Demand for business jets

 - September 26, 2007, 6:22 AM

For those who gaze into crystal balls and analyze the business jet market, there are heady days in store, according to recent industry prognostications. Honeywell Aerospace’s 21st annual business aviation market forecast predicts the industry can expect short-term record growth and delivery of more than 14,000 new business jets by 2017–numbers that reflect even more optimism than those the company released last year. “We’re going to come out fairly strong in terms of communicating that delivery growth continues through 2008 well into 2009, and we’re going to forecast 2008 being another record year,” said Rob Wilson, Honeywell Aerospace’s president for business and general aviation.

The Teal Group is making similar– though slightly more conservative–predictions in its 17th annual Business Jet Over-view. Most market forecasts are predicting, based on current backlogs, a 2009 peak to the boom the business aviation industry has been riding since its recovery from the slowdown after 9/11.

Each year, Honeywell surveys more than 1,500 aircraft operators to build the basis for its analysis. The company’s statisticians select a representative population of the entire business aviation industry to gain insight into where the market is going. Its primary criteria for inclusion of aircraft are based on survey respondents reporting that they will use the aircraft for corporate transport. Traditionally, its survey does not include general aviation or aircraft to be used in charter or air-taxi operations.

Since last year’s forecast, Honeywell has revised its projected number of aircraft deliveries upward by 2,000, based in part on the more than 1,000 aircraft projected to be delivered this year. For next year, that number is expected to exceed 1,300.

On the order side of the ledger, business is booming. For the year to date, new jet orders have risen 100 percent over the first half of 2006 levels, and OEMs are facing record backlogs of more than two years in many cases (and beyond six years in some cases), despite predictions of 1,200 to 1,400 aircraft deliveries per year for the remainder of the decade.

In North America, respondents told Honeywell that they expect to replace or expand about 20 percent of their fleets over the next five years, down a fraction of a percent from last year’s survey. According to Wilson, that means that this area of the market will remain significant. “Despite slower economic growth and recent credit and stock market fluctuations, survey purchase plans lost less than one percent of their 2006 levels,” he said. “Like last year, we continue to hear concerns about high fuel costs, taxes, user fees and ease-of-use issues, such as temporary flight restrictions in the U.S.”

The survey showed overall buying goals remained steady, with replacement plans increasing and offsetting some of the slowdown in anticipated fleet expansion. “Historically, we have always been concerned about gross domestic product in the U.S. and about its ability to remain above roughly three percent,” said Wilson. “History has told us that above that level we see strong order intake. When it drops below [that], we start to see it slow down. In the last three or four quarters we’ve seen it popping around and below that three-percent line, so we certainly start to be concerned about long-term order intake in the U.S. When you look at the growth outside the U.S., when you look at the dollar versus things like the euro, the fundamentals are still strong. I can’t say there are no clouds on the horizon but certainly right now, based on the input we are getting from our cross section of the business aviation customer, it looks good.”

International Market
While estimates of GDP growth in the U.S. over the next year-and-a-half remain sluggish, Honeywell believes the globalization of the business aviation market might be enough to stave off a possible slump in the industry.

“One would think it would certainly soften the impact on total aircraft demand. One of the second order impacts that we’ve not thoroughly analyzed nor do we understand is the interlinking of economies worldwide. For example, China versus the U.S. and some of the other key trading partners, how would a downturn or softening in the U.S. affect the economies in other countries?” Wilson asked. “That is still an area to be seen. Certainly just a general softening that we’re seeing in
the U.S. economy I think is going to have limited impact on the global demand, so we still see a strong outlook for 2008 and 2009.” Overall, North America will still account for nearly 50 percent of business jet deliveries over the next five years.

Honeywell believes the market will gain steam from the rest of the world. “A couple of things are really starting to pop out of this survey. One is purchase expectations by region. We’re seeing high expectations for fleet growth, the five-year replacement and expansion percentage that we track pretty closely,” Wilson told AIN.

“In Asia, the Middle East and Africa, as well as Europe, we see some strong growth in those regions and that’s helping the forecast outlook to grow. This trend is spreading across the industry as many OEMs are reporting that the balance in their customer geography is shifting, reflecting the increasingly global nature of the market. Today we see about 50 percent of the deliveries from the current OEMs occurring outside North America; 10 years ago the deliveries were roughly 80 percent North American,” said Wilson.

With the exception of the U.S. market, all the other segments in the survey showed anticipated growth. In Europe, purchase expectations of 47 percent were up significantly over last year’s 25 percent. Honeywell sees the overall strength of the euro against the dollar as providing incentive for the purchase of new aircraft, along with the increased wealth and business expansion anticipated for Eastern Europe and Russia.

According to the Teal Group forecast, business jet demand in Europe is following the pattern set in the U.S., of industries farming out labor-intensive production to developing countries with reduced transportation infrastructure, creating an ideal incubator for business aviation. In Western Europe, industries reaching out to tap the Eastern European industrial labor pool will continue to embrace corporate flight.

The region with the highest expectations– Asia, the Middle East and Africa–saw anticipated purchases rise to record levels of 50 percent. That is the highest level in the history of the survey, according to Honeywell. The Middle East market–along with certain African economies–is fueled by the recent surge in oil prices, while continued Asian economic growth is boosting interest in longer-range aircraft equipped with high-end avionics.

In Latin America, despite the contradictory forces of rising fuel revenues and political instability in some cases, purchase plans rose more than eight points from last year, to a level where 38 percent of current fleets are expected to be replaced or added to over the next five years, said the Honeywell forecast. Overall, airframe age and lack of range remain the primary reasons operators plan to replace their aircraft. European operators, however, listed the need for more spacious cabins as high among their wants.

Another boost to the market comes from operators of fleets serving fractional share owners and jet card holders, which account for nearly 18 percent of the bizjet backlog, according to Honeywell. Its forecast states that deliveries to fractional fleets should account for nearly 150 new aircraft annually for the next 10 years. Sales of jet cards, which offer aircraft access in blocks of flight hours, remain strong, and nascent charter operations, such as air-taxi services, continue to place large orders for light jets and VLJs.

“Gains in new aircraft capability and flexibility, incremental demand from fractional ownership and jet cards, airline use of business jets, branded charter operations and special mission applications are all fueling unprecedented business jet demand,” said Wilson. As strains on the airline system continue to alienate people with the resources to travel by other means, Honeywell believes the use of fractionals will only expand.

The Teal Group takes a less charitable view, suggesting instead that the fractional market might have reached its peak. According to this year’s report, “There is no proof that fractional-ownership businesses can maintain consistent profitability.” The report points out “the number of fractional shares has remained relatively static since it rose above the 6,000 mark in 2003, staying below 7,000 through 2006.” While the report acknowledges a substantial backlog of orders to the four major fractional players, analysts claim their deliveries are playing a smaller role in the overall market.

Long-range Airplanes Remain Popular
As they have for the past two years, respondents to Honeywell’s survey expressed strong interest in long and ultra-long-range aircraft–the Gulfstream G450/550, Bombardier Global Express and Global 5000, and Dassault’s Falcon 7X and Falcon 900. This is consistent with the projected economic growth in regions benefiting from transpacific capability. Over the span of the forecast, Honeywell believes deliveries in this class could top 2,000 aircraft and should average around 180 completions per year. The Teal Group agrees, noting that the market for the long-haul luxury aircraft is larger than first anticipated, with Dassault’s 7X expected to take a large bite out of a $67 billion segment the French airframer once considered too small to delve into.

On the smaller end of the scale, Honeywell forecasts that the light-medium to light jets will make up about 19 percent of the total projected five-year demand. The company upgraded its prediction of orders for this category by 18 percent over last year’s Business Aviation Outlook. Between 2007 and 2017, the forecast calls for deliveries of more than 3,850 aircraft in the Hawker 400XP, Embraer Phenom 300, Grob Spn, Citation XLS category.

Given the relative lack of interest  from corporate aviation in the VLJ category, Honeywell generally does not receive much response on these aircraft in its survey. However, by using other data sources including OEM order backlogs, along with smaller specialized surveys, the company predicts another 6,000 to 7,000 VLJs will be delivered over the next 10 years. The Teal Group believes that number is vastly overstated. Separating out Embraer’s Phenom 100 and the HondaJet as major players in the segment, with close to 750 deliveries between them over the next 10 years, the Teal Group report leaves room for only another 1,600 VLJs from other manufacturers.

Another area where the Honeywell and Teal predictions differ is in the business-liner segment, which includes the Boeing BBJ, Airbus ACJ and Embraer Lineage. Honeywell’s forecast calls for orders of 250 of the large aircraft over the next 10 years with a value of close to $15 billion, while the Teal Group’s prognosis is more favorable, predicting sales of nearly 300. Even so, Teal does not anticipate those deliveries having a major impact on the market for mainstream business jets, which will still provide better access to smaller airports.