Honeywell sees upturn start in ’12

 - October 27, 2010, 9:09 AM

As the industry sees ­glimmers of hope that the downturn is finally ending, engine and avionics manufacturer Honeywell anticipates at least one more down year in 2011 before the start of a rebound cycle.

The company’s 19th annual business aviation forecast released at the NBAA Convention late last month–predicts deliveries of between 675 and 700 new business jets for this year (the lowest total since 2004), followed by another year of fewer than 700 deliveries in 2011.

“I think the downturn in 2009 demonstrated for all of us that nothing is really firm in an economic calamity. But that said, I think we are seeing a lot less volatility in the order book, a lot more stability and more of a sense of continuity,” Rob Wilson, Honeywell’s president for business and general aviation, told AIN.

“I would add that we have yet to see widespread consistent order intake across the entire industry, and that is what we are looking for before we start to signal a strong recovery.” That recovery is now expected to begin in 2012, fueled by deferred demand, new high-value aircraft models and more solid rates of global economic rebound. The forecast anticipates a late-decade cyclic peak likely higher than in 2008.

In last year’s 10-year forecast the manufacturer predicted deliveries of up to 11,000 new business jets through 2019, based on record purchase expectations outside North America. While this year’s forecast sees little change in that total, there has been some shuffling in regional demand. “This year operators outside North America have become more cautious about the strength and pace of the recovery,” said Wilson. “While they are still looking beyond the current economic climate and anticipating a return to improved business conditions, they have tempered near-term expectations and buying decisions as reflected in the current delivery forecast.”

To generate its forecast, Honeywell interviewed 1,200 randomly selected flight departments worldwide. “As part of the survey, we asked, ‘Do you plan to purchase [a business jet] in the next five years?’ and that’s what we cite as the purchase expectation number,” said Charles Park, the company’s director of analysis. “Then we asked, ‘At what point in the five-year window do you expect to replace or expand your fleet?’”

Park and his team use market analysis and production data from the airframers to determine the forecast for the coming decade. Based on the survey results, Honeywell sees increasing activity toward the end of that five-year window, with approximately 90 percent of planned purchases considered for 2011 and beyond. “Acting on these purchase plans in 2011 and 2012 is critical to giving the recovery momentum as current backlogs will not sustain delivery levels indefinitely,” said Wilson. “If [the anticipated purchases] occur we will start back on the path toward recovery and expansion in the industry.”

5,000 Bizjets in 2011-2015

Over the life of the survey, Honeywell sees potential worldwide demand for more than 5,000 business jets between 2011 and 2015, excluding orders from fractional providers and branded charter start-ups. Despite the slowdown in orders, Wilson noted there have been ­relatively few program cancellations from the manufacturers.

“Even in a downturn, many of the OEMs across the ­industry are continuing to work on new airplane development, and historically, new aircraft entering service have driven demand, especially as they set new points of performance around value,” he said.

“Part of what is going to fuel our recovery is some of these new aircraft coming on line in the latter part of the next five years.” While the total delivery prediction of up to 11,000 new business jets over the next decade remains unchanged from last year’s forecast, Honeywell this year revised the sales value of those purchases upward by 10 percent, to $225 billion, reflecting the increasing popularity of large-cabin aircraft among survey participants. “Another point that keeps coming back is the importance of the large-cabin aircraft,” Wilson said. “[Large-cabin aircraft account for] 70 percent of the dollar value over the forecast horizon and 42 percent of all the mentions that were in the survey.”

Overseas Expectations Shrink

According to the survey results, international demand now accounts for approximately 42 percent of new business jet purchase plans over the next five years, down from the more than 50 percent of purchase plans expected in this segment last year. Honeywell attributes the decline mainly to the lackluster global economy. Overall, the survey calls for five-year purchase expectations around 30 percent, with North America trending up one point over last year to an anticipated replacement or expansion of 26 percent of the respondents’ existing fleet. Over the life of the survey, the region accounts for 58 percent of aircraft deliveries.

“Despite the slow pace of recent economic growth in the U.S. and the ongoing concerns about job growth and credit restrictions, the survey indicates that purchases over the next five-year period are planned at levels similar to those reported in our 2009 survey, reflecting the value and productivity these aircraft deliver,” said ­Wilson. Deferred purchasing was a clear motivation, with aircraft age selected as a reason for replacement plans in 45 ­percent of the replies.

In Europe, the second largest consumer of business jets, purchase expectations of 34 percent of the current fleet were down considerably from last year’s record high of nearly 59 percent, but the forecast considered possible declines of the dollar against the European currencies as a potential incentive for aircraft purchases starting as early as next year. In terms of purchase plans, large and midsize cabins outpaced small aircraft by a five-to-one margin. Operators identified a desire for longer legs and the comprehensive warranty coverage of new aircraft as key ­factors in their purchase considerations.

Operators in the Middle East, Africa and Asia have likewise tempered their purchase expectations for the next five years. Based on the plateau of oil prices that existed for most of the year, and sluggish increases in oil demand, the Middle East and Africa have become more conservative in their economic outlooks, as evidenced in purchase expectations of approximately 30 percent, down 25 points from last year’s survey. Purchases in the region are still planned for sooner in the five-year window than in North America, Latin America and Europe, but diminish during the mid-forecast period, when expectations in those other regions begin to improve.

Respondents in this region cite more range and aircraft age as the top reasons for replacement.

In Asia, the current purchase plans of 40 percent represent an 18-point decline from those of a year ago, which Honeywell attributes to caution among operators as a result of slow recovery of the region’s major trading partner economies and concerns about export-fueled growth and Chinese real estate markets. The Asian survey respondents indicated that larger cabin size and increased range are their primary motivators for future aircraft purchases.

With purchase expectations down five points from last year’s survey to approximately 35 percent of current fleets, Latin American operators are still showing historically high levels of interest. Responses suggest that while there is concern in the region about the outlook for economic growth, operators remain upbeat about long-term prospects, with 85 percent of planned purchases anticipated next year and beyond. Unlike operators in other regions, those in Latin America cite range and more modern avionics as the primary drivers for aircraft replacement.

The resale market has seen signs of slight improvement over the past year, with inventories (currently totaling 2,672 aircraft, according to recent statistics by industry data provider JetNet) decreasing by about three points off the peak levels recorded early last year. This year’s survey found a slight improvement in anticipated used jet purchases globally, with increases in North America, Asia and the Middle East, while European and Latin American operators predicted a decline in their used aircraft acquisition plans.

All the regions reported firm ­intentions to increase their aircraft utilization in the
near future. That mirrors reported increases in the number of flight cycles in the U.S., according to Wilson. “Probably one of the more meaningful stats can be seen in the overseas departures from the U.S. in business jets. They’re up in the ­double digits over last year, so that’s a ­significant uptick in usage, which says customers are using business jets and are realizing the productivity enhancement and efficiency of them. We see that continuing.”

The segments with the largest increases in flight activity lie at both ends of the spectrum–the very light jets such as the Cessna Mustang and Embraer Phenom 100, and ultra-long-range aircraft including the Gulfstream G550 and the Bombardier Globals. In addition to recovering utilization rates, both classes are among the most rapidly expanding.

In the fractional ownership segment, new jet deliveries were off 80 percent from last year through the first half of this year, and net incremental sales have continued to deteriorate further after last year’s more than 50-percent loss.

Honeywell is forecasting significantly lower deliveries over the next few years as the fractionals work off excess capacity and rebuild shareholder levels. “They are still rationalizing their overall operations and getting the fleet right-sized,” said Park. “Initially you will start seeing orders to replace aircraft before they go into another growth mode.”

Aircraft by the Numbers

Based on the results of the survey, Honeywell sees a slow but steady change in aircraft category demand over the next five years. Through 2015, medium to large aircraft such as the Bombardier Challenger 605, Dassault Falcon 7X, Cessna Citation X/Ten and Embraer’s growing Legacy series will account for 32 percent of the projected purchases, while light and medium-size business jets, including new designs such as Bombardier’s Learjet 85, the Gulfstream G250, Embraer’s Phenom 300 and Cessna’s CJ4, will make up approximately 22 percent. Long-range and ultra-long-range aircraft such as the new Gulfstream G650 and Bombardier’s Global series will garner 21 percent. Those longer-range aircraft will constitute nearly 50 percent of the delivery dollar value over that same period. Very light jets will constitute the remaining 25 percent of demand but equate to only 5 ­percent of the retail shipment value.

While the personal jet segment is not part of the survey, the forecast calls for deliveries over the next 10 years of 500 to 1,000 of these aircraft, such as the still-developing PiperJet (see article on page 10) and the stalled Cirrus Vision. As recently as two years ago, Honeywell’s forecast called for deliveries of these aircraft reaching 4,000 to 5,000 in a 10-year span. Last year, that number dwindled to between 1,000 and 1,500. “The numbers have fallen significantly as [manufacturers] have dropped out, and the issue there is as much attributable to supply as to demand,” said Park. “There may still be demand for many of these airplanes, but the people who had aspirations in that part of the market have not been able to execute their business model plan.”

The forecast also does not ­explicitly include bizliners such as the Airbus ACJ, Boeing BBJ, Embraer Lineage 1000 and corporate versions of twin-aisle and regional jetliners among its forecast totals, yet Honeywell predicts deliveries in this segment to average roughly 20 per year for the 10-year period, adding $17 billion in sales to the bizav OEMs’ bottom line.

FBOs and Airports Lukewarm

For FBOs such as those run by the ­Assistair group in Spain, the key feature of a VLJ is that you do just about as much work to provide handling as you would for a larger jet, but for less money. “VLJs can be ­financially frustrating for FBOs,” said ­Assistair CEO Catherine Gaisenband.

VLJs arriving at Assistair’s facilities in ­Palma de Mallorca, Gerona, Valencia, Barcelona and Ibiza often carry about the same number of passengers as larger jets–usually three. On the other hand, the Assistair founder still sees the glass as half full in that she hopes VLJs will introduce more people to FBOs and increase use of smaller, secondary airports. She also hopes to diversify her revenue streams to start sharing the VLJ dividend. For ­example, since VLJs have no APUs, and therefore no air conditioning while on the ground, ­passengers and crew will not be able to sit in them while parked–at least in warmer climates. This could mean that they spend more time inside the FBOs, prompting her to think of things she could sell to them while they wait.

James Dillon-Godfray, ­business development director of London ­Oxford Airport, shared some of these reservations about VLJ traffic. He pointed out that these aircraft aren’t quite as ­versatile operationally as some imagine. “Don’t underestimate the amount of runway that they need,” he told the Light Jets Europe conference, claiming that VLJs can’t get into popular European airports such as Cannes in the south of France and Frankfurt’s Egelsbach.