POSITION & HOLD
an editorial opinion
Business jets—the view from the market trough
Why the future still looks bright
Given the severity of the market drop, it will take the industry 9 years to get back to last year’s high point, but this is a conservative forecast.
Although some have equated business jet ownership and use with excess and abuse, the extraordinary transformation of the business aircraft market over the past 14 years has been closely linked with corporate profits.
Again, the composition of these profits also indicates encouraging trends. It’s impossible to state empirically that one type of profit is more conducive to bizjet demand than another. But it’s notable that manufacturing profits have made the strongest leap of all the business sectors.
As the table on this page indicates, US manufacturing profits leaped from $53 billion in 2001 and $48 billion in 2002 to $317 billion in 2007 and $240 billion in 2008. The strength of the US economy in 2003–08 had almost as much to do with manufacturing as it did with financial services.
Profits in that segment were stronger but flatter, going from $228 billion in 2001 and $276 billion in 2002 to $450 in 2007 and $309 billion in 2008. There is a strong likelihood that US and other developed-country manufacturers are prospering because they are transforming themselves into product integrators.
In other words, they’re farming out labor-intensive production to work in developing countries, keeping higher value integration, development and marketing for themselves. Establishment of new facilities in less developed areas increases the attraction of private aviation.
And, of course, the profits that result from a successful new manufacturing strategy are also good for business jet demand. This hypothesis is boosted by bizjet demand in Europe. Just as US companies are likely to transplant production to Latin America, European manufacturers are looking to new European Union entrants in Eastern Europe and Turkey for lower-cost manufacturing.
Such countries lack the excellent public infrastructure—airlines and trains—that have traditionally limited business aircraft demand in Western Europe. Companies setting up shop in Eastern Europe are increasingly looking toward private aviation.
In 2001, only 10.7% of the global business jet population was domiciled in Europe. By 2008, Europe’s share of the world fleet was almost 15.0%. Meanwhile, economic development in emerging markets is gradually boosting business jet demand in many of those countries too.
Relatively high commodity prices are further increasing demand, particularly in Latin America and the Middle East. Non-US markets accounted for 23.5% of the fleet in 2001, rising to 30.0% in 2008.
By 2008, most business jet manufacturers reported a majority of sales from outside the US. Asia remains largely quiet as a source of demand, for reasons of geography, politics and comprehensive airline service, but there are signs that this could change.
Due to its economic growth, poor infrastructure and vast geography, China could emerge as a huge market as its air space rules are liberalized. But, as of today, the country has only about 20 bizjets in civilian use.
If China opens its airspace, there would likely be profound consequences for demand in the rest of Asia. Many Asian manufacturers in higher-cost economies such as Japan, Singapore and Taiwan look to China as a source of lower-cost manufacturing.
Basically, Asian businesses in high-cost manufacturing countries could emulate their US and European equivalents, looking to private aviation as they follow an integrator model of manufacturing.
In short, despite today’s grim market conditions and negative short-term jet delivery outlook, there are solid reasons to believe that this market will recover. In fact, there could even be more solid growth drivers ahead if the world’s economies continue the trend toward globalization.
Richard Aboulafia is VP Analysis at Teal Group Corp, an aviation and defense market intelligence and consulting company. He has tracked the business aircraft market for over 20 years.
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