The new U.S. federal tax law lowers the corporate tax rate from 35 percent to 21 percent, increases bonus depreciation on new business aircraft purchases from 50 percent to 100 percent from this year through 2023, and introduces 100 percent bonus depreciation for preowned aircraft purchases. It allows for the one-time repatriation of an estimated $3 trillion of corporate profits held outside the U.S. at rates of 15.5 percent for cash and just 8 percent for less liquid assets, with companies able to spread their tax payments over an eight-year period.
A fresh influx of capital into U.S. corporate coffers, exemplified by recent announcements by companies such as Apple, is already replenishing “dry powder” available for corporate purposes. These include investments in plants, property, equipment, people, and business development (such as acquisitions, joint ventures, and initial public offerings), as well as liability reduction and capital restructuring (such as debt payoffs, share buybacks, and increased pension funding) and higher dividends. And did I mention business aircraft?
With equity markets at all-time highs—the Dow Jones Industrial Average is just above a stratospheric 26,000 level—the question for many U.S. business leaders is: “What’s not to like?” Could booming stock markets and a new tax law be the impetus the business aviation industry needs to finally accelerate out of the chop and into the clear air ahead?
Let’s examine some of the key drivers that have been inhibiting the purchase of new aircraft over the past several years. In my communications with existing aircraft owners and operators, many believe they simply have no need for an additional aircraft. Others are discouraged by the widening gap between new and preowned aircraft values, or are held back by lingering uncertainty regarding the economic and regulatory environment. Combined, these inhibitors have sidelined more than half the population of existing owners and operators from buying a new aircraft.
If recent history is a teacher, sky-high equity markets are no longer coupled with business aircraft orders or deliveries. The key to healthier business aircraft markets lies in a return to more stable and predictable aircraft residual values, which result from demand and supply forces that are reasonably well balanced.
Most economists believe that the recent U.S. tax cut will improve U.S. GDP growth prospects in the short term, estimated to be an addition of 0.2 percent to 0.4 percent this year. This is certainly a welcome, albeit modest, shot of adrenalin to the world’s largest economy, home base to more than 60 percent of the world’s business jet fleet.
But it will simply take time for companies to assess the implications of the new tax law and consider all of the best uses for their fresh-found capital. Well represented among the Fortune 500 and those owning the $3 trillion in overseas profits, publicly traded companies will be flush with new cash but will have many alternate uses for their funds, often with more attractive returns than a depreciating business aircraft.
I expect that the beneficial impacts of the new tax law will be largely back-end loaded in 2018 and into 2019 as companies go through the process of reviewing their investment alternatives, issuing requests for proposals, negotiating with suppliers, getting in line, and ultimately taking delivery of equipment.
Customers of new aircraft will enjoy a plethora of choices, while preowned shoppers might be disappointed to find that inventory has been largely “picked over” in recent years. Throughout this year, we should expect a fresh influx of gently used trade-in aircraft with service entry of the Pilatus PC-24, Cessna Citation Longitude, Gulfstream G500, and others, as the buyer's market continues.
Rolland “Rollie” Vincent is president of Rolland Vincent Associates, a Plano, Texas-based aviation consultancy with a focus on market research, strategy, and forecasting. He can be reached by email or telephone at (972) 439-2069.
