Business aircraft market continues to face uncertain recovery

By Richard Aboulafia
VP, Teal Group

While private aircraft remain essential tools for businesses, economic vola­tility and a delayed replacement cycle have prolonged the market's downturn.

Civil aerospace markets are defined by cyclicality. Periods of growth are interrupted by painful setbacks, induced by global recessions or other economic factors. Typically, a down cycle lasts about 2 years, with a sharp recovery. The 2001–02 downturn, followed by the 2003–08 market boom, is a classic example of this pattern.

Yet the current down cycle has more than outstayed its welcome. All leading indicators began a precipitous fall in mid-2008, with aircraft production plummeting starting in 2009. We are now past 4 years of pain. While there are signs of recovery, there is also the likelihood of permanent structural change for the industry.

Slow and uncertain

Expectations of an aircraft demand recovery in 2011 were completely dashed. In all, the value of the market dropped by 0.6% relative to 2010. While corporate profits and company cash holdings were at record levels, there were few signs that companies were actually making big investments, whether in business jets or in other products.

But 2012 looks a bit better. While utilization has only risen modestly, fuel sales are up sharply, possibly due to a decline in prices (a 7.0% drop since April). Best of all, the percentage of the business jet fleet available for sale has fallen to just 12.0% in August (as measured by Merrill Lynch/Bank of America, with some older aircraft deducted). This is down from a high of 16.3% in May 2009.

Perhaps most promising, we're finally starting to see aircraft production increases. According to GAMA, the value of deliveries in 1H2012 rose to $8.2 billion—a 13.2% increase over 1H2011.

But this is no V-shaped recovery. We've seen false hope for many of these indicators at several times over the past 18 months. And progress has been astonishingly slow. The aircraft fleet availability number, for example, has spent the past 12 months declining by just 1 percentage point. (In mid 2011 this figure was at 13%.) And pricing remains weak, although this is typically a lagging indicator that improves after the market begins to strengthen.

There are 2 ways of viewing this dismal situation. One is that the market is now in a "new normal"—a relatively stagnant or slow-growth condition that reflects the generally mediocre and highly volatile condition of the world economy.

With this scenario, there won't be a V-shaped recovery, or even a U-shaped recovery. While numbers will rise fast enough to avoid an L-shaped prolonged slump, this point of view implies that we simply shouldn't expect much more than stagnant growth for the rest of the decade.

The other way to view the market is that a variety of factors simply created an untenable peak and considerable overbuilding in the 2003–08 market boom, and that it is merely taking longer than usual to digest excess production.

But, this view holds, when that excess production is absorbed, we will see strong growth. After all, utilization didn't show permanent declines, the number of users globally is rising, and fleets are aging. It stands to reason that replacement and new demand growth will again induce an up cycle.

It's easy to accept the 1st point of view. After all, there are very few other segments of the global economy that are showing strength today—why should business aircraft outperform the others? The much-vaunted emerging markets story seems to have been somewhat oversold, particularly when it comes to China as a demand driver.

Both the unemployment rate and the used-jets-for-sale rate tell a story of a painfully slow economic recovery.

And, of course, a 4-year downturn can make even the most optimistic market observer begin to view sustainable growth as a "show-me" story.

Yet, looking at the numbers, it seems the 2nd view—a "delayed recovery" comeback—is the correct one. Cash holdings and profits continue to build at companies in North America, and that remains the most important market.

The US stock market—another key indicator of demand—is also showing growth. Other economic indicators tell a story of delayed demand that is cautiously returning as excess supply is built down. For example, a comparison of the US unemployment rate with the percentage of jets for sale over time tells a very similar story.

Teal Group's forecast calls for just a modest recovery this year (around 5.0% over 2011 by value) followed by a slightly faster 8.0% recovery in 2013. After that, we expect to see a 12.0% per year recovery that's somewhat more muted than previous recoveries. (The 2003–08 upturn saw a 17.5% compound annual growth rate.) But this modest growth still restores the market to a place above its 2008 peak by 2016.

What's changing

In addition to its prolonged duration, this market downturn is notable for 2 other features. The 1st is bifurcation—the split between 2 broadly defined market segments. The 2nd is overcapacity.

The business jet market is now effectively 2 markets. One market—the top half—consists of jets costing $25 million and more (in 2012 dollars). The 2nd market—the bottom half—consists of jets costing less than $25 million. For over 25 years these 2 market halves rose and fell in tandem, with very little deviation. The 2003–08 surge actually saw the bottom-half market outperform the top half, with deliveries growing at a 20.2% CAGR.

(Top-half jets grew by a 15.7% CAGR.) But over the past 20 years, in aggregate, both market segments stayed roughly equal in size.

But the post-2008 market downturn has seen this relationship change drastically. The bottom half fell by a record-breaking 56.4% by value in 2008–11. The top-half market, by contrast, is holding up well, finishing the 2008–11 period with virtually no change (0.3% growth by value). For top-half manufacturers, growth has halted, but there has been no real pain.

As a result, the most notable lasting legacy of this downturn will be a structural shift in deliveries toward the high end of the market. If growth resumes equally for most segments, then what was once the top half of the market by value will from now on be the top 65%.


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