Asia, Credit Markets Explain Stark Industry Contrast

AIN Air Transport Perspective » October 22, 2010
Airbus plans to raise A320 production to close to 40 aircraft a month, while ...
Airbus plans to raise A320 production to close to 40 aircraft a month, while business aircraft manufacturers have cut production rates dramatically since 2008. Copyright Airbus
October 22, 2010, 7:21 AM

One might attribute the striking contrast between the business jet industry’s predicament and the more-than-healthy production rates at major commercial aircraft manufacturers to several factors, but credit and the Asian market seem to rank as the two most prominent.

The business aviation sector has been suffering since 2008. While the upper segment has limited losses and maintained deliveries at comfortable levels, orders remain scarce; it would seem fair to say the entire business aviation industry is caught in the doldrums. Meanwhile, Airbus and Boeing have announced further production-rate increases, to levels of close to 40 per month for the A320 and the 737, starting in 2011-2012. A salesperson at a North American business jet manufacturer told AIN he is simply puzzled by these planned outputs.

As Gil Roy, founder of the French aviation news Web site Aerobuzz observed, the business aviation industry has lagged behind the airliner sector in the past. Nevertheless, this time a new environment prevails. First, Asia has been experiencing strong growth in both sectors. But, because the base for business aircraft is much smaller, growth translates into comparatively small numbers, Teal Group analyst Richard Aboulafia pointed out.

“Asia holds a high potential but it is not Eldorado yet,” a Dassault spokesman added. For example, he said, the continent’s infrastructure hasn’t allowed business aviation to mature there yet. On the other hand, China alone accounts for 20 percent of Airbus and Boeing deliveries.

Aboulafia also stressed that single-aisle airliners are highly financeable liquid assets. In other words, should a customer fail, the creditor could easily take back its asset and find another customer somewhere in the world. This partly explains why the A320 and the 737 models account for 60 percent of combined Airbus and Boeing deliveries, he said.

The situation is the opposite, again, for business jets. It is a fragmented–as opposed to standardized–market in terms models, customization and users, Aboulafia noted. As a result, a business aircraft is less movable. Therefore, creditors are much more nervous about financing them.

Fragmentation might account for one reason the second-hand business jet market remains depressed. Prices are severely depressed, which has owners delaying replacement plans, the Dassault spokesperson emphasized. Moreover, buying business jets is not the first decision a company management team makes when the economy starts to improve, he conceded.

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