POSITION & HOLD
an editorial opinion
Business jets—the view from the market trough
Business aircraft deliveries are closely linked with corporate profits, with a 1 to 2-year lag.
This has since been revised, with expectations of a 1.4% shrinkage—meaning that 2009 will be the first year without world economic growth since WWII. It’s quite possible that the world faces a prolonged period of structural readjustment, or that it is reaching the limits of growth.
While several prominent economists and commentators have put the risk of this development at about 20%, nobody believes that a depression of this magnitude is a baseline scenario. Second, it’s clear that the business jet industry is facing cultural headwinds.
Key politicians in both US political parties have criticized bizjet users, and certain high-profile events have cast a pall over business jet ownership. The CEOs of Chrysler, Ford and General Motors came under heavy criticism for taking private planes to Washington to plead for aid money.
GM promptly terminated leases on 7 Gulfstream jets. Similarly, Citigroup, the recipient of billions in US government funding during the financial crisis, was pressured to cancel its order for a Dassault Falcon 7X.
Senator Carl Levin (D-MI) said on his website, “The notion of Citigroup spending $50 million on a new corporate jet, even as it is depending on billions of taxpayer dollars to survive, does not fly.” Citigroup also put 2 older Falcon 2000EXs on the market, although this might be an example of jets being put on the market but with no actual intent to sell.
Not long after, both Cessna and Hawker Beechcraft began advertising campaigns intended to defend the image of corporate aviation. Cessna Pres Jack Pelton pointed to the pressure on executives to avoid private aviation, saying, “That stigma is a factor we’ve never experienced in the past.” Yet this cultural antipathy isn’t totally without precedent.
History is replete with anti-bizjet pronouncements during recessionary times. The 1987 movie Wall Street was popularly viewed as putting bankers and their private jets to shame. In the last downturn, a USA Today article commented that “sales of business jets, once the ultimate status symbols, have cooled with the US economy...
The sleek stratospheric board rooms have come to represent corporate greed for some, and for others are simply no longer affordable.” That appeared on Feb 11, 2003—a few months before the fastest growth spurt in the history of the business jet market.
Moving forward
Nobody can say where the world is headed in terms of economic recovery, but what is becoming clear is that the cause of this downturn—a devastating near-collapse of credit markets and financial liquidity—was a discrete event.
There might be similar additional shocks ahead, but the crisis that led the world’s economy to its current condition ended in 1Q2009. The timing of any recovery, however, let alone a return to economic growth, remains quite uncertain.
One likely characteristic of this business cycle is high volatility and numerous “false start” recoveries. Stock markets, especially in the US, have made considerable gains since the precipitous drops of late 2008 and early 2009.
More importantly, there’s been a slight increase in corporate profits—the most relevant good economic news for the bizjet industry. However, the composition of these profits tells a different story.
The only profits increase has come from a recovery in the financial sector. Some of that increase is related to the arrival of government funds such as the Troubled Asset Relief Program (TARP). And some is also likely due to the sector’s recovery from a wave of bankruptcies in the previous quarter.
By contrast, the manufacturing sector is still under heavy pressure, and slack demand is translating into lower sales. Unemployment is still rising, pushing 10% in the US. There’s talk of another stimulus package, but in many sectors there is still overcapacity and it’s difficult to identify any particular growth drivers in sight.
And, as long as a disparity persists between the Main Street and Wall Street economies, there will be little hope of lifting the stigma currently attached to business jet orders from the financial sector.
Another problem that will likely hobble the recovery is stagflation—slack demand coupled with high costs for commodities and other key goods. The best example of this is oil, the price of which has been growing at rates that are completely disconnected from world economic numbers.
Our baseline scenario, therefore, says that we are just halfway through a severe 3-year recession. Of course, it’s possible that the economy is doing better than it appears, and that we’ll enjoy a faster than expected recovery. The past 2 recessions—1992 and 2001—were relatively brief at 8 months each.
But the difference this time goes beyond the mere severity of the numbers. Those 2 instances were classic business cycle downturns, with consumer and corporate demand placed on hold and inventories built down. This time, in addition to a massive inventory build-down (evidenced by record air cargo shipment reductions) we also have a profound process of deleveraging.
The amount of money available for investment has been severely curtailed, and government stimulus programs worldwide are nowhere near enough to compensate for the falloff in private sector investment cash.
As a result, this downturn has already become the longest since the Great Depression of the 1930s. So far—from early 2008 to the end of 1Q2009—the net worth of US citizens has fallen over $12 trillion, or almost 20%.
There is a 3rd alternative—a decade-long depression—which would produce a “swimming pool” market trend, with a market drop followed by a long flat bottom. But, as discussed above, nobody regards this as a baseline scenario.
Assuming that our baseline scenario is the correct one, we can expect the economy to remain in recession through 2008, 2009 and 2010. This means that bizjet market conditions—new and used jet sales, availability and pricing—will stay poor through early 2011.
It also implies that we will not see a recovery of new jet deliveries until 2012. If the number of available jets keeps rising beyond the present 16.2% of fleet (and if they are actually on the market), it might take an additional 6 months for new deliveries to recover as the market absorbs all the used planes.
But, assuming that the credit shock has produced a relatively “front-loaded” downturn (ie, one where the sharpest market drop is felt initially), it seems appropriate to forecast a 40% peak-to-trough ratio.
This market drop is in line with past downturns, only longer. Assuming that we recover starting in 2012 at a relatively muted 10% rate, deliveries won’t reach 2008 peak levels until the end of our forecast period.
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