Business aircraft market continues to face uncertain recovery

By Richard Aboulafia
VP, Teal Group

Since the bottom end will not recover at a faster pace, top-end segments will continue to have a greater share of the overall market.

One possible driver behind a faster bottom-half recovery is fractional ownership providers' refleeting. There are currently 917 business aircraft in these services, according to JetNet, with an average age of 8.2 years.

Assuming that these businesses can achieve and sustain a reasonable level of profitability in an upturn, this implies strong demand for new jets. Also, it's entirely possible that a strong US economic recovery produces disproportionate benefits for the bottom half of the market, due to a broader (and delayed) need for replacement aircraft.

Yet, assuming that growth rates for the bottom half of the market do not outperform growth at the top, market bifurcation has helped create the 2nd notable aspect of this downturn—structural overcapacity. The industry now has 5 bottom half (or bottom third) market manufacturers.

There are additional prospective new bottom-half market entrants, most notably HondaJet. Many small and mid-size jet market price points currently have 4 or 5 different competing products, and all the manufacturers have developed new derivative models to compete in as many price points as possible.

These developments speak to a strong level of fierce price competition and a level of overcapacity that may be unsustainable if the market does not recover. For a downturn of this magnitude and duration, it's remarkable that there have been no serious moves toward industry mergers or consolidation.

Unsurprisingly, this downturn has already produced some product deaths. Even before its bankruptcy, Hawker Beechcraft had been forced to suspend production of the Hawker 400, the latest version of the long-running Beechjet. Bombardier was also forced to halt production of its Learjet 60 due to weak sales. Dassault decided to suspend (and perhaps redefine) its SMS super midsize product. If the market does not recover, it's likely that we will see the demise of further models.

With an uncertain recovery, structural change and serious overcapacity, business jet manufacturers have needed to adjust. The extent of each company's adjustment depends on which side of the high-end/low-end market line they fall.

Industry tries to cope

Companies with high-end market exposure will see their market shares increase at the expense of companies with lower end exposure.

Manufacturers at the top end of the market have had it best. Bombardier, Dassault and Gulfstream suffered no meaningful downturn, and have merely needed to cope with halted growth and a deliveries plateau. They have pushed forward with new product development, although with a few setbacks.

Bombardier, despite the distractions of its expensive CSeries jetliner development effort, has moved ahead aggressively with its Global 7000/8000 ultrahigh-end models. It has also moved forward with its composite Learjet 85 and the Learjet 70/75—an upgrade to the Lear 40/45. Gulfstream has successfully brought its G280 and G650 to market (with both receiving certification in Sep 2012) but there has been a lack of progress on its awaited P42 G350/450 (and perhaps G550) replacement.

The bottom half of the market is a different story. Cessna is the dominant player in the bottom-half market, and its fortunes reflect the broader market—a dizzying fall, followed by a tentative and uncertain recovery. In 2008–09, the company put the brakes on the production line, just at the moment parent company Textron was facing a serious credit crunch.

There were mass engineer layoffs and management changes, and new product development came to a halt. The company's supermidsize Columbus, killed in Jul 2009, was the highest profile casualty.

Since then, Cessna's delivery numbers have stayed low, but the company has been given the financial resources needed to resume new product development. In 2011 it launched the Citation M2—a light jet just a notch below its CitationJet series, and the Latitude, positioned between the company's Citation XLS and Sovereign.

Both of these product launches are designed to help Cessna compete with new Embraer products (the Phenom 100 and Legacy 450, respectively). Earlier this year, Cessna followed the Latitude with a larger cousin, the Longitude. This is effectively a rebirth of the Columbus, only with Snecma Silvercrest engines in place of the earlier model's Pratt & Whitney Canada powerplants.

Then there's Embraer, which can be characterized as having a great strategy but awful timing. The company's 1st wave of new dedicated business aircraft products—the Phenom 100 and 300—arrived right in the middle of the downturn. While well received, delivery numbers for the 100 have fallen, showing that nobody is immune from a bear market. The 2nd wave—the Legacy 450 and 500—have been delayed by flight control development problems, but should arrive in the next 2 years, possibly just as the market's recovery gathers strength.

Not surprisingly, Embraer is turning its attention toward other markets. Once viewed as a possible new steamroller in this market, Embraer's position in business aircraft looks increasingly like a successful new niche player.

Instead of putting their cash toward a 3rd wave of new product development, the company is pushing ahead with an ambitious new medium-size military airlifter—the KC390. It is also planning a major upgrade and re-engine program for its 170/175/190/195 family of large regional jets. Together, these initiatives will likely keep the company from making any major new bizjet launches in the next 5 years at least.

Hawker Beechcraft, weakened by debt and a product line that somehow combined new technologically risky models with badly aging older ones, has been hit hardest. After declaring bankruptcy earlier this year, the company announced in July that it was in exclusive negotiations with Superior Aviation Beijing to be purchased for $1.79 billion.

There is absolutely nothing about Superior's size and history that would provide reassurance that this transaction will go ahead, and as this is written the situation is far from clear.

Before the sale announcement, Hawker Beechcraft had revealed restructuring scenarios with draconian plans. Under all 3, the company's Premier/Hawker 200 series would be killed. Under 2 of the 3 scenarios, the top-of-the-line composite-based Hawker 4000 would be killed. Under 1 of the 3 scenarios, the company would exit business jet production altogether.

While Hawker Beechcraft's fate is far from clear, it's remarkable that this painful and long-lived downturn has not induced any other major changes in the business aircraft industry. There are still 6 major and about 8 minor players, none of whom have merged or exited the business. Of course, if the current positive trends prove to be another false start, we could still see significant and dramatic change.

Richard Aboulafia is VP Analysis at Teal Group Corp, an aviation and defense market intelligence and consulting company. He has tracked the business aircraft market for over 20 years.


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