ENROUTEā€”an editotial opinion

Business aircraft makers and the market's fall-a growth industry interrupted

Severe and long-lasting downturn threatens innovation and new product development.


Embraer is set to join the industry as the 6th player in the traditional business jet market.

In terms of acquirers, defense companies might play a key role in Cessna or Hawker Beechcraft's future. Many defense corporations have had experience with business jet company ownership.

Perhaps the most intriguing player is General Dynamics, which has had a generally happy experience owning Gulfstream for over 10 years. GD also acquired Galaxy Aerospace, and in 2008 purchased Jet Aviation.

A Cessna acquisition would give GD nearly half the market, and position the company very nicely for a market recovery. Private equity is also a highly likely player in any acquisitions.

Onex and Goldman Sachs were certainly not the first private equity players to own a business jet company. Most notably, Gulfstream was owned by Forstmann Little from 1990-98.

Also, it's possible that current turboprop manufacturers may obtain investment backing to enter the jet arena. Piaggio, in particular, has plans for a new family of light/medium jets.

Defense revenue at its parent corporation should allow Gulfstream G650, the world's most ambitious traditional business jet, to arrive on time.

While it has yet to find the resources to accomplish this goal, the company has obtained some financial backing from Mubadala, a UAE investment fund. Socata, which is interested in creating a business jet family to sell alongside its TBM850 turboprop, was sold to Daher in late 2008.

Daher, an industrial conglomerate looking to get into general aviation, is more likely to fund new aircraft development than Socata's previous owner, European Aeronautical, Defence and Space (EADS), which remains focused on Airbus jetliners and military equipment.

Fewer new products

Despite hopes for outside cash to fund new products, the unfortunate reality is that most business jet manufacturers are not in sufficiently strong shape to develop new jets.

As revenue falls at all the bizjet manufacturers, there will be fewer resources available to commit to new product development. Independent research and development (IR&D) spending tends to fall in tandem with sales.

This market decline will not only affect new jet introduction-suppliers will likely reduce their development spending too, implying slower introduction of new and innovative engines, avionics and other components.

So far, there have been only a handful of new product development casualties. Dassault was widely expected to launch its Falcon SMS (supermidsize) model late last year, but this has been deferred. Rolls-Royce, whose engine is the only known supplier contract awarded for the SMS program, has argued that Dassault should continue to defer this new $22-25 million model.

Hawker Beechcraft has shelved its Hawker 450XP-an update of the Hawker 400XP-and has also reportedly deferred its Premier II derivative of the Premier IA. Cessna's highest priority is its Citation Columbus, but with an $800-million development bill the new large-cabin jet hasn't been able to withstand budget cuts.

In March, Cessna announced that it was stretching out development by 6 months. If Textron does not recover, or if Cessna cannot find a new source of capital, the delay could worsen.

On the positive side, Bombardier has confirmed that it will continue to develop its composite Learjet 85. And, once again, defense revenue will play a role in this industry. Gulfstream's 2 new programs, the G650 and G250, are proceeding as planned.

Notably, the G650 will be the biggest, heaviest and most expensive traditional business jet built yet-and, thanks to General Dynamics' military business, Gulfstream will have the resources needed to bring its highest priority to market.

When the business jet market recovers after 2011-12, it will enjoy revenue from the Learjet 85, G650, G250, Columbus and, hopefully, the Falcon SMS.However, there will likely be a new product development drought after these new products arrive.

The market's rapid deflation means it will be worth billions of dollars less than anticipated in the coming years. In addition to reduced resources for new designs, this market drop implies reduced incentive to spend on new products.

For example, if business jet deliveries had kept ramping up above $30 billion annually, there would have been an ironclad case to develop a long-awaited supersonic business jet (SSBJ).

While Gulfstream and other established companies continue to research the basic engineering behind an SSBJ, an actual program launch has moved further out almost certainly beyond 2020.

Two niche companies that offered their own SSBJ designs-Aerion and Supersonic Aerospace Intl (SAI)-will likely need to put their business plans back on the shelf for a few more years.

Recent product launch decisions by Bombardier and Embraer provide the best illustrations of the diminished prospects for new bizjets. In Jul 2008 business jet market leader Bombardier launched its 100/130-seat CSeries jetliner family.

Bombardier is designing the midsize Learjet 85 as its first composite design. This will be the 3rd composite business jet fuselage after Hawker Beechcraft's Hawker 4000 and Premier I.

This represents an enormous commitment for the company, and basically rules out any kind of direct response to Gulfstream's G650. Today, the Bombardier Global Express XRS and Gulfstream G550 are priced similarly and compete for the same customer base-corporations and wealthy individuals who want the largest and most capable traditional business jet.

But now that the G650 is poised to establish a new high end, the Global Express has been left behind (along with the G550) as just another price point in a broad market spectrum. With the CSeries launch decision, Bombardier will need to continue to rely on upgrades of its Global Express product, and accept a gradual loss of business jet market share in order to fund a move into the large jet transport market.

Meanwhile, Embraer, whose highest priority over the past 5 years has been the development of its Phenom and Legacy bizjet product lines, has launched its KC390 military transport.

The company made a firm decision to proceed with this long-mooted product in Apr 2009. There is a certain logic to both these moves. Bombardier finds the CSeries target market attractive because, even though airliners typically enjoy lower profit margins than business jets, jetliners offer almost guaranteed long-term growth.

Embraer finds the KC390 market attractive because it's a relatively secure place-it's a small niche, but a home market customer (the Brazilian Air Force) will help pay for much of the aircraft's development costs.

In short, the CSeries and KC390 product launches reflect a wavering of confidence in the business jet market's future. This lack of confidence will persist until we see firm signs that the market is growing again.

Clearly, a market downturn of this severity has profound consequences for the evolution of the bizjet industry. Fewer new players, fewer new products, and reduced innovation are all likely unfortunate side effects of the market's sudden and painful fall from grace.

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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