Skies clearing for business aviation industry

Aviation International News » May 2011
May 1, 2011, 10:25 AM

While few in the business aviation industry are forecasting a spike in growth, they are willing to recognize that a recovery appears to be under way, albeit with fingers crossed behind their collective backs.

The recovery seems to have started in the early months of 2011 as charter and fractional operators began reporting a gradual increase in activity and those in aircraft sales watched as pre-owned inventory began to dwindle slowly, with large-cabin aircraft moving most surely. 

At the same time, more and more reports of inquiries turning into contracts began to trickle in from the maintenance, repair and overhaul providers and independent completion and refurbishment centers.

Argus TraqPak closely follows arrival and departure information on all IFR flights in the U.S., and it reported that March activity was up 17.2 percent over the previous month, with Part 91 seeing the biggest month-over-month jump at 18.6 percent. According to the Cincinnati-based aircraft activity analysis and market intelligence specialist, all aircraft category segments showed comfortable double-digit increases in activity, from a high of 19.5 percent for turboprops to a low of 12.7 percent for large-cabin jets.

Fractional share sales also stirred from their slumber. Flight Options saw a 46-percent increase in its JetPass membership card sales, compared with the same quarter in 2010. “We have more airplanes in the air than at any time since 2008,” said Flight Options CEO Michael Silvestro. He added that aircraft utilization has been up nearly 10 percent. Flight Options expects to take delivery of 15 to 17 new aircraft–a mix of Phenom 300s and Citation Xs–this year.

Demand for charter remained steady in the first quarter this year at 20 to 25 points above last year, despite the 32-month high in oil prices during this period, according to the Avinode Business Intelligence monthly report issued in mid-April.

“We forecast that demand would remain strong through the early part of the year and three months in, this prediction has held true,” read the report. Avinode added it expects the trend to continue over the summer months “as the market transitions into a traditionally higher demand period.

“That would be a reflection of the assumption that the lift in the index has been generated by a combination of an increase in actual market demand and a shift in popularity to heavy jets,” according to the report.

Avinode Marketplace managing director Oliver King noted that the increase in demand for the heavy-jet segment may, in part, have reflected the number of emergency response situations around the world.

JetBrokers Europe also has encouraging numbers. The Farnborough-based firm reported on April 14 that it has experienced “a steady growth of interest since the end of February, reinforcing current reports that optimism is returning to the industry and recovery is beginning to emerge.

“Buyers are definitely starting to return, more optimistic and more ready to commit,” said JetBrokers Europe managing director Tim Barber.

Aviation employment consultant JSFirm offered good news from another market segment, reporting that nearly 90 percent of 328 aviation companies surveyed expect to be hiring this year. Suggesting something of a trend, the Fort Worth, Texas firm noted that nearly 195 companies reported they did not cut jobs in 2010.

One consistent bright spot for the business aviation manufacturing industry in the U.S. has been a relatively healthy market elsewhere in the world, in particular Brazil, Russia, India and China. Assuming a global economic recovery, it appears that bright spot is taking on additional luster as a weaker dollar brings bargain seekers to the U.S. market.

As of mid-March, according to the Firestone Management Group, there were 136 private jets registered in India, and over the past 36 months no fewer than 43 aircraft have been delivered to customers in that country. “The growth opportunity for private jet manufacturers to deliver their products in India is tremendous,” said managing director Justin Firestone. “As the world’s largest democracy, the second most populous country and one of the fastest growing major economies, [India] is clearly embracing the need for safe and efficient business jet travel.”

With that in mind, it should come as no surprise that Dassault Falcon showed up at the India Aviation 2010 exhibition in 2010 in Hyderabad with a selection of its large-cabin business jets. The French OEM already has 16 Falcons in service in India and another dozen on order for delivery over the next three years.

At the Latin American Business Aviation Conference & Exhibition (Labace) last year in São Paulo, Brazil, every major business jet manufacturer was represented on the aircraft static line, some with as many as half a dozen of their production aircraft. And show organizers expect the 2011 show in August in São Paulo will draw an even larger representation.

Manufacturers Still See Clouds

While there is ample good news for the business aviation industry, it’s the rare road that doesn’t have a bump, or two or three. And not everyone is ready to go charging into an economic question mark on afterburners. Dassault Falcon may appreciate the activity in India, but it watched 2010 close with a record 95 deliveries but a slump in sales, prompting Dassault Aviation president Charles Edelstenne to forecast an uncertain 2011, predicting deliveries of approximately 70 business jets.

Embraer, too, is suggesting a slower recovery than it had thought possible last year. Embraer v-p for executive market intelligence Claudio Camelier recently said there remain concerns about how sustainable the economic recovery will be. With that in mind, the Brazilian OEM anticipates the number of deliveries this year could be 50 fewer than in 2010.

New aircraft sales typically are at the tail end of an economic recovery, lagging behind used aircraft sales. Nevertheless, there was a little good news from Stifel Nicolaus analyst Stephen Levenson, who upgraded the stock of Cessna parent company Textron to “buy” from “hold” on March 21. Levenson pointed out that “midsize businesses that suffered during the downturn are Cessna’s traditional customers, and a turnaround in that market could prove to be a sales drive.” Shares of Textron jumped 4.8 percent, to $26.73, on the shoulders of the report, and three weeks later had steadied slightly lower at $26.26.

A JPMorgan North American Equity Research study from March 29 stated, “We are gaining confidence that a recovery is taking hold following good news in recent weeks,” but less than a month later, JPM aerospace analyst Joseph Nadol III cautioned, “We remain guardedly optimistic…the path is a winding one and data points are mixed.”

Although the used aircraft market is exhibiting healthy signs of a recovery, with a steady if slow drop in the inventory since last October, Nadol pointed out that in March it recorded an uptick, albeit minimal at 0.1 percent. And he further noted that pre-owned aircraft prices also declined 0.1 percent.

Analyst Richard Aboulafia, speaking at the Wichita Aero Club in early April, was optimistic but cautious, saying it would be another six months before [used aircraft] pricing rebounds. And while corporate profits are recovering nicely, he added that there is still a sense of uncertainty in the economy.

Analyst Brian Foley expressed a similar outlook, pointing out that most recoveries are not a straight line and “there are some speed bumps along the way.” He noted in particular such recent “bumps” in the path of the economic recovery as the March 11 devastation in Japan following the earthquake and subsequent tsunami, the continuing political unrest throughout much of the Middle East and subsequent rise in the price of fuel, the impact on aviation of the eruption of Icelandic volcano Eyjafjallajokul last April, and the possible impact on the euro as some member states struggle to avoid financial disaster.

Also making the industry skittish are regulatory expectations related to the environment. Last June, the UK launched a major initiative to reduce carbon emissions of aircraft on the ground at UK airports. More recently, the UK has signaled its willingness to impose its own aircraft carbon emissions requirements well in advance of, and independent of, European Union plans (see related article). Tossed into that mix are decisions such as that of the UK government in March to start taxing business-jet passengers, a process that would mirror the country’s existing airline passenger duty.

Foley also took note of a small- and medium-cabin business jet market that has been hardest hit by the recession, and how it might react to the rising cost of fuel. “Approximately two-thirds of the hourly operating cost of a light jet is fuel burn, and as a result this segment is particularly sensitive to rising fuel costs,” he noted.

He also pointed out that this rebound is different from those in the past, in that, “We seem to be more directly connected to the stock-market ups and downs than in the past when a business aviation recovery lagged behind a stock-market recovery by about a year.”

Despite the hiccups, however large or small, a recovery in the long term seems to be under way and the business aviation industry is on its coat tails.

“I don’t know how long it will take to get back to those glory days, and maybe we’ll never get back,” said Silvestro. “But clearly, from my desk, we’re now moving in a forward direction from where we were two or three years ago.”

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