Business jet market flexes its muscles

 - February 1, 2007, 9:03 AM

Describing last year as a “turnaround” for the industry, the General Aviation Manufacturers Association (GAMA) last month credited both the bonus depreciation allowance and the growing U.S. economy for changing what had been forecast
to be a year of stabilization into one of industry growth.

Industry billings totaled $11.9 billion–the third highest ever and a 19.1-percent increase over 2003 billings. The total number of airplanes shipped last year increased to 2,963, a 10.3-percent increase above the previous year. Airframers shipped 591 business jets last year compared with 518 in 2003. Builders also delivered 245 business turboprops last year versus 211 in the previous year.

“The fact that total shipments increased indicates that this turnaround is broadly based,” said GAMA chairman James Schuster. “GAMA member companies believe this bodes well for the future of general aviation.”

The mood at GAMA’s annual industry review and market outlook in Washington last month was definitely upbeat and optimistic, and GAMA interim president Ron Swanda described general aviation’s 2004 results as “fantastic.”

Meanwhile, GAMA also celebrated the 10th anniversary of the enactment of the General Aviation Revitalization Act. Signed into law by President Clinton in 1994, it has reduced the number of frivolous lawsuits against GA manufacturers and fostered a rebirth of the piston-engine airplane industry in the U.S., according to GAMA.

Swanda said that last year Honeywell, one of the most respected forecasters of GA shipments, introduced empirical evidence that airplane sales strengthen when the U.S. economy grows more than 3 percent over three consecutive quarters.
“Last year, that relationship proved accurate,” he said. “The U.S. Council of Economic Advisors recently predicted that the U.S. economy is fundamentally strong, with growth expected to continue at solid rates for the next 10 years. We expect new airplane shipments will follow suit.”

Despite the recent good news, GAMA’s new president, Peter Bunce, will have his work cut out when he takes office April 1. Bunce, who attended the industry review and outlook, will have to contend with cuts in the budgets of the FAA and NASA, and with the nation’s airlines calling for a new way to fund the FAA, which many interpret as user fees on GA.

Bombardier Nearly Doubles Deliveries
Shipments of the new Learjet 40s and Global 5000s, added to those of other models, helped Bombardier nearly double deliveries–from 70 in 2003 to 129 last year. While this is certainly noteworthy, readers will recall that Bombardier reported that no Learjets were delivered in the first two quarters of 2003 when production was temporarily suspended. Still, the fact remains that no other manufacturer came close to this rate of improvement, not even Cessna, whose numbers included three new Citation models that started being delivered last year. (In fact both Cessna and Boeing reported fewer deliveries of their respective business jets last year compared with the previous year.)

Bombardier’s delivery performance last year is also noteworthy because it was accomplished amid ongoing major changes at the Montreal-based company, namely a reorganization that saw the consolidation of business aircraft manufacturing, assembly and completion.

Bombardier also experienced the premature departure in December of its CEO after his immediate dismissal by the company’s board of directors (AIN, January, page 1). The results of that event and the subsequent announcement of a management restructuring will likely be reflected in Bombardier’s performance this year.

Citations Sold Out into 2006
Cessna forecast last year that Citation deliveries would be down, that it would introduce new products and that orders would strengthen through the year. However, the OEM exceeded delivery expectations, according to the year-end financial report released by Textron, Cessna’s parent.

“As it turned out, we delivered 181 Citations last year, 15 more than in 2003 and more than our January 2004 guidance of 165 to 170,” said Textron chairman, president and CEO Lewis Campbell. “On the new-products front, we began deliveries of the new XLS in the first quarter, the Sovereign in the third quarter and the CJ3 in the fourth quarter. We also introduced two new corporate jets at NBAA in October–the CJ1+ and CJ2+.”

Cessna’s strategy of investing in new products continues to bear fruit, as demonstrated by order results. Said Campbell, “In the fourth quarter we received orders for 120 new jets. Including a number of jets for CitationShares and 34 for NetJets, this adds up to orders for 330 jets in all of 2004.”

With the strong order rate, Cessna plans to deliver 235 Citations this year, the number that its supply chain can reasonably accommodate. If that production target pans out, it will be the most Citations delivered since the 305 shipped in 2002. The order book beyond this year is also very strong. “We already have orders in hand for about 185 jets due for delivery next year,” Campbell disclosed. “Unless something happens to disrupt the general economy, we believe jet growth will be solid for the rest of the decade.”

Meanwhile, Cessna still plans to hire about 600 workers by the end of the year. The company last year already recalled 400 laid-off employees.

The backlog in Cessna aircraft business (recip and turbine) at the end of the year–more than $8.5 billion–is the company’s highest ever. Not including CitationShares, the backlog at Cessna alone increased again, up from $1.5 billion a year ago to $5.4 billion. That’s great news for Cessna, but it means Citation customers will have a longer wait for aircraft. “If you ordered a Citation today you would have to wait until the second quarter of 2009 for a Mustang, fourth quarter of 2006 for a CJ1 or XLS, and second quarter of 2007 for a CJ2 or CJ3,” Campbell said. “So we are trying to turn up the heat as much as we can on the production rate to increase volumes. It’s a good problem to have.”

Gulfstream Reports Record Orders
Gulfstream’s reported net orders for 95 aircraft last year represent a 61-percent increase over the 59 aircraft ordered in 2003 and, excluding fractional providers, adds up to “the largest number of orders in our history, both for a quarter and annually,” according to Nicholas Chabraja, chairman and CEO of General Dynamics, Gulfstream’s parent company since 1999.

The fourth quarter was especially strong, with 43 of last year’s airplane orders finalized in that period. General Dynamics revealed more good news for Gulfstream. It said the Savannah airframer delivered 78 green Gulfstreams last year compared with 74 in 2003, the first increase in annual deliveries since the 101 airplanes shipped in 2001.

Deliveries were split between Gulfstream’s large aircraft (G350, G450, G500 and G550) and midsize aircraft (G100 and G200), with six more large aircraft and two fewer midsize aircraft shipped. Unlike the other manufacturers, Gulfstream does not break down deliveries for its individual models.

Commenting on the exclusion of fractional customers in the order figures for last year, Chabraja said, “I think it’s fair to exclude fractional orders. We get fractional orders in large groups and they are not entirely representative of current demand.” Last year Gulfstream received no orders from fractional operators, and the last such large order was from NetJets in 2002.

“So far for this year,” Chabraja said in late January, “we are about 92 percent sold on our planned production of large aircraft and 68 percent sold on our planned production of midsize aircraft. If we can pull a few aircraft into this year, our operating plan is to build four more of the large aircraft [60 in all] and the same number of the midsize aircraft [22].”

Said Chabraja, “The question is, can we get all of our suppliers, including some critical ones, lined up to give us what we need to satisfy some customer demand? If you ask our sales people what’s the toughest competitive threat they face, their answer would be availability of Gulfstream aircraft.”

The stronger the market, the firmer new aircraft pricing. “I want to drive this home,” Chabraja emphasized. “We experienced considerable pricing improvement in our order book in the fourth quarter. Those are airplanes that are going to be delivered late this year at the very earliest. Most of them are for delivery next year.

“In my view, demand picked up noticeably in the fourth quarter a year ago [2003],” Chabraja said, “and it continued to be a good demand through 2004, but in the fourth quarter of last year there was clearly a surge and it carried with it strong pricing improvement across the product line.”

Gulfstream disclosed that it had taken “quite a number” of orders for the G350 in the year, “a little more than frankly we wanted,” Chabraja conceded, “but we had some very good customers who placed fleet orders for the G350, our least expensive large aircraft.”

The head of General Dynamics also commented on the return of the traditional customer. “The one marked change [in customer profile] between 2003 and 2004 was the growth of the public corporate business,” Chabraja said. “This is our standby customers coming out of the woodwork. That’s really not surprising when you see the earnings growth and the cash generation that’s been going on in the Fortune 500s.”

Deliveries, Orders Up at Raytheon
Raytheon Aircraft last year exceeded profit, delivery and order expectations for its turbine business aircraft segment, according to the parent company’s financial report released late last month. The company said Raytheon Aircraft delivered 217 Hawkers, Premiers and King Airs last year, compared with 180 in 2003.

At the end of last year, the company reported it had booked orders for 299 jets and turboprops, compared with 211 at the end of 2003. Raytheon Aircraft has more than doubled its expected sales and backlog this year versus last.

Said Raytheon chairman and CEO William Swanson, “Approximately 55 percent of our 2005 Hawker deliveries and 36 percent of our 2005 King Air deliveries are currently in backlog. This compares with 25 percent of 2004 Hawkers that were in backlog and 13 percent of 2004 King Airs that were in backlog at the beginning of last year.”

Raytheon Aircraft also ended the year with an operating profit of $63 million, a significant improvement from its expectations at the beginning of the year. Raytheon said its aircraft unit started out last year with a plan to break even, “a plan based on certain assumptions, including pricing that actually turned out through the course of last year better than we planned.” The improvement resulted from better pricing and continued focus on execution and cost improvements.

“Pricing is firming up,” said Raytheon Aircraft chairman and CEO James Schuster. “If you are looking for a kind of compass heading on pricing, I think it’s headed northward, although it’s too early to tell how far that will go.”

While attention is usually focused on the major manufacturers of business jets, Pilatus’s PC-12 has a delivery distinction of its own. When you look at each individual model rather than broader series of airplanes, the big single-engine turboprop from Switzerland has clearly been the leader in shipments since 2001, “and orders for this year continue at a record pace,” the company said.

Pricing of pre-owned aircraft has turned around so that it’s more favorable to manufacturers taking in aircraft on trade. Inventory of used aircraft at the end of last year at Cessna, for example, “was just $8 million” (three or four airplanes).

The total number of Citations as a percentage of the fleet for sale had fallen to about 13 percent by the end of the year. “The really interesting statistic is that of the fleet that’s for sale, more than 80 percent are older than 15 years and nearly 60 percent of those on the market are more than 20 years old,” Cessna said. “Only about 60 jets on the used market are models that are currently in production. So those aircraft on the used market that put pressure on new aircraft sales are down low and selling well.”

Thirteen percent looks as if it’s going to be a “good number for us because of the aging factor. You figure that when more than half the airplanes are more than 20 years old, there are just not many people who will be buying those airplanes. At some point they are going to be taken off line and cannibalized for parts.”

Pre-owned Aircraft Market
Cessna has dialed back its commitment on how many used aircraft it’s going to take and the way it structures pricing arrangements on those used aircraft, “so that our level of commitment to take trade-ins relative to new sales is lower than in the past,” Cessna conceded. “Since about the 2001/2002 time frame, we have become more conservative on giving the potential customer the right to trade an aircraft in at a fixed price. When we take one in we have a little more control over what kind of price we have to pay.”

Gulfstream said it ended last year with eight pre-owned aircraft in inventory. Three or four were under contract to be sold and delivered in the first quarter of this year and the others are not for sale because they are subject to temporary lease agreements with customers waiting for delivery of new aircraft.

As good as the number of deliveries was year over year, the industry has a long way to go to match or exceed the number of deliveries between 1999 and 2002. The effect of bonus depreciation may be overrated. Most of the major manufacturers echoed what Cessna said. “Possibly we [Cessna] pulled a few orders from first quarter of this year into the fourth quarter of last year,” Textron’s Campbell said, “but I don’t think it was a major driving factor. We support an effort to extend bonus depreciation further, but I wouldn’t bet the ranch on that happening. We’re not counting on it. It’s not even in any of our forecast models.”