Forecasts predict growth for business aviation

 - December 14, 2007, 11:59 AM

The forecasts released last month at the NBAA Convention from turbine-engine manufacturers Honeywell and Rolls-Royce and market research firm Inflight Management Development Centre (IMDC) agree: the business jet market has turned the corner. Honeywell and Rolls-Royce project delivery of between 500 and 550 business jets this year, on par with, or slightly above, last year’s deliveries. IMDC analysts predict a more precise 526 deliveries by year-end, a small recovery from last year’s 518 jets. In the longer term, from 2005 to 2014 and beyond, the forecasts show continued growth in deliveries, though to varied degrees.

Honeywell’s Outlook

Honeywell Aerospace’s 13th annual business aviation outlook projects increasing demand for new business jets, with customers expected to purchase more than 8,300 jets valued at about $131 billion from now through 2014. The forecast also projects sustained near-term sales for business jets, welcome news for an industry weary of the doldrums of the last three years.

“Improved order rates, established new model backlogs, continuing expansion in fractional ownership in North America and Europe and sustained economic recovery are key factors supporting a longer-term outlook for growth,” said Honeywell president and CEO Bob Johnson. “Operators continue to tell us they recognize the benefits of business aircraft and express strong interest in new technology and new models with improved value propositions.”

Manufacturer backlogs of orders, options and deposits continue to account for nearly 1,500 aircraft, according to Honeywell, and about 40 percent of them are destined
for fractional-ownership programs. Close to two-thirds of the total order backlog is for new designs, amounting to more than 1,000 aircraft. These new aircraft include the Bombardier Challenger 300, Gulfstream 150, Cessna Citation Sovereign, Citation Mustang, Dassault Falcon 7X and Raytheon Hawker Horizon.

Many aircraft manufacturers have been reporting higher sales activity this year than last, said Honeywell, a fact that supports strong planned increases in production next year. “This is also consistent with the pickup in economic growth combined with the positive effect of bonus depreciation.” (President Bush signed the bonus depreciation benefit on October 22.)

After a record peak in 2001 when business jet manufacturers shipped 750 aircraft, deliveries declined more than 30 percent over the next two years to 506 last year. “This occurred as backlogs for many current models were either deferred or severely depleted and many buyers postponed new orders due to uncertainties leading up to the decision to go to war with Iraq or pertaining to the pace of economic recovery,” Honeywell said.

“The past three years have been a testament to the resilience of the business aviation industry,” Johnson said. “Aircraft manufacturers and suppliers continued to invest in the future despite the decline in industry billings. As a result, we are enjoying numerous new aircraft and system introductions now, and more are on the way.

“Honeywell is currently tracking more than 20 all-new or derivative business jet programs that are in various stages of study or preliminary design, many of which are expected to enter service during the next 10 to 12 years,” he added. “There is also a great deal of activity in the general aviation and personal jet segments, with several personal jet and small turboprop programs in development plus others under consideration.”

In its forecast, Honeywell defined very light jets as the segment consisting of the Cessna Citation CJ1, CJ2 and Mustang, Raytheon Premier I and the Sino Swearingen SJ30-2.

The survey data (based on interviews with more than 1,000 corporate flight departments worldwide that operate more than 2,500 business jets, and with the major business jet OEMs) and econometric analysis indicate that order intake is likely to remain “healthy” into next year.

“This suggests solidification of order backlogs for many current models and supports higher aircraft deliveries in the near term when coupled with the effect of new models entering service this year and next,” Honeywell said.

The combination of forecast sustained economic growth and a series of new model introductions suggests that next year will mark the beginning of a sustained expansion of deliveries that could last for several years, absent further shocks. Honeywell believes that later in the decade, new aircraft offerings will support a “sustained market of around 800 aircraft deliveries per year.”

Survey results showed that demand for commercial transport aircraft configured as business jets–not included in the core survey–remained steady compared with a year ago. This year’s survey data indicates this segment should continue to support total deliveries of about 125 to 130 of these aircraft between this year and 2014.

First-half deliveries of 238 turbofan aircraft represented a 2.6-percent increase over levels recorded in the first half of last year. Honeywell expects operators to take delivery of approximately 525 to 550 new traditional business jets this year, compared with 506 a year ago, increasing to more than 650 next year. These delivery levels compare favorably with those enjoyed by the industry during the industry expansion of the late 1990s. Deliveries in 2006 are expected to be in the range of 650 to 700 jets.

Microjets Not Covered

With the exception of the Citation Mustang, Honeywell did not include emerging “ultra light jets” such as the Eclipse 500, Adam A700, Diamond D-Jet, Avocet Projet and HondaJet in its outlook. “While these aircraft offer the exciting possibility of ultra-low-cost solutions appealing to the owner- flown, high-end piston and single-engine turboprop markets, we do not extend detailed coverage to them in our outlook.”

Honeywell said it does record “purchase interest in these specific models from our corporate survey respondents if indicated, but based on recent surveys, the core of demand for this class of aircraft seems to be in the owner-pilot segment.” Not so with the Mustang, according to Honeywell, which said that the majority of survey respondents perceived the Mustang as a “corporate” aircraft and “they have yet to identify other ultralight jets as candidates for such purchase.”

Honeywell claimed that recent studies it has undertaken in the general aviation segment corroborated this view and found “broad familiarity with emerging ultra-light jets as well as indications that a potential demand for up to 8,000 such aircraft over the next 10 to 15 years might exist.” Based on current aircraft specifications and pricing, purchase expectations were substantial, as expected, in the owner-flown segment of aircraft operators, Honeywell claimed.

Honeywell has been creating a business jet delivery outlook for 18 years but sharing the results with the public only since 1991. A look back on how the annual Honeywell business jet outlook correlates to what actually happened indicates a remarkable level of accuracy–within about ±2 percent over the nearly 20-year history of the survey.

Rolls-Royce Forecast
“Economic indicators, coupled with a reduced inventory of viable used aircraft and growth of share purchases at fractional companies, support our increased delivery forecast,” said Ian Aitken, president of corporate and regional aircraft for Rolls-Royce. Also supporting the upbeat forecast is an anticipated wave of replacement activity. Barring any external shocks, next year and beyond should see a consistent increase in deliveries, based on these and other major leading indicators.

The long-range Rolls-Royce forecast, covering this year through 2023, shows a need for 23,000 aircraft with a delivered value of $284 billion. These numbers include bizliners through very light jets, which Rolls-Royce dubbed “microjets” and included in its forecast for the first time. For the powerplant manufacturers, this means 47,000 engines (including spares) worth some $60 billion. The 5,000-pound-thrust and above categories will represent the majority of the engines delivered by value.

When the VLJs are left out of the Rolls-Royce crystal ball, the company predicts 15,000 business jet deliveries through 2023, up slightly from last year’s forecast.
The forecast indicates a rising proportion of new aircraft deliveries for fractional use relative to the total market. Today, fractional operators take delivery of between 10 and 15 percent of annual deliveries. The forecast shows this proportion increasing to as much as 22 percent.

Most of this growth will come from North America, which will account for 73 percent of the purchases. The European market will acquire 11 percent of the new aircraft, Latin America 6 percent and the rest of the world 10 percent.

IMDC Perspective
IMDC’s forecast predicts that continued recovery in the business jet market will drive demand for 6,300 new business jets over the next 10 years. “Confidence has returned to the business jet market and we are seeing a resurgence of interest in equipping new and existing airplanes with advanced in-flight entertainment and in-flight connectivity,” noted IMDC CEO Walé Adepoju. “We anticipate the market continuing to recover into 2005 and 2006, and to expand through to 2009.”

Following the company’s previous outlook, issued in April last year and in which its analysts predicted 519 deliveries last year against the actual total of 518, this year’s forecast sees 526 new business jet deliveries this year, a slight increase over  last year’s.

For this year, lower deliveries at Raytheon and Cessna will balance stronger year-on-year delivery performance at Bombardier and stable levels at Gulfstream and Dassault Falcon Jet, IMDC said. By far the largest share of business jets are manufactured by Cessna, with an expected 33 percent of current-year deliveries, according to the forecast. However, IMDC said Gulfstream leads the market in terms of the value of business jets delivered, with 27 percent of the markets by value last year.

The annual market for business jets is currently worth around $9 billion, which, although at about 60 percent of its 2001 peak, remains relatively strong in terms of past performance–only one year before 1998 saw higher deliveries than are anticipated this year.

IMDC said recovery in the market is being driven by strong economic growth, particularly in the U.S.; last year’s stock market recovery; introduction of new business aircraft models (10 this year alone); strengthening of the positive sentiment toward business jet use, particularly with respect to perceived security and privacy of travel; and the extension of bonus-depreciation provisions in the U.S. until the end of next year.

The business jet market is highly concentrated in the U.S., IMDC pointed out, with 72 percent of the fleet and around the same proportion of deliveries. However, it said the market is highly dispersed in terms of customer base. Of the 12,800 business jets in service with approximately 7,500 operators, less than 1 percent have more than 10 aircraft, 2.5 percent have more than five and 84 percent have just one aircraft. The top 20 percent of operators have just 40 percent of the fleet, IMDC noted.

Of the 6,300 business aircraft that IMDC forecasts will be delivered from now until 2013, the breakdown by class is as follows: entry-level, 847; light, 1,594; light medium, 1,032; medium, 1,199; long-range, 968; very-long-range, 562; and bizliner, 97.

Chad Trautvetter and R. Randall Padfield contributed to this report.