POSITION & HOLD
an editorial opinion
Business jets—the view from the market trough
By Richard Aboulafia
VP, Teal Group
A severe recession has left the market with too many airplanes and too few buyers, but nothing has caused fundamental damage to the industry’s long-term prospects.
In late 2008 and early 2009 massive financial shocks threw the business aircraft market into free fall.
While the ordeal of the worst financial crisis since the Great Depression seems to have ended, the economy and the market are now in a less catastrophic but still painful recession.
These developments provide an unpleasant reversal of one of the best growth markets in business aircraft history. There are few hopes of a recovery any time soon, and signs point to a 3-year downturn.
The only consolation is that the fundamental drivers behind this market’s transformation—it has almost quintupled in size since 1995—remain intact.
Some awful numbers
After growing at a record 17.1% compound growth rate between 2003 and 2008, business jet deliveries are now falling at an even faster rate.
By any measure, the leading indicators of bizjet demand are in terrible shape. Many world economies are shrinking, with the US suffering a 6.1% drop in 1Q2009, following a 6.3% drop in 4Q2008.
And today there are fewer high-net-worth individuals (HNWIs)—2/3 of Russia’s billionaires in 2008 are no longer billionaires. Worst of all, corporate profits—the indicator with the closest correlation to business jet demand—are slumping.
From an annualized peak of $1.7 trillion in 3Q2007, US corporate profits have fallen to $1.3 trillion in 4Q2008 and about the same in 1Q2009. Typically, deliveries of new bizjets begin to fall 12–24 months after profits fall.
The chart on page 16 clearly indicates the close correlation between corporate profits and bizjet deliveries, but it also shows the serious decline in profits in 2008. Since 2009 jet production is falling fast, this market cycle looks set to fit the normal historical pattern.
Market health indicators are in terrible shape too, although they are starting to stabilize. Business jet utilization in the US, as measured by cycles (takeoffs and landings), has been falling by double-digit rates for ten consecutive months.
Feb and Mar 2009 cycles were down by a disastrous 30% relative to 1 year ago, although by May this number had recovered slightly to a 26.7% drop. Used aircraft pricing is down across the board, but the worst development concerns the part of the fleet that’s on the market.
As the chart on this page indicates, availability has reached record levels, with 16.2% of the fleet (well over 2000 jets) up for sale as of June. However, this level was reached back in April, with no further deterioration of any note.
Record numbers of jets are on the market, but some sellers may not be serious about selling.
Typically, when 13% of the fleet is on the market, it’s a clear sign of a serious market downturn. The current level is unprecedented and indicates a severe oversupply problem.
However, one possible explanation of this high number is that companies and individuals are putting their aircraft up for sale as a demonstration of frugality—either to politicians or stockholders—but with no actual intent to sell the plane.
This is the only possible silver lining in a dark quantitative cloud. Meanwhile, backlogs, long vaunted as a cushion for the manufacturers against any serious downturn, have proved completely meaningless.
All OEMs had been reporting backlogs ample enough for several years of full production, yet all have announced production cuts for this year or next. Cessna, conspicuously absent from this year’s Paris Air Show, provides the best illustration of backlog weakness.
Up until the 4th quarter of last year, the company was planning to build 525 Citations in 2009—up from 467 in 2008. Last November it cut the number slightly, to 495—then, in late January, it cut anticipated 2009 production to 375.
By April this number had been reduced to 290–300 and, since about 1/3 of these are $3-million Mustang VLJs, the drop in value is even greater than the drop in units. Yet Cessna’s backlog didn’t change much with these announcements.
In late 2008 the company said it had a $14.5-billion backlog. At the end of 1Q2009, the company announced a $13.0-billion backlog. Orders had slowed to a trickle, so the only changes were due to deliveries of existing orders and a relatively light number of cancellations (92 net in the quarter).
This means that these massive production rate plan reductions have been almost purely due to deferrals, against which backlog announcements are meaningless. We see the same dynamic in the airline industry.
If corporations and HNWIs make money, they order jets. If they keep making money, they take delivery of them. We see a similar phenomenon in other segments of the manufacturing economy.
During the 2003–08 boom, backlogs were touted by everyone from luxury yacht builders to luxury home builders as proof that their fortunes would hold up even if demand softened and new sales collapsed.
Harley-Davidson even put buyers on a waiting list. Yet, just after the bad times hit, abandoned yachts started clogging the coast, and perhaps the less said about houses the better. Today there are many Harleys available, and they’re being heavily discounted.
UBS Motorcycle Analyst Robin Farley says sales have “hit a wall” and thinks production will fall about 20% this year. Clearly, backlogs offer no guarantee that a broad section of customers won’t defer.
Have attitudes changed?
All the usual bizjet market health indicators and delivery outlook numbers are truly dire, but these are temporary problems.
Only 2 possible events threaten the future of the business aircraft market—an end to world economic growth, or an end to the link between that growth and bizjet utilization. The first is a very remote risk—the second is somewhat overstated.
First, there is no disguising the magnitude of the world economic downturn. Until April, the Intl Monetary Fund (IMF) had tentatively forecast that the world economy would grow at a 0.5% pace in 2009.