Having been in aviation for almost 30 years, I have been asked on occasion to comment on the current “state of the market”.
The market I participate in is the piston, turbine and small jet finance market. If I would have been asked to comment on the market in 1993, 2000, or 2007, I am confident that I would have given a concise and accurate summary and aptly described how specific factors impacted day to day lending. Sadly, since 2008, the hard lessons learned don’t seem to apply and the last several years have been ones of steady, yet lackluster growth. This year promises to be more of the same, more of the “new normal”.
In the “good old days”, low fuel prices, low interest rates and low unemployment would mean that the economy was healthy and business was good. As the economy would heat up, the interest rates would climb, fuel prices remained stable and business would start to slow. The inverse would happen once the economy turned sluggish and business would happily continue on that course with the net effect of healthy sustained growth and profitability. Those same basic rules no longer apply in today’s feeble economy.
It is rather obvious that a strong economy is the key to most every industry’s success. Very few industries find refuge in a sluggish economy. My business is similarly dependent on a strong and vibrant economy. More directly, a large portion of my clients and a large portion of aircraft owners are small business owners, entrepreneurs whose livelihoods are a microcosm of the economy as a whole. When they struggle, the aviation market struggles.
What normally would help accelerate the economy, low interest rates & low fuel costs, seem to have no perceptible impact. Our current economic malaise is reflected in a sub 2% annual growth rate. Our economy is suffering through the lowest labor participation rates since the late 70’s, and median incomes are down approximately 4% in just the last 8 years. Quantitative easing may have stopped the economy from slipping into a depression, but it has also stalled the lively expansion that historically comes after a serious recession.
All of the economic activity that has yet to unfold has the Federal Reserve Chairman tinkering with rates as her “confidence” in the economy has given way to concerns of “no inflation” according to the minutes of the Fed’s December meeting, which were recently released. The confidence remarks were made at the press conference after the decision to raise its benchmark rate by .25%. The notes of this meeting appear to bring into question the wisdom of the Feds decision to act. The monetary policy seems to have had little effect and has run their course.
Concerns that China, the world’s second largest economy, is sliding into recession have the markets jittery. How this will impact the economy is yet to be seen. Of greater concern is the strong dollar, which makes US products more expensive for our trading partners to import. With the dollar at a 12 year high, economists at the Fed estimate that this alone has cost our GDP .5% growth.
It is apparent that the current administration does not have any fresh ideas to help unleash the markets. Fiscal policy has had a record, on occasion of igniting economic activity. It would make sense to some to unleash the drivers of our market, the US consumer. In the past, lowering marginal tax rates and cutting corporate tax rates have had the beneficial effect of accelerating the economy. Putting money into the pockets of the wage earners and giving business confidence would certainty improve the market. The down side of course is that it also drives the debt as our elected officials have very little political courage to curb spending. For the next year at least, don’t count on the economy rebounding, median incomes going up or labor participation rates improving…
Given these circumstances, the state of the aircraft finance market is as strong as can be expected. We anticipate continued measured expansion with rates staying relatively low, employment markets continuing to grow, the energy market and aircraft prices remaining flat. This guarded optimism is driven by a stable yet slow economic growth. The one element which seems to be the constant regardless of the economy, interest rates and fuel costs is the passion that aviation rouses. There will always be people who are motivated by the liberty and adventure that comes with flight. These are the people who are the heart and soul of this industry and the state of their passion is unwavering.