POSITION & HOLD

Bizav continues on a diet with big cabin aircraft selling and smaller jets slipping


Bombardier chose NBAA 2010 to announce the launch of its extended Global family.

Bob Rockwood, managing director of aircraft marketers Bristol Associates, is both more and less optimistic. "I don't see anything different about this recovery than those from the 1980s, 1990s and again in the early 2000s," he says.

"As much as we would like to believe differently, corporate air travel is a luxury, and a lower-cost alternative exists. As such, sales spike and prices reach a bubble during periods of economic excess, and plummet with prices reaching artificial lows during periods of economic retrenchment.

He continues, "We are nearing the point that people and corporations are going to be willing to spend on private travel. This will drive the demand for flight hours, which will drive the demand for aircraft.

At the same time, many who are currently thought to be aircraft sellers will withdraw from the market. Supply will go down dramatically as a result of this [as will] sales. Very quickly, supply will dip below 10% of the fleet and prices will start to rise. By 2013–14, prices will have returned to a 10-year mean, then rise again to bubble proportions by 2017."

Nonetheless, he concludes, "I am not quite certain I agree with Honeywell, Teal or some of the others calling for the sale of 11,000 corporate aircraft over the next 10 years. The corporate jet fleet grew by about 3000 units from 1990–2000 but by over 7000 from 2000–2010. It's my experience that this type of growth figure is not sustainable in any market."

Pro Pilot Publisher Murray Smith says, "It's true that jobs are taking a long time to recover from the recession but, for business aviation, that is probably the least important economic indicator—and it is just about the only one that is not improving fast."

Such economic indicators include the fact that US gross domestic product grew by 3.1% in 4Q2010. For the year, GDP expanded by 2.7%. This is in sharp contrast to the 2.6% decline seen in 2009, and it was accomplished without triggering significant core inflation. Growth of 1.8% in 1Q2011 was off a bit but still rates as solid expansion compared with 2009.

Corporate spending on equipment and software was up at the end of 2010 as well, by 7.7%. It improved again in 1Q2011, by 11.6%, for the 8th straight quarterly increase. This suggests that company managers anticipate better times ahead.

Exports of goods and services increased by 9.6% in 4Q2010 and 4.9% in 1Q2011. Nonfarm productivity rose by 2.6% in 4Q2010—almost 1/5 better than economists had expected. Manufacturing productivity rose by 5.9% in the quarter, and unit labor costs fell by 2.7%.

There are even signs of life in the construction sector. Nonresidential fixed investment increased by 7.7% in the 4th quarter of last year, and 5.5% for the year overall. It has continued to rise in 2011. This follows a drop of 17.1% in 2009. Residential fixed investment has been the weakest segment of the building industry, but even this grew by 3.3% in 4Q2010. In 2009, it collapsed by 27.3%.

Better yet, there is strong evidence that people have finally accepted that the recession is over. Real personal consumption expenditures were up 4.0% in 4Q2010, with durable goods purchases rising a spectacular 21%. Personal consumption was up again in 1Q2011, by 2.7%, with durable goods purchases growing every month this year.

Consumers are putting a lot of those purchases on their credit cards—a sure sign that they believe their personal economies are growing more secure. Dollar volume of credit card purchases rose 7.4% year-on-year in January, and the number of transactions was up by 8.3%.

By April, consumer confidence was already recovering from the hit it took in March, thanks to the "triple whammy" of the tsunami in Japan, the spike in oil prices and the conflict in Libya. The Thompson Reuters/University of Michigan consumer confidence index rose 2.7% that month, to 69.8%.

The Conference Board's Consumer Confidence Index climbed slightly as well, to 65.4%—well above its recession low of just 55.3%. And it may spike in May following the death of Osama bin Laden.

In all, Americans seem to be in a mood to spend. Some 62% of those polled in March said it was still a good time to buy appliances, furniture, and other big-ticket items, and that number held steady in April.

But the best news is coming from the employment numbers. The unemployment rate has fallen by nearly 1% in 1Q2011, while nonfarm payroll employment has been growing steadily since last October. According to recent surveys, 2/3 of US companies expect to expand their workforce as the year continues. Coming out of a recession, employment is a lagging indicator. When it begins to pick up, you know the worst is over.

Results such as this point to better corporate profits in the immediate future, Smith says. "This is true both in the US and in most other major economies," he says, "and that is what counts for business aviation. So long as profits continue to improve, company fleets will put in more flight hours. Based on the evidence, I believe the future of business aviation will be a lot brighter than most people have yet recognized."

Bombardier's observations support this view. "We are seeing sustained recovery in the economy, both in the US and worldwide," reports Bombardier Business Aircraft Division VP Marketing Rod Williams.

"Preliminary world GDP growth estimates from IHS Global Insight released in Jan 2011 indicate a forecast annual average growth rate of 3.3% over the next 20 years—up from their estimate of 3.2% last year. Emerging economies like China, India and Brazil are leading the growth. The US is currently showing many signs of sustained recovery while the recovery in Europe is lagging."

Bombardier forecasts that the worldwide business jet fleet (excluding very light jets and large corporate airliners) will grow from over 14,000 at the end of 2009 to 21,000 in 2019—a compound annual growth rate of 3.6% for the worldwide fleet, net of retirements.

Williams says, "Even in the US, which easily has the world's largest installed base of corporate jets, Bombardier expects the fleet to grow by 2% per annum, net of retirements. Replacement of older business jets in this market will be an important source of demand for new jets."

The fleet mix will be changing, he adds. "Through the recent market downturn, the large category was affected the least. Thanks to globalization and the strong growth of emerging economies [located far from] the US or Europe, aircraft with the range capabilities and cabin comfort to serve these markets have been in strong demand.

These market needs were an important consideration in Bombardier's decision to launch its extended Global family (Global 7000/8000)."

Bombardier forecasts 2200 large bizjet deliveries from 2010–19, making it the fastest growing size category of business jets.

Most bizjet demand in the established markets of the US and Europe is for light and medium aircraft, says Williams, adding, "Even in these categories there is increased demand for greater cabin comfort and transcontinental range capability."

Bombardier forecasts 5000 deliveries in the light category and 3300 deliveries in the medium category from 2010–19.

2


1 | 2| 3 next