POSITION & HOLD
an editorial opinion
Bizjet market flows at top and continues to stagnate at bottom
By Richard Aboulafia
VP, Teal Group
Bizjets visiting HND (Henderson, Las Vegas NV) for NBAA 2011. While the show certainly saw signs of optimism, the year ended with record low deliveries for the current down market cycle.
After an unusually prolonged downturn and several false recovery starts, the business aircraft market is showing signs of health. While the market's indicators have only been heading upward for a brief time, and while deliveries are still scraping the bottom of the trough, the economic background looks solid. The most likely scenario is that a sustainable recovery is at hand.
Nevertheless, there are still risks ahead. Also, this downturn has had a profoundly different character than previous ones. The industry that emerges from this painful process will likely be significantly different than the industry that enjoyed a record peak in 2008.
Short-term market indicators
As we review 4Q2011 numbers, it's clear that new-build aircraft deliveries are still way down. After a remarkable 2003–08 growth surge that saw deliveries fall by a 17.5% compound annual growth rate (CAGR, by constant 2012 value), the market suffered a 28.7% decline through the end of 2011.
A 28.7% cyclical downturn is perfectly normal for this market, or indeed for almost any other aerospace market segment—but, this time, that wasn't the end of the story.
Historically, the business jet market could be divided in half by values. The top half consisted of jets costing $25 million and more (in today's money). The bottom half consisted of jets costing less than $25 million. Also historically, these 2 halves rose and fell in tandem, more or less.
In fact, in the 2003–08 surge, bottom-half jets actually outperformed top-half ones, with deliveries growing at a 20.2% CAGR (while top-half jets grew by a 15.7% CAGR). But over the past 20 years, in aggregate, both halves stayed roughly equal in size.
Yet this market downturn has seen a major change in the relationship between these 2 segments. The bottom half fell by a record-breaking 56.4% by value in 2008–11. By contrast, the top half of the market is holding up reasonably well, finishing the 2008–11 period with virtually no change (0.3% growth by value).
The positive news is that direct indicators of market health are generally trending upward, and look set to rescue the bottom half from a dire situation. The part of the current business jet fleet up for sale has been considerably reduced in the past few months.
After peaking at 16.3% of the fleet in 1H2009, jets for sale fell to just over 13.0% for most of 2011. However, in January the level fell to just 12.7%—which, historically, has been a number associated with a relatively healthy market.
Even with a respectable recovery growth rate, the market will not return to its 2008 peak until 2015.
The bifurcation between the top and bottom halves of the market is also reflected in the availability numbers. While 12.7% of the medium and 14.0% of the light fleet is available for sale, just 10.0% of the heavy fleet is on the market. According to Jetnet, in some segments—most notably turboprops—the availability rate is lower than 10.0%.
Typically, declining availability leads to rising prices. There's not a lot of firm data to provide evidence of rising prices, but Jetnet's turboprop numbers indicate a very significant 51.6% increase in turboprop asking prices in January. In other segments, there is anecdotal talk of a switch to more of a seller's market.
Business jet company executives are reporting a surge in new sales, with Cessna's parent company Textron CEO Scott Donnelly saying that sales in early 2012 have been considerably better than in recent years. In early 2012 Rockwell Collins CEO Clay Jones stated that business jet production for most aircraft classes would rise this year.
Meanwhile, business aircraft utilization is finally seeing signs of improvement. Business aircraft flights in January reached their highest activity levels in almost a year.
There are even signs of hope in the fractional ownership industry, which has suffered from overcapacity and weak pricing.
Deliveries to fractionals fell from a peak of 132 jets in 2005 (18.6% in numbers of aircraft delivered) to just 42 airplanes in all 2009–11 (or less than 2% of total aircraft delivered in that period). But industry leader NetJets reported a significant increase in revenues and profitability, with 2011 pretax earnings rising 10.0% to $227 million.
This industry is successfully shrinking itself to profitability, but it still has a fleet that is aging and will need replacement in coming years. NetJets, for example, has placed large orders for up to 125 Embraer Phenom 300s and 50 firm orders (plus 70 options) for Bombardier Global series long-range jets.
If these orders stay on course, they will boost production numbers starting in 2013, particularly for the beleaguered bottom half of the market. According to UBS, of the 235 jets delivered to fractional providers in 2007–08, 211 were bottom-half market jets.
These positive signs are welcome news, but for the most part they represent a relatively brief trend. And there have been momentary signs of false hope earlier in this downturn. Thankfully, the macroeconomic backdrop behind the business jet market offers more durable positive trends.
Corporate profits are the prime leading indicator for the health of the business aircraft market. The trend through 2011 was very strong, producing all-time record numbers by 3Q. As of this writing 4Q numbers were not yet available, but it appears that total US profits for 2011 will come close to $2 trillion.