POSITION & HOLD
an editorial opinion

Overcapacity in business aircraft production forces OEM changes

By Richard Aboulafia
VP, Teal Group


Static ramp at EBACE2011. Challenging market conditions suggest that the time may be right for some industry consolidation.

Consider this. The business aircraft industry has more manufacturers than any other aerospace market. There are, for example, 2 large jetliner primes, 5 helicopter primes and just 2 large jetliner primes. By contrast, the turbine business aircraft industry has no fewer than 13 primes, with more possible market entrants on the horizon.

Over the past 2 decades, business aircraft have offered the near-guaranteed long-term growth of the commercial aviation sector, yet with profit margins equal to or greater than the defense sector. Total business aircraft market output (in value of deliveries) grew by a 14.4% compound annual growth rate (CAGR) between 1991 and 2001, and by a 17.6% CAGR between 2003 and 2008.

Those market growth and trends, and the industry's strong profits track record, combined with relatively low technological barriers to entry, were a virtual recipe for new industry player creation. This proliferation of manufacturers wasn't a difficult problem when the market was exhibiting record growth rates—yet the market dropped by 22.7% in 2009 and 6.8% in 2010.

That downturn, coupled with doubts about the timing and angle of the recovery, has resulted in concerns that there may simply be too many players. To rephrase that in hopeful concerns, the right conditions for rational industry consolidation may be emerging.

A poor bottom

   03-08 CAGR 2008–09  2009–10
Airbus 12.5% 15.6% 21.1%
Boeing –2.3% –36.9% 170.7%
Bombardier 28.8% –21.5% –10.4%
Cessna 17.3% –49.3% –40.2%
Daher-Socata 12.0% –40.0% 5.6%
Dassault 12.1% 11.0% 24.8%
Embraer 21.0% 3.4% 26.4%
Gulfstream 13.9% –27.6% 0.5%
Hawker Beechcraft 13.9% –21.7% –26.3%
Piaggio 20.1% –20.0% –54.2%
Pilatus 9.7% 3.1% –21.0%
Piper (TP) 16.7% –44.2% –20.7%

If the business aircraft industry has a structural problem, it is confined to the bottom half of the market. This bottom half—comprising aircraft costing $25 million and less—suffered a disastrous decline in 2009–10. Relative to the 2008 peak, bottom-half segment deliveries in 2010 were 57.1% less by value.

Cessna, the biggest legacy player in the bottom half, derives almost all of its revenue from this part of the market. Accordingly, as the table below indicates, it suffered more in 2009 and 2010 than any other business jet company.

More worryingly, its engineering and new product development budget has been slashed, raising concerns about the company's ability to rejuvenate its product line and maintain competitiveness against new and existing competitors. In May, longtime CEO Jack Pelton left the company after a 1Q2011 loss of $38 million, raising further concerns about Cessna's future market standing.

Gulfstream's supermidsize G280, arriving in 2012, was previously known as the G250. It represents a considerable upgrade over the G200.

Second largest bottom-half legacy player is Hawker Beechcraft. While the company was certainly hit hard in 2009 and 2010, it generally did much better than Cessna. This was partly due to the belated arrival of the supermidsize Hawker 4000, which boosted the company's revenues. It also allowed HBC to enter a segment of the market it hadn't been in before.

Military deliveries also helped rescue Hawker Beechcraft from Cessna's level of pain. The King Air series continues to benefit from strong demand for military surveillance aircraft.
However, Hawker Beechcraft still faces serious challenges.

The T6 trainer program (not included in the numbers above) will wind down in the next few years—at least for the US military. While King Air deliveries for military customers still look strong, the past 2 years have seen a strong boost from the MC12W Project Liberty program—a unique 37-aircraft event. (The last of the 37 was delivered in Sep 2010.)

Meanwhile, HBC is also struggling with a considerable debt load—a total of $2.1 billion. Of this, $800 million is due in Apr 2015 and another $300 million in Apr 2017. In short, if the civil market doesn't recover enough to compensate for the military downturn, Hawker Beechcraft could face financial challenges perhaps as dire as those faced in the 2009–10 downturn.

Embraer Legacy 500. This will be Embraer's top-of-the-line traditional business jet.

Bombardier's bottom-half market presence has suffered too, with Learjet and Challenger 300 deliveries dragging down the company by double-digit declines in 2009 and 2010 even as its high-end products enjoy relative prosperity.

As for Gulfstream's bottom-half presence, its G150 and G200 numbers have fallen by more than 70%. The G200 deliveries drop might be explained by a shift toward the upcoming G250, but the G150 was just introduced in Aug 2006 and should have held up better as a relatively new type on the market.

Finally, there's the 5th and newest bottom-half business jet player—Embraer. The company delivered its first clean-sheet business jet—the Phenom 100—in late 2008. The Phenom 300 light jet arrived in late 2009.

These will be followed by the Legacy 450 and 500 in 2013 and 2012, respectively. These new jets, in addition to Embraer's business jet adaptations of its regional jetliners, will establish the Brazilian company as a major player in the bottom half of the market.

This development is happening at a time when that segment is reeling from its worst contraction since the market was created, and when the legacy players can least afford to give ground to a new and aggressive player.

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