NBAA Convention News

Industry Perspective: Dassault Falcon

 - September 30, 2008, 10:57 AM

There has been a housing bubble, a credit crunch and now an investment banking meltdown, but few are ready to say with certainty that the market for business airplanes will be dragged down by the financial crises now gripping Wall Street–and threatening Main Street–as the U.S. economy seems headed toward a recession.

Dassault Falcon president John Rosanvallon counts himself among those who see a continuation of business aviation’s relative good health, though he concedes sales likely will not remain at the same record levels of the last three years. But like all the major business jet manufacturers, Dassault can rely on a lengthy production backlog to help buoy the company even as it is lashed by wild stock market fluctuations, a slowdown in business jet sales to U.S. buyers, a weak dollar and uncertainty about when the global credit market’s perfect storm will pass.

Rosanvallon says today’s predicament is different than in years past, when OEMs counted primarily on U.S. customers for new orders and before bulk orders from fractional providers like NetJets could add billions to their bottom lines with the stroke of a pen across a sales contract. NBAA Convention News spoke with Rosanvallon to get his take on the current market climate.

How concerned are you that the current turmoil in the economy will eventually become a downturn for business aviation?

We are concerned. I wish I had a crystal ball. With these big yo-yo swings in the stock market I’m glad I’m not a stock broker. These poor guys must be close to a nervous breakdown.

I think there are two reasons why this severe shock in the economy is different for business aviation. I have been in the business since 1975 so I have seen a few severe downturns. I think what’s different is, first we and most of the other OEMs have very significant backlogs. In our case, we have confirmed that at the end of June we had just under 500 aircraft on order. I think the estimated business jet backlog by the main OEMs is around 5,000 jets. That type of number, for us and for the industry, is a first since the beginning of business aviation. So the next question is, how solid is this backlog?

We’re obviously watching that carefully. We see a few people who are tempted to reschedule or to cancel their orders, but I would say that based on everything I know today the portion of our backlog that might be at risk is less than 5 percent. It’s very different from all the discussions you hear about the airline backlog. Airlines have a big backlog, but I think it’s nothing like the solid backlog we have in our business.

The second thing is that for the first time non-U.S. orders are exceeding U.S. orders.
The percentage grew to 60 percent in 2006 and 70 percent in 2007. We’re on the same trend for 2008. So our business is much less sensitive to an economic downturn in the U.S. I’m not saying that this downturn may not be global, but at least our risk is much more spread than it was at any time in the last 30 or 40 years. These two characteristics make this crisis unique, and a little different in terms of analysis.   

Have you started to see a drop off in sales?

We had a good first half of the year. We reported 87 sales, which is second only to our record 2007, so the first half was solid–again, in spite of a not very strong U.S. market–but the rest of the world had been pretty steady. As for the third quarter, it’s a little too early to say. What I can say is that we still have a substantial volume of serious prospects, but really it’s too early to say what the financial crisis will do to our business. We are realistic; it will have an impact. But again, because of more global business, I think it will be less dramatic than if we had the percentage of U.S. business we had five or 10 years ago. The global expansion and strength of the backlog will make it less painful than it would be otherwise.

What parts of the world are particularly strong right now?

Russia and Eastern Europe are strong. Western Europe has been not as strong, but still it’s pretty firm. The Middle East and India have been reasonably good. And of course, in our 87 orders reported at the end June we had 20 Falcon 2000LXs from NetJets Europe.

The number of airplanes for sale on the pre-owned market has risen pretty dramatically in a fairly short time. What impact do you think that will have on sales of new airplanes?

Not a significant impact. Again, because of the backlog, if you want a new Falcon 2000LX, 900LX or 7X you have to wait a minimum of three years in the case of the 900LX and up to five years or more on the Falcon 7X. We need to have some airplanes available as an interim solution for people who have none. As long as the volume of pre-owned airplanes is not too big, you can say you still have a limited
number available for sale. For the last two or three years the prices were very high–sometimes even higher than for new airplanes–so now you have a softening on the price, but I think it’s coming back to a more normal value, down from an unusually high level. Some people would call it a market adjustment. I do not see it as a dramatic event.

What about the impact of the weak dollar? What effect is that having on your ability to remain as profitable as you would like?

It’s one of the toughest strategic issues we are facing. When the dollar was very recently at $1.50 or even $1.60, that was really an unrealistic value. Now we are down in the low $1.40s. That’s still high, but a little better. We look at it as a long-term issue, but clearly it’s one of our most difficult issues. We are working hard in terms of productivity, in terms of assessing other opportunities. But you know, Bombardier and Embraer are also faced with a similar issue because the U.S. dollar has been weak against the Canadian dollar and the Brazilian real. In fact, for Brazil it has been pretty dramatic in the last few years.

You’ve just returned from a trip to China. Is there anthing you learned about that market?

Asia continues to be a medium- to long-term opportunity for business aviation. As of today the region represents less than 5 percent of our business, but I think it’s reasonable to assume that based on its economic weight it will grow. Now, if you look at a country like Brazil among the emerging countries, it has taken a while to become a big player, but for the last three to five years it has been a significant player in business aviation, especially the high end. It has a sizable fleet of small- to medium-size jets, but now they’ve entered the large-cabin, long-range segment in a big way. It will take China time to get there.