers Customized Aviation Solutions for both commercial & business aviation. Offering an array of solutions in the Biz Jet market from 12 month leases, to aircraft sales, to headhunting pilots and lots more.

Fabrizio Poli, Aviation Analyst & Managing Partner fabrizio.poli@tyruswings.com www.tyruswings.com

QuaestorQ QuaestorQ works with ultra affluent clients to create the best wealth management relationship based on their personality, circumstances and needs. Completely independent of the market, and so with our clients’ needs at the heart of everything we do, we provide the strategic guidance to help them achieve the right wealth management relationship for them. Ziggy Harris, Managing Director ziggy@quaestorq.com www.quaestorq.com

1


Biz Jet Insights: From China to the West Business aviation in China is in its fledgling years, if you will excuse the pun. Significant barriers have prevented the business jet market in China from growing in line with the country’s exponential boom in private wealth observed over the last decade. Barriers such as restrictive airspace access, high aircraft import taxes, a shortage of airport infrastructure for business aviation and high user fees have all contributed to limiting China’s fleet of business jets based in the country to a comparatively modest 210 at the end of 2011. However change is in the air. According to the latest airport development plan from General Administration of Civil Aviation of China (CAAC) the number of civil airports will grow to 244 by 2020, an increase of 88. At the same time China’s air traffic authorities understand a ban on the use of low-altitude airspace is set to be relaxed by the government later this year. These changes coupled with the continued rapid growth of China’s ultra affluent individuals should provide the perfect environment for business aviation to flourish in China during the next two decades. In fact, Bombardier Aerospace, headquartered in Canada, states in its latest market forecast that the number of business jets in China could increase to 2,590 in 2031 from the current 210. If accurate, this would make China the third largest region in the world for deliveries in the next two decades behind only the US and Europe.

In ‘Biz Jet Insights: From China to the West’ we will first consider the various levels of business jet engagement. We will then take a bottom up approach to considering the scale and potential growth of China’s ultra affluent and how their demand for business jets may increase as both their numbers and collective wealth swells. Finally, we will explore the core motivations for choosing business jet travel over commercial airlines.

Types of business jet interaction To begin we should consider the various ways the ultra affluent can engage with a business jet and, indeed, the level of wealth usually required to do so. There are four main means of accessing a business jet: purchase new, purchase second-hand, lease for a number of months or charter for a specific trip. Given that we are considering travelling from China to the West we will be considering long-range aircraft capable of such a journey.

New purchase As with any other large luxury purchase the cost of a new jet can vary significantly, with capacity, brand, performance and specification all factors in determining how many millions your plane will cost. Prices can range from USD50 million to USD70 million with an average assumed for our analysis

©2013 Tyrus Wings & QuaestorQ. All rights reserved

2


Biz Jet Insights: From China to the West

of USD60 million. Additionally one must consider the annual expenses associated with running and maintaining your new jet, these of course vary based on how often you use it with fuel and landing fees representing a significant proportion of the variable costs. An average figure of USD15 million annually is indicative which means a first year investment of USD75 million. In order for this to present as a feasible option you are likely to have a net worth of around USD750 million.

Second-hand purchase If you wish to enjoy all the benefits of owning your own jet but seek a more economical solution a second-hand purchase might be your answer. Prices can range from USD18 million to USD45 million including a substantial refurbishment and the inclusion of personal specification. Using USD25 million as a representative average and factoring in a slightly larger annual maintenance to cover the great mechanical depreciation associated with age of about USD18 million, a first year investment of USD43 million represents a saving of over USD30 million when compared to purchasing new. At this level a net worth of around USD375 million would afford you the potential to start considering purchasing your own jet.

Lease Although in some circumstances shorter leases may be possible, the normal length of a lease is 12 months and will require an outlay of between USD1.2-1.5 million per month. This figure includes all maintenance costs and so once agreed the monthly invoice only really varies in line with the fuel costs associated with your flights. A figure of USD15 million would represent a fair reflection of the average annual cost of a leased business jet. Leasing therefore becomes an option for the ultra affluent with around USD200 million in personal wealth.

Charter The ‘gateway’ to the world of business jets, chartering represents the entry level means of engagement. In the context of flying from China to the West for both business and pleasure an emerging trend is to fly first class on a commercial airline from China to a central European ‘hub’ before chartering a business jet to hop around Europe and North Africa for meetings. Of course the fee for chartering is therefore heavily dependent on the nature of the trip – the number of stops, the duration, the geography covered. Assuming the scheduled trip involves meetings in three or four countries the total cost inclusive of return first class flights from China to Europe would be around USD150,000. So to pass through the business jet ‘gateway’ on a regular basis a net worth of around USD30 million is likely to be required. Although the cost of chartering can of course be reduced if you are able to bring together a group of your ultra affluent friends in order to benefit from economies of scale.

©2013 Tyrus Wings & QuaestorQ. All rights reserved

3


Biz Jet Insights: From China to the West

China’s private wealth creation With minimum wealth levels determined, we can now consider how ultra affluent demand has shaped the business jet industry in China over the last decade and how that demand will evolve over the next 5 years. China’s growing economy has played a significant role in the exponential growth of billionaires and multi-millionaires in the last 10 years, and while China emerged relatively unscathed from the 2008 credit crisis that has continued to affect the other parts of the world, the pace of growth in China has certainly been tempered when compared to its 2007 highs. With fluctuating GDP growth China has seen its ultra affluent numbers decline twice since 2007 (in 2008 and 2011). However the foundation of wealth creation remains strong, and with the exception of 2008 China sees it number of millionaires increase year-on-year, even after a difficult 2011.

China’s ultra affluent 2003-2017

Source: QuaestorQ wealth curve analysis, 2013

The greatest risk to China’s continued growth is external, as the struggling economies of the West show a reduced demand for Chinese exports. The challenge for China therefore is in promoting domestic and regional demand thereby reducing its dependence on demand from the West. Following a difficult 2012 the outlook is largely positive and China’s GDP growth is expected to stabilise at a steady rate of 8.5% over the next 5 years according to the WEO Database. Should this GDP growth be achieved it wouldn’t be a surprise for China’s ultra affluent numbers to continue to grow as rapidly in the next 5 years as they have in the last 5 years as China mounts a serious challenge on the second spot in the world rankings for affluent citizens (behind the US).

©2013 Tyrus Wings & QuaestorQ. All rights reserved

4


Biz Jet Insights: From China to the West

In this context comments from Zhang Peng, vice president of Hainan Airlines subsidiary Deer Jet, that the demand for business jets in China “will grow 50 per cent annually, and there will be at least 500 business jets by 2015” seem very achievable.

USD30 million+ 2003 2008 2012 2017 (est.)

641 3,432 9,283 20,111

Individuals with wealth of: USD200 million+ USD375 million+ 21 254 891 2,262

7 107 410 1,097

USD750 million+ 2 42 174 494

Source: QuaestorQ wealth curve analysis, 2013

If we consider the above table, the number of affluent individuals potentially able to support the purchase of a new or second-hand jet will grow from 410 in 2012 to 1,097 in 2017 – a 150% increase in 5 years. In the same period the potential market for brand new business jets will grow from 174 to 494 – almost a threefold increase. The business jet industry in China will also be supported by a further 1,165 ultra affluent individuals potentially seeking to lease a business jet for a year in order to aid them in their business and leisure activities across the country, region and the globe. While a further 17,849 ultra affluent individuals will be considering the benefits of chartering a business jet as they seek to do more deals in pursuit of taking their wealth to the next level. This demand will surely help the business aviation industry overcome some of the challenges inherent with being a relatively young industry – only starting to grow in China in the mid-1990s. The Chinese government does recognise that business aviation can help expand the economy, and so with strengthening demand over the next 5 years business jet infrastructure, such as airports, private terminals and over-flight permits, should be developed more quickly. The world's leading aircraft producers are very confident about China's jet market and are actively expanding their business in the country as, supported by China's ever growing economy, it is believed that China will become the world's third-largest market for business jets in the next decade.

Why use a business jet? There are of course many reasons an ultra affluent individual might choose to use a business jet over a commercial airline. It may be the image that owning or traveling by private jet projects, it might be fuelled by a desire for greater personal privacy, heightened security for the individual and their family or even simply to escape the screaming child in row 16. However the number one reason for using a business jet over a commercial airline is that it represents the ultimate productivity solution. Business jets can support a schedule not met by airlines, reach locations commercial airlines do not service, provide greater connectivity whilst up in the sky, be more cost effective and result in a significant increase in work-related tasks. A business jet is a productivity tool.

©2013 Tyrus Wings & QuaestorQ. All rights reserved

5


Biz Jet Insights: From China to the West

A recent study by Harris Interactive titled “The Real World of Business Aviation: A Survey of Companies Using General Aviation Aircraft” discovered that passengers perceive themselves to be more productive when on a business jet than when in the office.

Source: Harris Interactive, 2009

Compared to a typical hour in the office, business leaders are 20% more productive aboard a business jet, while they face a 40% productivity drop on commercial flights. The time spent on work related meetings with colleagues, business partners and clients faces the most marked transformation. While the lack of privacy on a commercial airline means a negligible amount of time (just 3%) can be dedicated to these key aspects of business, this jumps to more than two-fifths of time (42%) on a private jet – deals get done. Additionally, companies with business jets are reaching locations that would not otherwise be reachable with commercial flights – getting them to deals faster. According to the Harris Interactive study, almost half (47%) of private jet flights are made into airports with infrequent or no scheduled airline services, while a further third (33%) are into secondary airports. In fact it has been estimated that two in five flights (40%) are to airports in communities that never had scheduled airline service. It is no surprise that with this greater accuracy of travel and increased productivity during the flight, a number of studies show these advantages translated into superior financial performance, stronger customer access and higher average revenue growth for companies that use business jets over those who choose to rely on commercial airlines. In short – without a business jet everything is planned around the airlines, with a business jet everything is planned around getting results.

“Time is money” Everyone is familiar with Benjamin Franklin’s famous line in Advice to a Young Tradesman – “time is money”. Many business leaders consider their business jet to be their very own time machine. On long-distance trips, whether for business, leisure or a mixture of both, it is not unusual to save over 50% of your time using a business jet when compared to a commercial airline solution.

©2013 Tyrus Wings & QuaestorQ. All rights reserved

6


Biz Jet Insights: From China to the West

Example journey – business jet versus a commercial airline solution Business jet travel Commercial airline travel Ground transportation Guangzhou (China) to Bergerac (France)

19hrs 55mins

12hrs 29mins

Bergerac (France) to Oxford (UK)

01hrs 30mins 09hrs 55mins

Source: Tyrus Wings flight analysis, 2013

Š2013 Tyrus Wings & QuaestorQ. All rights reserved

7


Biz Jet Insights: From China to the West

Example journey – business jet versus a commercial airline solution Business jet travel Commercial airline travel Ground transportation Aberdeen (UK) to Tyumen (Russia)

05hrs 30mins

19hrs 35mins

Tyumen (Russia) to Guangzhou (China)

07hrs 13mins

29hrs 50mins

Source: Tyrus Wings flight analysis, 2013

Š2013 Tyrus Wings & QuaestorQ. All rights reserved

8


Biz Jet Insights: From China to the West

Consider an ultra affluent business owner based in Guangzhou who wants to undertake a business and leisure trip to Europe with his core team. He hopes to check on his wine vineyard investment in France, to visit his son who is studying at Oxford, meet with some distributors and partners in London, play a round or two of golf at the Trump International Golf Links in Scotland, before heading to Russia to close a new oil deal. Quite a trip!

Trip Guangzhou, China to Bergerac, France

Bergerac, France to Oxford, UK

Oxford, UK to Aberdeen, UK

Aberdeen, UK to Tyumen, Russia

Tyumen, Russia to Guangzhou, China

TOTAL

Business Jet Check in: Flight: Layover: Flight: Customs: Drive: Drive: Check in: Flight: Layover: Flight: Customs: Drive: Drive: Check in: Flight: Check in: Flight: Layover: Flight: Layover: Flight: Customs: Check in: Flight: Layover: Flight: Layover: Flight: Customs:

Direct

Direct

Direct

Direct

Direct

20mins 11hrs 49mins 20mins 12hrs 29mins 10mins 01hrs 10mins 10mins 01hrs 30mins 10mins 01hrs 01hrs 10mins 20mins 04hrs 50mins 20mins 05hrs 30mins 20mins 06hrs 33mins 20mins 07hrs 13mins

27hrs 52mins

Commercial Flights Guangzhou-Paris (0020-0640) Paris-Bordeaux (0740-0855) Bordeaux to Bergerac Bergerac to Bordeaux Bordeaux-Paris (1800-1920) Paris-London (2055-2115) London to Oxford Oxford to London London-Aberdeen (0955-1125)

Aberdeen-London (0630-0850) London-Moscow (1005-1805) Moscow-Tyumen (0030-0505)

Tyumen-Moscow (0740-0845) Moscow-Dubai (1745-1210) Dubai-Guangzhou (0140-1230)

02hrs 13hrs 20mins 01hrs 01hrs 15mins 01hrs 01hrs 20mins 19hrs 55mins 01hrs 20mins 02hrs 01hrs 20mins 01hrs 35mins 01hrs 20mins 01hrs 01hrs 20mins 09hrs 55mins 01hrs 30mins 01hrs 01hrs 30mins 04hrs 02hrs 01hrs 35mins 02hrs 4hrs 06hrs 25mins 02hrs 35mins 01hrs 19hrs 35mins 02hrs 03hrs 05mins 09hrs 05hrs 25mins 02hrs 30mins 06hrs 50mins 01hrs 29hrs 50mins

83hrs 15mins Source: Tyrus Wings flight analysis, 2013 / Expedia

To our business owner time is key, he has ambitious growth plans for his core business in Guangzhou, and doesn’t want to waste days negotiating his way through the trip on commercial airlines. It takes him just over 12 hours to fly direct from Guangzhou to Bergerac in France, to see Š2013 Tyrus Wings & QuaestorQ. All rights reserved

9


Biz Jet Insights: From China to the West

how his winery investment is doing. He and his team are productive on the flight and arrive ready to do business. A quick jet from Bergerac over to Oxford and on the same day he is able to visit his son at University. Had he been relying on commercial flights he would have spent a frustrating nine-plus hours trying to connect between Bergerac and Oxford, and would likely be somewhere over Europe, rather than enjoying a meal with his family. A couple of days of meetings in London and it’s time to experience the new Aberdeen based golf course developed by billionaire Donald Trump. Direct flights save our business owner more than two and a half hours – crucial golfing time. Relaxed and refreshed from a few days spent in the fresh Scottish air, the last meeting of the trip is an oil deal in Tyumen, Russia. The flexibility of being able to fly direct once more saves a huge amount of time over ‘airport hopping’ with commercial airlines. The journey takes an afternoon, rather than a full day and with the contract signed it is time to return home. In total the time spent in the air with direct flights is just under 28hours; in contrast the time spent in the air, waiting in terminals and connecting via road with a commercial airline solution is over 83hours. This will clearly impact the total time required to complete the trip. With a business jet the whole trip including family time, business meetings, wine tasting and several rounds of golf could be completed in just 8-10 days. The same trip completed using commercial airlines, and making no allowance for the delays that 26% of all airline flights usually face, would take around 15 days. And as we must remember – “time is money”.

A business tool While often considered to be simply a symbol of luxury and success, a business jet is much more important to its owner than that. A business jet is a business tool. As we have explored, a business jet allows business leaders to leverage their time and helps them in building their business faster and more efficiently. Of course in an ideal world everyone would like their first jet to be brand new with a custom interior; however that is not always possible. Many successful ultra affluent business owners, recognising the business jet’s value as a business tool, have climbed up the levels of business jet engagement. Starting with a 12 month lease, access to a business jet accelerates their rate of business resulting in enough accumulation of wealth to purchase a business jet second-hand. Once more the business jet is used to accelerate the growth of their business and wealth, until they are in a position to order a brand new business jet. Ultra affluent clients have been observed to complete this process within a 3-4 year timeframe. As the number of ultra affluent individuals from China continues to grow, more and more business leaders are using business jets to give them an advantage, to speed up the growth of their business and increase their wealth. What would you do with a business jet?

©2013 Tyrus Wings & QuaestorQ. All rights reserved

10

From China to the West  

Avaition white pages from Tyrus Wings

Advertisement