Honeywell’s crystal ball shows slow climb for bizav deliveries

 - March 19, 2008, 6:21 AM

Don’t expect an economic miracle from the business aviation marketplace over the next decade. Honeywell forecasters once again are predicting nothing better than “slow but sustained expansion” through 2013. With that said, the sector is slowly moving in the right direction, taking steady steps toward recovery, according to the engines and avionics group’s 12th annual business aviation outlook, which was released at the NBAA Convention last month.

The latest report concluded that aircraft deliveries will be “flat to slightly higher” next year. This actually represents a somewhat more optimistic prognosis than last year’s report, which said that deliveries would fall slightly for the second successive year.

Honeywell’s number crunchers now reckon that more than 7,700 business jets will be purchased over the 2003-2013 survey period–representing a 1-percent increase on last year’s prediction of 7,600 new sales. However, the total value of these orders is now pegged at $115 billion–down 5 percent from the $121 billion order book envisaged 12 months ago. Lynn Brubaker, vice president and general manager of Honeywell’s commercial aerospace business, said at a Sunday press conference that this dip shows on average customers are investing in somewhat smaller, lower-value aircraft. She refuted the suggestion that it is due to a softening in new-airplane prices.

The latest survey foresees continued recovery in order levels over the next 12 to 18 months, but this is based on the assumption that projected growth in the U.S. economy over the next four to six quarters is realized. The report was completed in the summer, after President Bush declared the main combat phase of the Iraq war to be over.

“Strong new-model backlogs and continuing expansion in fractional ownership in North America and Europe, coupled with an expected strong economic recovery, remain key factors supporting a longer-term outlook for growth,” commented Honeywell Aerospace president and CEO Bob Johnson. But the company’s latest forecast actually shows backlogs down 17 percent from last year, with orders, options and deposits for 1,500 aircraft versus 1,800 in last year’s outlook.

About 40 percent of the current backlog is accounted for by fractional-ownership programs. “Continued slow growth in fractional ownership positions the industry for a near-term period of sustained demand at current or possibly slightly higher levels,” concluded the Honeywell report.

Close to two-thirds of the total order backlog is now for new business jet models. These include the Bombardier Challenger 300, Gulfstream 150, Cessna Citation Sovereign and Mustang, Dassault Falcon 7X and Raytheon Hawker Horizon.

Modest Increases
Some manufacturers reported high sales activity to the Honeywell forecasters, who said this points to “modest increases in production next year.” In their view, this would be founded on an anticipated pick-up in economic growth combined with demand also being fanned by the Bush Administration’s bonus-depreciation policy, which allows 50 percent of the purchase price of a new jet to be written off in the first year of ownership–an opportunity that will expire Jan. 1, 2005. Honeywell asked some 200 U.S. operators that are planning to purchase new jets over the next five years whether the tax break might lead them to make these purchases sooner. Only 14 percent said they will buy sooner, while 5 percent said they will now buy new equipment instead of used and 3 percent indicated they will buy more expensive aircraft.

Following record levels of business jet deliveries in 2001, there was a moderate decline last year (which was nonetheless the industry’s third best year ever), followed by a steeper fall this year. According to the report: “This occurred as backlogs for many current models were either deferred or severely depleted and many buyers postponed new orders due to uncertainties preceding the decision to go to war with Iraq. These events contributed to weakening the U.S. economy. Additionally, some aircraft development programs have suffered technical delays, deferring aircraft certification and expected delivery schedules.”

Despite the tough times of the past couple of years, Johnson argued that business aviation has proved its staying power. “Despite softening order rates and declining deliveries, businesses continue to invest in the future. Honeywell is currently tracking more than 20 additional 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 15 years. This does not include the half-dozen microjet programs in the public domain plus others under consideration,” Johnson said. Brubaker added that the high levels of investment still being made on the supply side of the bizav economy constitute a positive impetus for the eventual recovery in sales and deliveries.

It is the service entry of some new models, combined with the expectation of sustained economic growth, that has led Honeywell’s clairvoyants to suggest that 2005 will mark the beginning of the predicted “slow but sustained” increase in deliveries “that could last for several years, absent further shocks.” Later in the forecast period more new programs completing certification are expected to provide the impetus for “a steady climb” toward nearly 800 annual deliveries.

Backlogs Rebuilding
Honeywell anticipates new sales volumes will improve next year. It also expects to see some models rebuild their order backlogs, but also predicted that delivery levels will remain “flat to slightly higher” through 2004 due to limitations in manufacturers’ ability to ramp up the supply chain.

During the first half of this year 223 business jets were delivered, representing a 37.5-percent decline from the same period last year. By year-end, Honeywell expects between 450 and 500 new aircraft to have been delivered (compared with 676 last year), with another 450 to 500 units set to be delivered next year–an output rate that is roughly the same as that experienced by the industry during the growth years of the mid- to late-1990s. Deliveries during 2005 are expected to be in the range of 530 to 560 aircraft.

As part of the outlook report, Honeywell surveyed 1,000 corporate flight departments worldwide to ask chief pilots and managers about their aircraft purchase expectations for the next five years. The purpose of this exercise is to cross-check the conclusions drawn from manufacturer input, and it confirmed the company’s conclusion that new aircraft order rates will slowly recover during the second half of this year and throughout next year.

The customer survey revealed that new models now account for more than 40 percent of anticipated jet purchases over the next five years. Respondents mentioned no fewer than 13 new models, but there was particularly strong declared interest in Bombardier’s Challenger 300, Cessna’s Citation Sovereign, the Dassault Falcon 2000EX and the Gulfstream 500.

Overall, the 2003 jet purchase expectations were slightly up on those outlined in last year’s Honeywell outlook, with respondents saying that they expect to replace or expand almost 25 percent of their existing fleets over the next five years–amounting to 3,240 new jets. The forecasters concluded that these expectations mirror operators’ declared belief that economic recovery in the U.S. began during the second quarter of this year and will continue at least throughout 2004. “This should be viewed as a leading indicator of order and delivery levels in the near term,” they reported.

Breaking down the purchase expectation survey by geographical region, North American operators reported a slight increase in spending plans, whereas anticipated aircraft investments in Europe, Latin America and Asia/Africa/Middle East were all down from last year’s responses.

Although expected demand in Asia has fallen over the past 12 months (at a replacement/addition rate of around 38 percent of fleet size versus 45 percent last year), the region still constitutes the strongest potential source of new demand in the world. After aircraft age, range continues to be the most important factor in new aircraft purchase plans among Asian operators.

By contrast, on the basis of the Honeywell survey, Latin America remains the world’s softest business aviation marketplace, with expectations having dipped in the past year despite somewhat more positive feedback from Mexican operators. The survey revealed the disappearance of a significant number of Latin American flight departments and fleet replacement expectations there dropped from 18 percent last year to 15.8 percent this year.

North America is unchallenged as the world’s largest business jet market, with operators declaring plans to replace or expand 23.8 percent of their fleet–4.3 percent higher than last year’s projection. Approximately three-quarters of all new aircraft sales over the next five years will be made in this region, according to the survey. New technical requirements, such as RVSM, TCAS, EGPWS and TAWS, were identified as key drivers of fleet replacement plans among U.S. operators.

Five-year fleet replacement and expansion expectations among European operators fell from 30.7 percent this year to 26 percent last year, with their economies being adversely affected by poor trading conditions in the U.S. Despite the fact that the weakness of the U.S. dollar against the European currencies (especially the Euro) makes most new aircraft cheaper to purchase, the exchange-rate shift has also undermined the export potential of European corporations, forcing them to reconsider aircraft acquisition plans. Range was the most frequently mentioned motive for a new aircraft purchase in Europe, followed by aircraft age and cabin comfort.

Overall, the five-year purchase expectation survey revealed demand for some 3,243 jets and 540 turboprops. These figures exclude potential purchases by fractional ownership programs.

Fractional Still Important
The Honeywell forecasters concluded that, despite some short-term weakening in demand for fractional ownership, this form of business aircraft usage will continue to be an important engine of future market growth. Charter operations have also expanded, both in response to the shortcomings of the airline industry and to support demand from fractional fleet operators.

Today, the fractional programs account for around 6 percent of the global business aircraft fleet and serve more than 4,000 shareholders. Honeywell estimates that about 40 percent of the existing new-aircraft backlog is spoken for by the fractional operators so that by 2012 their share of the worldwide fleet should rise significantly to 10 percent. Annually, fractional demand in the near term contributes to around 15 percent of deliveries, but this could increase to around 20 percent by 2012. By 2007, there are projected to be around 1,200 aircraft in the world’s fractional fleet, with ownership extended to 7,000 share owners.

Five-year purchase expectations for used aircraft were up for the third successive year, at 19.3 percent of operator fleet size, versus 17.3 percent in 2002. Brubaker argued that this indicator of positive demand is driven largely by high availability of used airplanes and resulting attractive prices. She added, however, that July saw a 2-percent dip in used inventory, causing average prices to climb slightly. Honeywell’s survey identified around 400 used business jets on the market that are less than 10 years old. The company believes that these will sell quite quickly, paving the way for new aircraft sales because the older remaining used aircraft will be much less attractive due to the relatively high level of investment required to render them compliant with technical requirements such as RVSM.

Breaking down business aircraft by category, the Honeywell outlook drew the following conclusions:

Long-range/ultra-long-range–About 100 of these aircraft will be delivered during the 2003-2013 forecast period. Output for this class of equipment will rise significantly in the second half of the decade.

Large–There will be 770 deliveries in this category, with annual rates averaging 70 aircraft per year. Fractional ownership increasingly constitutes a strong driver of demand for these types.

Medium and medium-large–Deliveries will total 2,250 aircraft. Steady growth will result from the service entry of several new models during the second half of the survey period, taking average annual deliveries from around 100 to 280 units.

Light and light-medium–There will be 2,100 deliveries in this class, with strong interest throughout the geographical regions surveyed. Average annual deliveries will climb from 130 to 200 units by the end of the forecast period.

Very light–From annual average output of 80 units over the next few years, deliveries will increase to around 145 aircraft per year. Volumes will ramp up from around 2006 with the arrival of new types such as Cessna’s Citation Mustang.
Ultralight–New-generation jets such as the Eclipse and Safire S-26 were not included in Honeywell’s report. However, separate research by the company has indicated potential demand for up to 8,000 aircraft in this category over the next 10 to 15 years.