POSITION & HOLD
an editorial opinion

Overcapacity in business aircraft production forces OEM changes


A rich top

BBJ3, Boeing's biggest business jet, is based on the 737-900ER jetliner.

In contrast to the bottom half of the market, the top of the business aircraft industry spent 2008–10 feeling no pain at all. Orders declined, backlogs were built down, but actual deliveries (and therefore revenue) grew by 1.5% in value.

In other words, the worst economic crisis since WWII failed to dent the long-term rise of high-end business aircraft demand. And that's pretty much the only silver lining in the business aviation market's dark cloud.

In addition to a market that now seems immune from serious bust cycles, the top end of the industry also enjoys very high barriers to entry. There are just 3 traditional players—Bombardier, Dassault and Gulfstream. Dassault has the distinction of being the only traditional prime to play solely in the top half of the market. As a result, it also holds the distinction of being the only traditional prime to grow output through the downturn—so far.

There are 3 potential threats to this happy top-half market triopoly. The first threat is posed by jetliner manufacturers, which over the past 2 decades have moved into this space with business adaptations of their passenger aircraft.

But this threat emerged over a dozen years ago, and it's now clear that business jetliners have created a fairly discrete market niche, with relatively little impact on the traditional business jet segment

Business jetliners are a small and not very volatile space. Boeing's 171% market growth last year was due to the delivery of just 4 BBJ3s—the business jet adaptation of the 737-900ER.

The 2nd threat is technological change. For years, new and established companies have attempted to enter the high-end market with a supersonic design. In fact, a supersonic business jet (SSBJ) is perhaps the best researched never-built aircraft class.

Most recently, at the Jun 2011 Paris Air Show, HyperMach Europe Aeronautics introduced a new Mach-3.5 concept plane, the SonicStar. Of the other new players, Aerion has been most aggressive, promoting its 12-seat Mach 1.6 SSBJ using conventional Pratt & Whitney JT8Ds. Supersonic Aerospace Intl (SAI) has also been trying for years with a more advanced SSBJ concept.

However, there are no signs that any established aircraft manufacturer is interested in building these concept planes. For the next 10 years, the high-end market remains focused on developing traditional jets with ever greater range and cabin size, such as Gulfstream's G650 and Bombardier's Global 7000/8000.

Global 7000, Bombardier's competitive response to the G650, will arrive 5 years after the Gulfstream product.

Finally, the 3rd threat to the top-half players is bottom-half jets trying desperately to get out of their unpleasant niche. Cessna's Citation Columbus, cancelled in 2009, was the best example of this. Strangely, the other failed new plane of the past 2 years was an effort by Dassault to enter the bottom half of the market with its SMS (supermidsize) project.

While SMS died, in May 2011 Dassault announced its Falcon 2000S—an effort to make the baseline Falcon 2000 lighter and more affordable to compete in the SMS market segment. The only other evidence of a threat from the bottom half is Embraer's Lineage 1000, an adaptation of the Embraer 190 jetliner.

While designed to compete in the very-high-end segment, it has only sold in very small numbers, with just a dozen deliveries so far.

In short, the 3 high-end players look set to maintain their lock on a recession-proof market. As the chart [on p XX] indicates, we can expect each of these 3 high-end players to expand its market share over the next 10 years.

Small guys seek growth—new entrants wither

Just because the bottom half of the business aircraft market has relatively low barriers to entry doesn't mean that success is guaranteed. Embraer has done a fine job breaking into the market, and it looks like HondaJet will succeed too, but the past decade has seen the overwhelming majority of newcomers fail.

Of these failures, the worst was Eclipse Aviation, which built 258 Eclipse 500s before its very badly flawed business plan imploded, destroying $2 billion in investment money. Other failures include Adam Aircraft, Avocet and Aviation Technology Group (ATG). As of mid-2011, Diamond Aircraft was just barely hanging on with its D-Jet.

Meanwhile, in April the disastrous SJ30 reached an end game, as UAE-based Emivest sold the program to Utah-based Metalcraft Technologies, for the fire sale price of $3.5 million in cash.

The cause of these failures is the same factor that keeps aviation a relatively elite industry with high barriers to entry. A very heavy capital requirement is needed not just to design, test and build new products, but to create the extensive sales and support networks needed to satisfy demanding customers. New companies also need to generate the cash to develop new follow-on models, and to withstand market downturns.

Despite the terrible track record, there is some hope for established turboprop manufacturers to enter the jet market. Piaggio, in particular, has plans for its P1XX family of light/medium jets to join its successful Avanti turboprop. While the company has yet to find the resources to accomplish this goal, it 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 & Space (EADS), which remains focused on Airbus jetliners and military equipment.

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