Crystal ball: $208B in sales by 2019

 - August 26, 2010, 12:26 PM

Business jet charter, sales and acquisition firm Zenith Jet released a “bottom-up segment dynamics” forecast that predicts 10,940 business jets worth some $208 billion will be delivered this decade. While these numbers are similar to other industry outlooks released over the past year, “Where our forecast differs is that it is built upwards from a segment perspective. A large part of our business is to sell and acquire aircraft, so we intuitively know which aircraft compete against each other in the market and, from a practical standpoint, how customers’ requirements drive their choice of aircraft,” the forecast methodology reads.

“We are not saying that our forecast is better than anyone else’s. What we do warrant, however, is an unbiased and critical assessment of the business aviation market that provides some detail as to why certain models will fare better, or worse, than others,” it continues. As such, the outlook–prepared by Zenith vice president of aviation services George Tsopeis–pits aircraft models against each other and even predicts potential new business jets that have not yet been announced.

The big picture: large, super-large and ultra-long-range segments are expected to account for more than half of the $208 billion in sales. These business jet segments have held up better than others during the economic downturn, and Zenith expects the trend to continue over the next 10 years. This line of thinking also explains why the forecast sales revenues are $10 billion or more higher than previous outlooks from OEMs, engine manufacturers and business aviation research firms. By volume, “personal jets” are predicted to lead, followed by the midsize jet segment with 1,440  deliveries forecast.

In the near term, “With the clarity provided by the first six months, Zenith Jet predicts that 2010 will be lower than expected (in terms of unit deliveries) and that 2011 will see a marginal rebound, with momentum picking up only after 2012,” the report notes. Looking farther out, the forecast estimates a return to 2008 revenues and deliveries in 2015 and 2016, respectively. “Because of the higher segment mix of aircraft, industry revenue will rebound to 2008 levels a year earlier than unit delivery levels, largely due to the higher ratio of widebody aircraft programs,” it explains.

In terms of regional performance, the forecast acknowledges the BRIC nations (Brazil, Russia, India and China) as “potentially strong contributors” to manufacturers’ order books, especially given the appreciation of their respective currencies against the U.S. dollar. “However, critical to their contribution as the engine powering the recovery is the necessary capital investment to their aviation infrastructure and regulatory relief regarding operations and ownership. We believe that the pace of the infrastructure investment and the necessary regulatory relief will lag behind the regions’ economic profile.”

Meanwhile, prospects for a healthy European contribution to aircraft sales “have gone from promising to tenuous.” According to Zenith Jet, “Containment activity to control the sovereign debt issue in Greece aimed at preempting a fiscal contagion affecting Europe’s more prominent economies is threatening to relegate the entire region to the sidelines during the business aviation recovery and potentially over the entire forecast period.”

Further compounding this is Europe’s looming emissions trading scheme, which might also stunt business jet demand. “There is, however, a wild-card aspect to the emissions trade-off issue. Implemented correctly, the emissions legislation might serve to stimulate replacement demand for newer, more environmentally friendly aircraft.”

Regarding the traditional business aviation markets in North America, Zenith Jet has “strong confidence” that this region will rebound once corporate profits start to show signs of “discernible growth.” And, as Middle East economies are “inextricably linked” to U.S. growth, “So too will that region rebound once the recovery starts to take shape.”

Manufacturers Under a Microscope

A segment in the forecast’s predictions for the manufacturers boldly begins, “We predict that Bombardier will stop producing the Learjet 40XR and 45XR by 2014 and withdraw from the light and super-light segments altogether.” Zenith Jet’s reasoning is that these models have not had the sales success that the Canadian aircraft manufacturer expected, especially internationally.

“The Learjet 85 will allow Bombardier to wipe the slate clean and breathe new life into Learjet. It could choose to scale down the 85, but it would, again, force the company to go against engineering convention, as it did when it scaled down the 45 to come up with the 40.” A scaled-down Learjet 85 would result in “less than optimal” operating economics, not to mention a high engineering risk due to the airplane being all composite, Zenith Jet said.

“Furthermore, our forecast assumes that the Learjet 85 will replace the 60XR. We feel Bombardier will opt to focus on the higher end of the business aviation segments, especially since doing so will not hurt its revenue market share leadership, which is slated to be 28 percent over the forecast period.”

As for new models, the outlook indicates that Bombardier will soon offer clean-sheet replacements for the Challenger 605 and Global Express XRS, for entry into service (EIS) in 2016 and 2015, respectively.

Jumping to Gulfstream, Zenith sees “interesting activity emanating” at the company. According to the forecast, Gulfstream is “developing a clean-sheet large aircraft, which it will in turn stretch into a super-large model to be ready for entry-into-service in 2015. Our position is largely based on…the frenzied engine development activity in the 10,000- to 12,000-pound-thrust range.” These models are dubbed the G360 and G470 in the report, suggesting they would supplant the existing G350 and G450.

“Also of interest, despite the manufacturer’s recent commitment to its lower-end product line with the development of the G250, we may see Gulfstream shed the IAI products either through divestment, production line closure or a combination of both as these products have not translated into the expected sales success or trade-up opportunities Gulfstream envisioned.”

While he didn’t state this in the forecast, Tsopeis told AIN that the Gulfstream G650 will supersede the G550.

The Zenith Jet crystal ball paints an overcast outlook at Hawker Beechcraft. It cites the NetJets cancellations for Hawker 4000s, delays in the Premier II program and likely cancellation of the Hawker 450XP. The forecast also indicates that Hawker Beechcraft could launch a clean-sheet super-light jet for EIS in 2014, but Tsopeis said this is now highly unlikely given the company’s current financial straits.

At Cessna, the forecast predicts that the large-cabin Citation Columbus will be resurrected, with an estimated entry-into-service date of 2016. “One area of exposure surrounding Cessna’s ability to sell aircraft at their usual levels will be how it will do so without the benefit of extending in-house financing, which parent company Textron has promised to curtail. As a result, a heightened reliance on third-party commercial financing might translate into lower order intake numbers.”
Despite this uncertainty, the forecast shows Cessna as the unit delivery leader over the forecast period, accounting for about 35 percent of volume.

Regarding Dassault, Zenith expects the French aircraft manufacturer will finally bring its super-midsize program to market, but “we are anticipating a slow launch, development and entry-into-service cycle.” As such, it estimates entry into service for the SMS in 2018. And “with periodic upgrades to its existing aircraft, Dassault’s deliveries should translate into an average of 68 aircraft annually over the forecast period, but not much more.”

Meanwhile, “Embraer will solidify itself as the sixth major business aviation OEM, securing the number-two spot in terms of unit deliveries market share with 18 percent.” With its product line focused primarily on the lower end of the business aviation spectrum, Embraer will present “a much more formidable competitor to Cessna than Bombardier Learjet or Hawker Beechcraft ever was.”