Aviation industry defies economic drag

 - August 30, 2011, 5:25 AM

Democrats and Republicans wrangling over the debt ceiling, spending and tax increases and tax cuts have come up with a deal nobody really likes. In the meantime the economy continues to stumble along to the pulse of a stock market fluctuating wildly. Unemployment is nudging 9.2 percent, the housing market remains depressed, and the President again has singled out corporate jet owners as the whipping boys.

Amidst all this, business aviation is still alive, but the GAMA shipment and billings numbers for the first half of the year are sobering. Corporate aviation information provider JetNet in its mid-year analysis described 2011 as the “year of correction.” The Utica, N.Y.-based firm reported growth of 15.3 percent in pre-owned business jet retail sale transactions for the first half of this year.

Aviation Search Group also reports positive indicators for the first six months of this year. The Fort Worth-based, customized search program provider said in mid-July demand for hiring in the aviation industry is clear and that it closed an “unprecedented” first half of 2011. “Demand is actually healthy across the board and we don’t see it slowing down,” said director of sales Grayson Barrows. Hiring activity, he added, is up 40 percent from the first six months of last year.

Manufacturers See Positive Signs

It is generally acknowledged that in an economic recovery, new aircraft sales follow used aircraft sales, and with used aircraft sales rising, there are now reports from the OEMs that signal an upswing.

The Bombardier Aerospace report for the quarter ending April 31 showed revenues up from $2 billion in the first quarter of last year to $2.2 billion in the same period this year. It also listed 61 aircraft deliveries, compared with 56 for the same quarter last year, net orders for 86 airplanes compared with 61 in 2010, and an order backlog valued at $21.1 billion on April 31, compared to $19.2 billion at Jan. 31, 2011. The Canadian OEM was buoyed as well by a firm order from fractional operator NetJets for 50 Globals, with options for an additional 70. The value of the order could total $6.7 billion, including the options.

Cessna Aircraft announced revenues climbed to $17 million in the second quarter, mainly as a result of after-market support. Profits in the second quarter were modest at $5 million, up $2 million from the same period last year. According to Textron chairman and CEO Scott Donnelly, the second-quarter 2011 order numbers showed an increase over the first-quarter 2011 and over the second-quarter 2010 numbers.

Gulfstream said demand for its aircraft and aircraft services was “particularly strong” in this year’s second quarter, leading to an increase in its aerospace backlog for the third consecutive quarter. The Savannah, Ga.-based OEM also announced the signing of an MoU with China’s Minsheng Financial Leasing for the purchase of midsize and large-cabin Gulfstreams. The memorandum covers up to 50 aircraft with a potential value of $2.6 billion.

But there was a negative cloud cast by parent company General Dynamics with regard to its Jet Aviation division’s interior completion “throughput efficiency.” GD chairman and CEO Jay Johnson said the jobs were coming in Jet Aviation’s front door more quickly than they were leaving out the back door.

Dassault Aviation reported a net-22 new business jet orders, including cancellations. While Dassault offered no numbers regarding cancellations, Dassault Falcon Jet president John Rosanvallon described it as a considerable improvement over net orders in the first half of 2010 of just two aircraft. The order intake for the first half of 2011 in terms of revenue was up by 14 percent over that period last year. That amount might have been higher, said Dassault Aviation chairman Charles Edelstenne, “were it not for the unfavorable dollar effect. The unfavorable [dollar versus euro] parity penalizes our production costs in France,” he added.

At Embraer, deliveries were down, but the Brazilian OEM reported strong orders at mid-year. In June, Comlux The Aviation Group of Zurich ordered three Legacy 650s, and in July Minsheng Financial Leasing signed an MoU to purchase a mix of up to 20 business jets. Deliveries might begin as early as this year.

Industry sectors other than original equipment manufacturers were also offering up signs of improvement.

Flight Options revealed in July it had entered into a three-year, $167 million financing agreement with Brazil’s Banco Nacional de Desenvolvimento Econômico e Social (BNDES) to finance the fractional operator’s order for up to 150 Embraer Phenom 300 light jets.

Further suggesting a loosening of purse strings from financial institutions, GE Capital Aviation Services (Gecas) obtained $290 million in asset-backed securitization for acquisition of a pool of turbofan business jet engines. According to Gecas, it was “the first aviation securitization that has closed since 2007 [indicating that] it will not be long until the aviation asset-backed securitization market returns.”

To the north, Canadian MRO and completion and refurbishment specialist Flying Colours took note of “a steady growth in [completion and refurbishment] orders since the beginning of the first quarter 2011.” While the company’s base is global, director of completion sale and management Sean Gillespie pointed out that “the major spikes in these refurbishments have come from existing or new North American customers.”

Meanwhile, some aviation analysts watching the unfolding specter of a double-dip recession are concerned that what appears to be the beginning of a business aviation industry recovery might not be sustainable.

The fact is, said The Teal Group analyst Richard Aboufalia, that the health of the business aviation industry lags behind the economy–boom or bust–by six to twelve months, depending on the industry sector. The upswing business aviation experienced over the past six months or so is for the most part a response to influences such as strong corporate profits and a rising gross domestic product (GDP) in 2010 and early 2011.

“My concern is that nobody knows for sure whether the current economic condition is a hiccup, or if we’re in for a so-called double-dip recession,” said Aboulafia. “We can ride out a hiccup, but if we’re talking about a double-dip recession, the industry will be reflecting that in about six to twelve months.”

Analyst Brian Foley of Brian Foley Associates doesn’t believe the current equity market bounces, sovereign debt issues and overall economic uncertainty are precursors to another 2008-like industry free-fall. “I wasn’t shy about proclaiming the sky was falling then, and I’m now categorically insisting that the same scenario just isn’t plausible today.” The reasons he offers include: 

1.  current orders made by those with the financial wherewithal to buy their own aircraft, or by borrowers who have been heavily scrutinized by lenders and made meaningful down-payments.

2.  industry backlogs that are much smaller and made up of mainstream clients rather than charter and fractional start-ups, with delivery dates typically well into the future.

3.  aviation companies that survived the past two years have already adapted to a slower environment and are in a better position than they were before to deal with the occasional pullback.

Foley acknowledges that recent market volatility may result in a short period of slower sales for some manufacturers, but that net orders (sales less cancellations) will remain positive. “For the time being,” concluded Foley, “volatility is the new norm. But those companies left in general aviation are the leaner, tougher survivors.”