Bizav industry shows more signs of recovery

 - June 28, 2010, 11:29 AM

Based on relatively good news from manufacturers and analysts, many in the business aviation industry are on board the recovery boat. But amid indications of a recovery, there are also signs the boat is still leaking and more bailing is required.

Since January, the industry has watched with somewhat bated breath as flight hours and charter activity (albeit with the occasional stumble) steadily climbed and buyers began clambering off the fence to take advantage of seriously low used aircraft prices.

Numbers from Argus released on June 14 show business aircraft activity in May 2010 versus May 2009 is up 7.9 percent overall, with Part 135 charter industry showing the strongest increase at 8.6 percent.

Also on the positive side of the ledger, Swedish global charter portal Avinode reported in late May prospects for the executive and private charter market appear to be climbing as the traditionally busy summer season approaches. The Göteborg-based firm also noted that in North America, average flight hour rates showed double-digit growth. As examples, it noted rates for the Citation Excel were up 12.5 percent from a month earlier, and those for a Challenger 604 up 11.8 percent.

In April, NetJets predicted its European arm will post an operating profit this year, pinning its expectations on money-conscious companies opting for fractional shares rather than whole-aircraft ownership or charter.

JetNet also had good news about the used-aircraft inventory. The Utica, N.Y.-based market research firm’s May report showed that the inventory of used business aircraft declined further in April. Also, brokers have begun reporting an increase in prices, especially for low-time, large-cabin aircraft.

Pratt & Whitney Canada, the world’s largest maker of small and medium business jet engines, was optimistic, forecasting a return to peak production levels by 2015. According to Pratt & Whitney Canada president John Saabas, the company also plans to produce engines for large-cabin aircraft and its new PW800 will be a contender in that market.

If aviation conventions and shows are any indicator, two of the most recent offered signs of a business aviation recovery. This year’s Ebace saw more exhibitors and attendees than last year. More recently, a record 1,900 visitors signed up to attend the NBAA regional forum at Teterboro Airport last month and there were 90 exhibitors and 31 aircraft on the static display ramp.

Among the OEMs there was also good news. Montreal-based Bombardier reported net orders for six business jets in the first quarter versus negative net orders of 41 for the same period last year. CEO Guy Hachey also said business jet cancellations have slowed considerably from last year. He noted that the company received no cancellations at Ebace, a marked improvement from the 2009 show, when customers appeared in droves to cancel, amend or defer orders.

General Dynamics is predicting a “return to growth this year” for Gulfstream and Jet Aviation, according to chairman and CEO Jay Johnson early last month. He said this year Gulfstream Aerospace will begin an “attractive growth trajectory” and “is poised for double-digit growth” next year. And he further noted the backlog was valued at $18.5 billion at the end of the first quarter and that “orders have been outpacing defaults for four consecutive quarters.”

Speaking at Ebace, Gulfstream president Joe Lombardo told attendees that the company expects to be playing a major role in the globalization of business aviation. “It was not too long ago that approximately 80 percent of that fleet resided in North America,” he noted.

While the region still represents the majority of global usage today, the percent continues to decline year after year, he added. “Regions such as Asia/Pacific, Eastern and Western Europe, South America and the Middle East and Africa have provided incremental boosts to aircraft delivery and product support services.” In Asia, for example, he said, “the Gulfstream fleet has grown from 27 aircraft in 2001 to more than 110 today, [and] in Europe the fleet has grown from 62 to more than 160.”

However, the recession isn’t over yet. Cessna Aircraft launched rolling furloughs on May 17, affecting up to 200 people at the company’s Independence, Kan. factory. The move will cut production of the Citation Mustang very light jet through early next month. Scott Donnelly, CEO of parent company Textron, said Mustang sales have been softer than expected, “and if we need to modulate our production rates there, we will do that.” Nevertheless, Cessna does plan to deliver 100 Mustangs this year and will be delivering completed aircraft throughout the period of the rolling furlough.

While reporting that the pre-owned business jet market “remains on track,” JP Morgan also noted that the new aircraft market remains “elusive.” In its early June business jet monthly report, the firm’s chief aerospace analyst, Joseph Nadol III, said used inventories “continued to move downward, consistent with their path over the last 10 months. However, the shrinkage is minimal.”

In May, said the report, the used-aircraft-for-sale percentage of the in-service fleet was 12 percent, a modest downward move from 12.3 percent in April. That is still above the 10-year average of 9 percent and is higher than at any point during the 2001 to 2003 downturn. “And while they are now at the lowest level since December 1997, we see further softness ahead, given elevated inventory levels,” said Nadol. “More inventory still needs to clear before demand for new aircraft can pick up.”

Aviation market observer Brian Foley was also more cautious, suggesting that while a period of rather stagnant growth in the industry overall isn’t a cause for concern, “Most recoveries aren’t linear and the occasional pullback can be expected.” A year ago, he cautioned that the recovery might be W-shaped rather than V-shaped, indicating the possibility of a small double-dip before the long-term recovery. More recently he pointed out, “That appears to be what’s happening; the industry takes one step back before taking two more forward.”

At the Aircraft Interiors Expo 2010 in Hamburg, Germany in May, a European Union starting its own recession was a major topic of conversation, in particular among some of the U.S. exhibitors. Europe is the world’s second largest market for business aircraft, traditionally accounting for 30 percent of business jet sales.

They noted that in the past year, a strong euro compared with the dollar brought a lot of business to U.S. aviation shops and accounted for many of the new aircraft sales. Foley pointed out that the non-North American sales component helped arrest a further market slide. “Those economies and stock markets revved up long before the beleaguered U.S., and with the dollar remaining weak, effectively rewarded buyers with double-digit discounts when purchasing with their strong local currencies.”

Europe’s slide into a recession is enough to send a new shiver through the business aviation industry worldwide. Foley noted that the rising strength of the U.S. dollar might cause a general aviation market shift as the EU struggles to find a solution to the fiscal problems facing many of its member states, primarily Greece, Ireland, Italy, Latvia, Portugal and Spain.

Nevertheless, Foley believes that a U.S. recovery will eventually help lead the new aircraft sales revival, since the most desirable used aircraft will have already been picked over by buyers from other countries. “They’ll have no place to go but to the new-aircraft showrooms.”

And he concluded, “Going forward, manufacturers will have to balance their presence and resources more wisely throughout a widening world.”

But Foley still finds room for optimism. “The European crisis has taken the wind out of our sails, but only for the moment,” he said. “When we look back later, I think we’ll see this as a brief lull in the sales reports.”