The Recession: Then, Now and Tomorrow
It has been two years since the economy went south, dragging business aviation right behind, and a year-and-a-half since a panel of “top economists” formed by the non-profit National Bureau of Economic Research (NBER) declared the recession over as of June 2009. Most recently, data from various sources suggests an increase in both charter and fractional activity, and the unprecedented inventory of used aircraft for sale (the younger ones, at least) is starting to dwindle. On the other hand, the new aircraft deliveries and billings data from the General Aviation Manufacturers Association is hardly encouraging. So, where are we now? Here is what a selection of business aviation’s leaders and analysts think. They’re bound to know at least as much as the NBER, and if they’re right, hang on tight because this bumpy ride is not over yet.
Chairman, president and CEO,
Business jet manufacturer
The National Business Aviation Association Annual Meeting & Convention of 2008 was “interesting,” recalled Pelton with considerable understatement. “We went into the show with record backlogs and were taking orders in unprecedented numbers.”
But less than three weeks earlier, Lehman Brothers had declared bankruptcy. By the time the show opened, fuel costs were rising and credit was getting tighter. “There was bad news, but we were still taking orders; we were sitting on record backlogs and we assumed those backlogs would remain solid,” Pelton said.
But they didn’t. The economy went from bad to worse and from worse to a full recession. And it dragged the business aviation industry down with it all through 2009 and into early 2010. “It took our company and cut it in half–revenues, demand, production and workforce, ” Pelton said.
During that time, said Pelton, Cessna focused on making the adjustments demanded of a recession. The company made its cuts, but at the same time, explained Pelton, the Wichita OEM continued to put resources into research and development and in product upgrades; but in particular in customer service and support.
What Cessna has done, said Pelton, is take all the right steps that will allow the company to take advantage of the recovery when it comes.
He noted, as do others, that corporate aviation follows corporate profits and in the second half of 2010 corporate profits showed signs of recovery.
On the other hand, he pointed out, “There are issues related to this recession that we haven’t lived through before.”
Among them is the obsolescence of older airplanes, especially those in the small and midsize category. “There’s a large number of old airplanes, and pricing, the economy and regulatory issues may drive them into retirement.”
Another is that in past recessions, “There was a better understanding of what caused them and a better understanding of what it would take for a recovery.” This recession is different.
One example is the expansion of global interconnectivity and accompanying uncertainty. Pelton pointed out that with events like the falling dollar and a shaky euro following the bailouts of Greece and Ireland and pending bailouts of Portugal and Spain, markets are no longer so sharply defined.
Another difference from previous recessions is the matter of individual and corporate confidence. “Something is going to have to happen to bring back that confidence.”
Pelton followed those arguments with assurance that both the economy and business aviation will recover. “Consistent with other forecasts, we’re anticipating that in fiscal year 2012 there will be some production increases.”
But no less important to a recovery of the business aviation industry, said Pelton, “Is that the reasons for owning a business jet are unchanged, and will remain unchanged going into the future.”
As businesses grow and develop and seek to boost their bottom line, he explained, business aviation will continue to be a tool for success. “We believe that when the economic recovery comes, those reasons will be as strong as ever.”
President, Par Avion
Global aviation consultants
Iannarelli has been in the business aviation industry since 1983 and founded Par Avion in 1997. Her client list reads like a mix of Who’s Who and the Fortune 500. “I’m not a pilot,” she freely admitted. “But I am a survivor.”
Iannarelli said her Houston-based firm “felt the foundation getting shaky in early 2008,” well before the bottom fell out of the business aviation market in early 2009. “We were planning to introduce a client’s Falcon 2000 to the market,” she recalls. “We were tracking the market well in advance and as we moved into the spring, we noticed a growing number of units in the used inventory.
“At the same time, we started seeing things that made us uneasy–the housing market was already crashing and Lehman Brothers was in trouble; we knew something was going on, and it wasn’t good.”
Today, she says, “The big iron [Gulfstreams, Globals, Falcons] are still popular and there are buyers looking for opportunities.” As for the older, smaller business jets, “When the cost of maintenance exceeds market value [or] when the residual value is about the equivalent of the weight of the airplane, it’s time to consider scrapping it.”
Considering that new-aircraft sales are unlikely to begin climbing again until the used-aircraft inventory is reduced, Iannarelli said that won’t be anytime soon.
“When we first started looking at a down market, my analysts were saying five to seven years before a real recovery,” Iannarelli recalled. “A lot of people thought 2010 would be the start of the recovery, but to be honest, I think this is a year of hanging on, and 2011 will mimic 2010. It will be late 2011 before we see the start of a real recovery in our industry.”
President and CEO,
Aircraft maintenance and overhaul
Ziegler has spent most of his life in business aviation, and most of that in modifications, maintenance, repair and overhaul and completion and refurbishment.
“Our industry was starting to feel the recession toward the end of 2008 and then in 2009 it really hit,” he remembered. “Since then, budgets have been cut and for the last two years, people have been bringing aircraft in to do nothing more than what’s required.” Most of the discretionary spending, Ziegler added, was for an upgrade or modification upon which the sale depended.
His Wichita-based company includes holdings that provide maintenance, repair and overhaul. There has been minimal downsizing in that segment of Greenwich as a result of the recession, “most of it through attrition,” said Ziegler.
Economic indicators, said Ziegler, are suggesting a slight overall improvement in business aviation. “Corporate profits are up, and that’s the primary driver in business aircraft acquisition and utilization. We’re targeting markets outside the U.S. as an immediate and long-range strategy, in particular China and South America,” he added. “Those markets will lead the industry in utilization when the recovery begins.
“We’re seeing an ever-so-slight but welcome pickup in activity on the discretionary spending side. And we’re seeing more activity by OEMs that had outsourced work as a cost-cutting measure.”
Ziegler sees a slow, gradual recovery, initially in the in-service fleet and later in new-aircraft sales. “Over the next 18 months to two years we’ll see a gradual improvement.”
Directional Aviation Capital
Parent company of fractional operator Flight Options
It was clear by October 2008 that a serious recession was building, Ricci recalls. And after 30 years in the business aviation industry, he has seen more than one recession. “At that time,” he said, “we saw a 20-percent, almost instantaneous, drop in bookings, which then translated into much lower over-peak travel during the Thanksgiving and Christmas holidays.”
At that point, Directional Aviation Capital had only just invested in Flight Options and as Ricci put it, “We were just getting our hands around the right size for the company and some idea of the profitability potential. Then in the first quarter 2009, people started calling to ask what their shares were worth and inquiring about cutting back their flight hours.”
By the summer, the right-sizing of the company had compelled a round of layoffs. By mid-2009, the Cleveland, Ohio-based fractional provider was parking some aircraft and had announced another round of layoffs. For 15 months, business was flat, said Ricci, “But in the last 60 days we’ve seen a significant up-tick. It started at the end of September and we’re having a great last quarter 2010.”
Ricci is cautious, but not as cautious as he might have been a year ago. “We’re going to forecast about 12- to 15-percent growth [at Flight Options] for the last quarter 2010 and 12-percent growth for 2011.”
As for the business aviation industry as a whole, Ricci says a real recovery will come when people start buying new airplanes again. “But that’s probably a two- or three-year wait.”
CEO, Atlantic Aviation
Lou Pepper has been involved in fixed-based operations in some form for all of his 30 years in business aviation and has been through more than one recession, but none as bad as the current crisis.
As early as the fourth quarter 2007, Atlantic began seeing a slow downturn in FBO activity. “At the same time, there were growing domestic and global economic concerns. By the time we were into the first quarter of 2008, the downturn was starting to pick up momentum.
“I feared a recession, but at that time I had no idea how entrenched it would become.”
As early as the first quarter 2008, Atlantic began looking for ways to curtail expenses. “We had just done a sizeable consolidation of a number of new acquisitions over the previous 26 months. We went through a process of integration and exited some of the non-performing acquisitions, which resulted in a reduction in head-count. There’s typically a high turnover rate in the FBO industry and we continued to cut employee costs through attrition. We also took the step of centralizing some of the local functions into the corporate office. All this resulted in a large reduction in operating expenses.”
Pepper has been watching some sputtering growth in activity during the past six months. “We feel like this slow but steady pace in activity will continue into 2011.
“But as for a recovery,” he added, “I don’t think anybody really knows when, or what the industry will look like when we do come out of it. Certainly it will be a leaner, more efficient industry.”
President and CEO,
Aviation fuel and services
Avfuel felt the rumblings of the coming recession as early as 2007 when the Ann Arbor, Mich.-based supplier saw freight and cargo fuel sales begin a rapid decline, according to Sincock.
With more than 25 years at Avfuel, Sincock has been through recessions before and recognizes a decline in freight and cargo activity as warning of a recession to follow. “In 2000 freight and cargo fuel sales dropped, and even without the terrorist attacks of 2001, a recession was coming. When commerce slows down, freight and cargo daily shipments drop,” he told AIN.
From 2007 into 2008, Avfuel saw fuel sales flatten and then drop. By late 2008, the fuels market was off 25 percent as the recession caught up with the business aviation industry.
Avfuel had already begun tightening expenses, but Sincock said at the same time the company was also increasing market share. “That increased market share offset the drop in sales so Avfuel experienced only a 10.7-percent decline in fuel sales in 2009.” In fact, the company has continued to hire throughout the recession, albeit slowly, as that market share continued to increase into 2010. Hiring was necessary, said Sincock, to meet growth in its AvPlan trip planning and AvInsurance, as well as increased sales in the international market for contract fuel.
“We’ve been trying to get in front of the recession so we’ll be in position ahead of the recovery,” Sincock explained. “We’ve added 50 FBOs to Avfuel branding in 2010, we have approximately a 22-percent market share nationally with 600 branded FBOs, and 46,000 pilots are part of our AvTrip loyalty program.” What’s more, the company has begun moving into a new corporate headquarters, on which construction had been slowed in 2008 and most of 2009 “while we waited to see what was going to happen.”
The best news? “Freight and cargo fuel sales are starting to grow.”
Vice president of analysis,
The Teal Group
Aviation and defense market analysis
“We were overdue for a recession,” says Aboulafia, “and all our forecasts showed a recession coming, or at the very least an economic downturn. Seventeen percent annual growth in the business aviation industry was simply not sustainable. What we didn’t foresee was the extent of the recession.”
According to Aboulafia, in the last half of 2008 and the first half of 2009, aircraft production fell sharply, but in a split never seen before. In the large-cabin aircraft category, production fell just 4 percent, but in the bottom half of production–medium- to small-cabin aircraft–production dropped a startling 43 percent. “We had forecast a recession, but we didn’t see a bifurcation like that coming.”
And two years into the recession, said Aboulafia, only about 10 percent of the large-cabin used airplane inventory is for sale, while at the bottom half made up of medium and small aircraft, 16 percent of aircraft are for sale.
He also noted that large-cabin aircraft are selling better in markets outside the U.S. And while large-cabin sales remain strong in the U.S., “We need a sustained and strong recovery of the U.S. economy to help that lower half of medium and small business aircraft.”
Vice president of green completion sales,
Jet Aviation St. Louis
Completion & refurbishment
Like more than a few other business aviation professionals, Renaud found that when the recession took hold, there was “some right-sizing” to be done, the result of growing so fast during those halcyon days from 2003 into early 2008.
Renaud said that Jet Aviation’s completion and refurbishment segment saw business drop off in the first quarter of 2009, mostly in the refurbishment side of the house. “At the time, we still had plenty of green work and we simply transferred some workers to that side of the business.”
Nevertheless, he said, “We had read the tea leaves and realized what was coming.”
In 2009, then-Midcoast Aviation saw business in completion and refurbishment drop to about 60 percent of what it was in 2008, and Renaud watched the backlog dwindle slowly from years out to only about six months.
What has helped was the acquisition of Midcoast by Jet Aviation in 2006, and subsequent acquisition of Jet Aviation by General Dynamics in 2008. That and a decision to move a substantial portion of single-aisle bizliner completion and refurbishment work from Jet Aviation Basel in Switzerland to what was officially rebranded as Jet Aviation St. Louis on Jan. 1, 2011.
The new, larger single-aisle bizliner outfitting hangars are now engaged as an outsource center for cabin components going into a BBJ3 completion in Basel. “It’s a significant amount of work,” said Renaud. The center did a minor refurbishment job on a BBJ earlier this year at its own facilities and expects its first major single-aisle refurbishment job to arrive late this year.
“The overall completion and refurbishment backlog is starting to fill up again and we have a pretty significant amount of work; it’s enough to keep us busy well into 2011,” he added.
TWC Aviation, Van Nuys, Calif.
Aircraft management and charter
It was as early as late 2006 when Richmond and others at the company saw the beginnings of a recession. “Charter was slowing down, owners were flying less,” said Richmond. “Where I’d normally walk into a hangar and see one airplane, I began seeing three and five and seven. Between the end of 2007 to the bottom, we saw approximately a 35-percent drop in revenue and flight hours.”
As early as 2006, Richmond had begun cutting overhead and “even though we’ve always run a lean company, we laid off maybe five employees, so by the time it got really rough, we were as lean as we could be and still keep running.” He is now seeing relatively steady growth, with 2010 being “pretty solid.” At TWC, activity is about 15 percent of what it was in those peak years before 2006.
But, he warns, recovery in the business aviation industry will not be the same for all segments, with charter leading the way. Charter, he explained, “is typically seen as more affordable than fractional ownership or ownership.”
Used aircraft sales, he believes, will also be a leader. In fact, TWC took advantage of the depressed used aircraft market to add a G550 and a Falcon 2000LX to its fleet.
“As long as you can buy a near-new business jet for 20 percent less than new, new aircraft sales will stay flat.” But he also believes there will be pockets that will recover more quickly, noting that a used G550 is now priced only about 10 percent less than a new G550.
Meanwhile, even as charter activity picks up, the price per hour remains low, and Richmond believes some charter companies may not be able to hang on at those prices.
President and CEO,
Corporate aircraft finance
Labrozzi remembers a few lines from an interview he did about two years ago. “In it I said I felt we were firmly at the top of the market [curve] but were facing an economic downturn, but nothing like in the past when values dropped 20 to 25 percent.”
Like so many, he accurately forecast a downturn but did not conceive how deep it would be, or how long it would last.
It has been a learning experience for lending institutions, as it has for everyone. As they watched the value of aircraft falling for which they had made loans against the airplane itself as collateral, they hit the brakes and made adjustments.
“There has always been plenty of capital available in customary market terms for well established, creditworthy borrowers buying newer airplanes,” said Labrozzi. “On the other hand, there was that period when the market was so frothy that it was a lot easier for others to be approved also.”
Today, there is money available for loans. “We have more capital than we have demand,” said Labrozzi. “We have some customers with whom we’ve had relationships for 20 years or more who have traditionally traded in for a new airplane every four or five years. Now they’re waiting to see how things settle out. The world is a more complicated place than ever, and buyers are more conservative than ever.”
As for lenders, said Labrozzi, “We’re looking more closely at the borrower. We go back and look at the history; for a proven track record and liquidity. And we focus on the borrower’s ability to repay the loan, not merely the collateral assets.”
While the majority of those buying new business aircraft are no longer U.S. customers, the U.S. dollar is still the monetary lingua franca of aircraft sales, and part of the underwriting is based on a borrower’s access to U.S. dollars, said Labrozzi.
As for how the current business aviation industry angst will shake out, Labrozzi agrees with those analysts who are forecasting a low, slow recovery. “That’s the kind of bet we’re going with. To the extent there is a long, slow economic recovery, the business aviation industry will follow at the same clip.”