Industry starts to see signs of a turnaround

 - September 29, 2009, 10:45 AM

There are still white tails sitting on the ramps, but the numbers are dwindling. The inventory of used aircraft for sale remains staggering, but it too is shrinking. The skies aren’t filled with business jets, but as of July–the last month for the which data is available–the number of takeoffs and landings was rising.

This news comes on the heels of the U.S. stock market riding a steady six-month growth period, some small increases in new home construction, and a U.S. dollar that appears to be gaining strength. And as summer cast a glow on gathering autumn, the National Association of Manufacturers announced in its “Labor Day 2009: the Manufacturing Report,” that while the economy remains fragile, there are signs of improving conditions.

The news is not great, but it is certainly good enough to be encouraging, and to give some credence to forecasts by analysts and industry executives that this year marks the low point and that next year will see the business aviation industry begin a long, slow recovery.

According to brokers, who keep a careful eye on such things, the number of white tails, or unsold aircraft, on the manufacturers’ ramps is slowly being reduced. In fact, Bombardier has reported that its white tails have been reduced from 25 in the last quarter to 16 as of early last month.

There are reports by various brokers of the sale of these aircraft as well as those of other OEMs, “at eyebrow-raising” prices. But as one analyst put it, “It’s doubtful any discount to a new buyer amounted to a loss, as the manufacturer almost certainly kept as liquidated damages all or a good part of the money put up by the original buyer.”

Perhaps the most significant news comes from the used-aircraft market. According to the September UBS Business Jet Update, “Available business jet inventories stepped down two percent in August, the second sequential decline in three months, following 18 months of consecutive increases.”

Mark Bloomer, president and owner of Bloomer deVere Group Avia, confirms the UBS report. “We expect to close on seven airplanes within the next week, and we went to contract on both our Gulfstream 550s in just the past few days,” he told AIN early last month.

He also noted that acquisitions account for half the Camarillo, Calif.-based firm’s business, and as with sales, “most of it has been large-cabin airplanes, and virtually all of it involving international buyers.”

Industry wide, there were some 20 airplanes going through the pre-buy process as of early last month, “and we expect they’ll be reported as sold within the next month,” concluded Bloomer.

“There are liquidation deals, there are good deals, and there are still some great deals.” If buyer activity continues, he added, “We expect prices will be up 10 percent by mid-2010.”

Used Aircraft Customers Coming From Abroad

Bryan Comstock, president of Jeteffect of Long Beach, Calif., is also seeing increased activity in the pre-owned aircraft market, particularly in the large-cabin segment. “Anytime we can sell a GIV-SP into Nigeria, it’s been a good day,” he said. “We also have offers just accepted on two GVs and a G450.”

He added, “We’re seeing a lot of international activity. With asset values off 40 to 50 percent from a year ago, and a weaker dollar against some currencies reducing that by another 15 percent, we expect the international activity to continue.”

There are some 16,800 used aircraft in the worldwide inventory; of those, about, 3,110 business jets were for sale in mid-July. By August 3, said Comstock, that number was 3,083, and as of September 8, it was 3,062. “It may be a combination of frustrated sellers taking their airplanes off the market, and buyers taking advantages of prices about as low as they’ll ever go,” he said, “but if that continues through December, it will be a very encouraging trend.”

The September report by J.P. Morgan’s “Aerospace and Defense: Business Jet Monthly,” added its own cautiously positive look at the industry. “In a sign that conditions are improving modestly in the market for used jets, inventories fell 40 [basis points] in August, the first material decline of this cycle,” said the report.

Also encouraging, it noted, was that August flight operations have “perked up a bit as well,” though they remain depressed.

But the report stopped well short of declaring an industry recovery. “Despite these indications of improving used-market conditions, a recovery in the new market still looks far off. New jet deliveries decreased 27 percent, to 223 units, in the second quarter 2009, and deliveries fell for all three classes. Light and medium jets saw contractions of 53 and 52 percent, respectively, while heavy jets held up better with a relatively modest 13-percent slump.”

Bombardier and Gulfstream compete fiercely for market share, but they can agree from time to time; and they take a similar line on the outlook for business jets. In separate investor presentations early last month, executives for both manufacturers offered an optimistic view of new-production, large-cabin business jets over the next two years. Jay Johnson, chairman and CEO of Gulfstream parent company General Dynamics, and Bombardier Aerospace president and COO Guy Hachey both described the industry as “stabilizing,” and see sales of new, large-cabin jets trending upward.

Both companies are also looking at what remains a considerable backlog of large-cabin aircraft. According to Johnson, Gulfstream has a backlog valued at $2 billion, and large-cabin aircraft account for the bulk of it. Hachey said despite
order cancellations exceeding orders, Bombardier’s backlog of Globals (Global Express XRS and Global 5000) still spans 29 months, and the Challenger backlog
is 17 months.

Bombardier took a hit in late August when European start-up fractional Jet Republic announced in mid-August the shutdown of operations by its Portuguese subsidiary. The move induced Bombardier to cancel the company’s 25 “firm and conditional” orders for the Learjet 60XR, as well as the order options for 85 aircraft.

Hawker Beechcraft suffered a blow when fractional operator NetJets cancelled orders for 12 Hawker 4000s and deferred all deliveries for the rest of this year and all of next year.

In the early September business jet update from parent company Textron, Cessna Aircraft reported an estimated $3.3 billion in revenue for 2009, with demand down “dramatically” from the 2008 peak. However, it anticipates delivery of 279 business jets this year, which indicates early signs of stabilization, according to the update. Cessna also reported a 50-percent “headcount reduction” for 2009.

Moving Ahead on Project Development

Interesting to note is the approach of OEMs with regard to programs in development. While Cessna has cancelled its Citation Columbus program, it is continuing its Citation CJ4 program, and other companies are continuing development of future products.

Hawker Beechcraft continues work on the Premier II derivative of the Premier 1A, but recently revealed it has delayed entry of the light jet into the market. The Wichita company had forecast certification in mid-2010, with entry into service shortly thereafter. Now Hawker Beechcraft is projecting a date of late 2012 or early 2013.

Meanwhile, Gulfstream reports it is on track with its new G650, with the first flight scheduled for the second half of this year and certification in 2011. The G250, a G200 derivative with a T-tail and larger wing, is also moving ahead for a first flight later this year and certification likely in early 2011.

At Embraer, certification of the Phenom 300 light jet is expected before year-end, the new Legacy 450 and Legacy 500 programs are proceeding on track for certification in 2012 and 2013, respectively.

Aviation Research Group/U.S. (ARG/US) announced in its July report that business aircraft flight activity, which had been hit by a slump in demand, was now showing “tentative signs of recovery” in August and that “in recent weeks the trend suggests activity could meet 2008 levels in the near term.”

Not everyone agrees.

With shakeups in the executive suite, major startup failures and questions of survival for some established providers, the fractional jet industry is in the midst of major transformation, said Brian Foley of Brian Foley Associates consulting of Sparta, N.J. “Regrettably, there will be more turmoil in the charter, air-taxi and fractional arenas before year-end,” said Foley.

Speaking specifically of the fractional industry, Foley said the existing business model is geared to rapid growth. “So long as fleets expanded, providers could profit by buying new aircraft at discounts and selling them at list price to customers.”

But now,” he explained, “with fleet size very nearly constant, the emphasis must be on making the operational side profitable– or changing the business model altogether.”

On the other hand, Foley offered three positives for the charter, air-taxi and fractional segment:
• Given all the recent negative business jet publicity, it’s believed that the market will lean a little more toward user options that keep the jet under the radar, such as leasing, jet cards, charter and, of course, fractional.
• Those fractional companies that can adapt and survive will eventually end up with less competition–and therefore the ability to raise prices, a must for long-term viability.
• Foley is predicting double-digit percentage gains in year-over-year fractional flight activity (operations) later this year, which will be a healthy sign the slump has bottomed out and the industry has turned the corner.

The availability of credit and public relations are wild cards in the business jet recovery, said Bloomer. “Since the meltdown of a year ago, the domestic market was in a duck-and-cover mode as a result of bad public relations quotients,” he explained. “It will take some time and some effort by the industry to overcome that negative view.”

As for credit, it’s a two-edged sword, he said. “It’s available, but the market is slow to respond.

“Two years ago,” he said, “my high-net-worth clients had multiple credit relationships, but because of all the bank consolidations, those relationships have gone from being spread among as many as four banks down to two, or even one. In some of those cases, the banks are responding to a request for credit by saying, ‘Sorry, but I can’t afford that much exposure in a single client.’”

There are signs of improvement, a number of analysts and industry observers agree. But they also agree that it’s too early to be breaking out the champagne.