Industry outlook remains murky in prognosticators’ tea leaves

 - November 23, 2009, 9:24 AM

For the past several months, analysts and industry observers have been noting signs of a recovery, even as some statistics suggest otherwise. So where is the truth? Is the industry bouncing back, or is it experiencing a yo-yo effect and there’s more down to come?

“It depends,” in the noncommittal words of one analyst.

It depends on who and what you listen to, and two things are in plentiful supply: folks to listen to, and numbers to ponder.

Most recently, business jet activity in terms of takeoffs and landings has been up. The increase has been slight, but it has also been steady for the past several months.

The UBS Business Jet Update released October 30 showed an overall increase in business jet cycles (takeoffs plus landings) of 7 percent “on a seasonally adjusted basis from a weak August.” But it also marked the fifth sequential uptick in the past six months.

According to the report, “Cycles in September were 18 percent higher than their March low, although 9 percent lower than a year ago, and 27 percent lower than the mid-2007 peak.” Analysts also noted that the most rapid recovery was in short-range aircraft cycles, a category for which flight activity had declined the most as the industry went into the downturn. Short-range aircraft cycles were up 8 percent on a seasonally adjusted basis, with medium and long-range aircraft each up 5 percent.

According to the Aviation Research Group/ U.S. (ARG/US), business jet activity in October climbed 5.14 percent over activity in September and was 2.5 percent higher than in October 2008. Turboprop activity led the field, with a 9.1-percent improvement. Part 91 operations climbed the most overall at 5.9 percent, but overall Part 135 operations saw a 0.7 percent increase, spurred by a 12.8-percent increase in midsize jet operations.

Lest anyone become irrationally exuberant, the ARG/US report also pointed out that total flight activity for the past 12 months, compared with the previous 12 months, is down 18.41 percent.

In a report released shortly after the NBAA Convention in late October, Credit Suisse noted a rise in flight activity over the last six to eight months. Its business jet market update also noted that while 45 percent of FBOs confirmed drops in traffic this year, 68 percent have recorded a relatively recent increase in activity.

News of increased flight activity came with a dash of cold water with the announcement early last month that NetJets would begin shedding pilots starting in the middle of next month. The fractional giant expects to furlough up to 495 pilots, a decision that resulted from “a comprehensive analysis of current and projected flight demand,” said chairman and CEO David Sokol.

The decision came shortly before parent company Berkshire Hathaway revealed that its NetJets subsidiary had suffered a loss in revenues of 42 percent (about $1.5 billion) during the first nine months of this year, compared with the first three quarters of last year. The loss was attributed primarily to a 79-percent decline in fractional ownership sales and a 24-percent drop in flight operations.

Continued Bad News for the OEMs
While there was a modicum of good news in flight activity, there was nothing in particular for the aircraft manufacturers to cheer.

The General Aviation Manufacturers Association (GAMA) released the industry’s shipment and billings figures for the first three quarters on November 5 with news of a 46.8-percent drop to date to 1,587 aircraft from 2,982 in 2008. Billings were down 23.5 percent, to $13.8 billion. Business jet shipments slumped 37.8 percent.

While Cessna posted a $32 million profit in the third quarter, profits were down $209 million from a year ago and deliveries were nearly half what they were in last year’s third quarter.

Hawker Beechcraft early last month notified its machinist union local that it plans to close the Salina, Kan. facility, which builds wings, spars and other sub-assemblies. The facility typically employs about 250 workers and has been leasing space at Salina Municipal Airport since 1966. The lease ends in February 2012.

Hawker Beechcraft’s third-quarter general aviation sales declined by $98.6 million, down from 86 aircraft in the first nine months of last year to 64 in the same period this year. While turboprop deliveries in the first three quarters of 2009 actually increased by one, from 30 to 31, the number of business jet deliveries dropped from 34 aircraft to 25. The value of the company’s total backlog has shrunk from $7.9 billion at the end of third quarter 2008 to $6.6 billion. General Dynamics reported in October that third-quarter sales for its aerospace group–which consists of manufacturer Gulfstream and services provider Jet Aviation–fell 18.4 percent, to $1.12 billion, down $250 million from last year’s third quarter. For the first nine months of this  year, said GD president and CEO Jay Johnson, even as aerospace group revenues were up 0.3 percent, to $3.99 billion, earnings dropped 28.7 percent, to $540 million.

For the third quarter, Gulfstream delivered 17 business jets, 22 fewer than in the same period the previous year. For the first nine months of this year, deliveries dropped from 115 to 74 aircraft.

Nevertheless, aircraft manufacturers struck a positive note. “Order activity and interest continue to improve, with particularly strong demand in international markets for our large aircraft,” said General Dynamics’s Johnson. He noted that the backlog remained constant at about $19 billion and that orders were outpacing customer defaults. Large-cabin production next year is expected to be in the low 70s, and cabin completion slots are sold out through next year, and “well through 2011 and into 2012 for some models.”

Recent U.S. trademark filings by Gulfstream suggest that the company is looking forward to a recovery. Gulfstream has filed  to trademark the G700, G750, G760, G770, G800, G850, G860 and G870. Gulfstream president Joe Lombardo and senior v-p of programs, engineering and test Pres Henne acknowledged that the company is working on new aircraft models. “However,” Lombardo told AIN, “don’t assume that these aircraft are larger or faster than the G650. Model numbers don’t matter. Don’t read too much into these model numbers.”  

In Melbourne, Fla., Brazilian OEM Embraer has begun construction on its first U.S. assembly plant at Melbourne International Airport. It will be dedicated to final assembly and outfitting of Phenom 100s and Phenom 300s destined for North American service.

The Melbourne facility is expected to turn out as many as eight aircraft a month, but no production rate has been announced yet. The new complex will include a customer service center for cabin design. Embraer also recently opened a service center in Mesa, Ariz. At the same time, it has temporarily shut down its new Windsor Locks, Conn. center until its business jet fleet expands sufficiently to warrant reopening.

 Bolen Blames Triple Whammy
In a recent interview with AIN, NBAA president and CEO Ed Bolen pointed out that business aviation closely mirrors the economy and, more specifically, corporate profits. So the negative impact of the recession comes as no surprise to an industry that has weathered previous down cycles.

On the other hand, he added, the credit crisis is another contributing factor, as was the sudden popular public perception of private jets as fat-cat luxuries, a misperception exacerbated by executives of the Big Three automakers traveling to Washington in business jets to plead for federal bailout money in November 2008. That was followed by a suggestion by a number of policy makers that any companies receiving the so-called Tarp (troubled asset relief program) funds would have to divest themselves of their private aircraft.

“There’s no doubt that the negative publicity has exacerbated problems in the business aviation market,” said Bolen. “I don’t know how to quantify it, or if you can, but certainly there is enough anecdotal evidence.”

Both NBAA and the General Aviation Manufacturers Association recognized that something would have to be done to battle the negative image and the “No Plane, No Gain” program was re-launched. “There is tangible proof that it’s making some difference,” said Bolen.

He pointed out that a new general aviation caucus that includes more than 80 members of the U.S. Congress has been created. And he noted that 70 mayors from 15 states have written letters to President Obama in support of general aviation. In more local displays of support, the governor of Georgia issued a pro-aviation proclamation, and in Little Rock, the governor of Arkansas attended a rally held at Dassault Falcon Jet facilities in support of the industry.

Brian Foley, president of Brian Foley Associates, believes the low point is past, “although it continues to be a good news, bad news situation. As early as late 2009 we’ll start seeing double-digit increases in takeoffs and landings, and a steady increase in business jet operations through 2010,” he predicts.

He explained that some sectors of the business aviation industry–charter, for example–were hit by the downturn before others. As they were sinking, the OEMs were still doing well and asking, “What recession?”

Now charter is at least not getting worse, and indications are that flight hours are slowly increasing. “But the OEMs are going to have to wait a little bit longer.”

At the same time, Foley added, “Their phones may be ringing more seriously by mid-2010. I think the OEMs will be pleasantly surprised by mid-2010.”