Bizav sales disparity shows big jets holding, small jets struggling

By Richard Aboulafia
VP, Teal Group

Aircraft salesman talks to potential customer during NBAA Regional Forum at TEB on Jun 10, 2010. Sales of large bizjets have held steady.

After suffering from apocalyptic numbers in 2008 and 2009, the business jet market has spent this year convalescing, but with few signs of a complete recovery.

Key economic health indicators are sending mixed messages, and fundamental market trend signs remain depressed. However, there are hopeful prospects for a recovery of deliveries in 2012. Meanwhile, as a result of this downturn, the industry is experiencing a transformation in terms of how the market is structured. We’re moving toward an industry that favors larger planes.

Hardly getting over it

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.

Output dropped by 22.8% in 2009 and, as of September, output for 2010 looked set for another double-digit decline. This is hardly surprising given the unpleasant trauma the world economy suffered in 2008–09. In fact, 2009 was the first year since WWII that the world saw no economic growth—instead, the world economy shrank by just over 1%.

US corporate profits fell at a precipitous rate. From an annualized peak of $1.653 trillion in 3Q2006, profits fell to $995 billion in 4Q2008, with not much of a recovery in 1Q2009. Typically, deliveries of new jets begin to fall about 12–24 months after profits fall. This market cycle looks set to fit the normal historical pattern.

Used aircraft pricing is down across the board, but the worst development concerns that part of the fleet that is on the market. As the chart below indicates, availability peaked at record levels, with 16.3% of the fleet (well over 2000 jets) up for sale by May 2009. There was steady improvement in this key metric in 2H2009, but 2010 has seen that progress stall out.

Since the start of this year a consistent 14.7–14.9% of the fleet has been for sale. Typically, when 13% of the fleet has been on the market, it’s been 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 to stockholders, but with no actual intent to sell the plane.

That’s the only possible silver lining in a dark quantitative cloud. Otherwise, there’s not a lot of good news. Used aircraft pricing has shown no improvement at all. Other indicators of market health also experienced terrible declines, although they too are starting to improve. Business jet utilization in the US, as measured by cycles (takeoffs and landings), fell by double-digit rates for 10 consecutive months.

Feb and Mar 2009 cycles were down by a disastrous 30% relative to a year ago, although by May 2009 this number had recovered slightly to a 26.7% drop. Numbers this year have shown respectable 10–20% increases relative to 1 year ago—but, compared with 2 years ago, business jet utilization remains down by over 10%.

A good-news indicator, with caveats

The percentage of the current business jet fleet that is up for sale recovered in late 2009, but this recovery has stalled so far this year.

As the chart below indicates, corporate profits are the most accurate leading indicator for business jet demand. As noted above, these took a beating in 2008 and 2009, but they’ve come roaring back. However, there are several important caveats that introduce an element of caution to any forecast for a jet delivery uptick based on this indicator.

First, the good news. Corporate profits have not only recovered to pre-crisis levels—they are setting new records. According to the US Bureau of Economic Analysis (BEA), 2Q2010 numbers show profits running at an annualized rate of $1.693 trillion. And these profits look particularly good as a percentage of GDP.

Profits hit 11.25% of GDP in the 2nd quarter—the highest percentage of profits for the economy since 4Q2006. What is particularly encouraging about these numbers is that manufacturing profits are doing especially well. It is impossible to state empirically that one type of profit is more conducive to business jet demand than any other.

But it is notable that manufacturing profits have made the strongest leap of all the business sectors. As the table above indicates, US manufacturing profits leaped from $53 billion in 2001 and $48 billion in 2002 to $305 billion in 2006 and $271 billion in 2007. 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 at first, but of course they later crashed. Today, manufacturing is thriving. Second quarter numbers have not yet been published, but 1Q2010 saw manufacturing sector results that were nearly in line with the 2006–07 peak.

The percentage of the current business jet fleet that is up for sale recovered in late 2009, but this recovery has stalled so far this year.

There’s a very strong likelihood that US and other developed country manufacturers are prospering because they are transforming themselves into product integrators. That means they are farming out labor-intensive production to work in developing countries, keeping higher value integration, development and marketing for themselves.

The 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. Even without that product integration trend, manufacturing corporations are the most important business aircraft market because they need to coordinate distribution, development and logistics units that are increasingly global.


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