NBAA Convention News

J.P. Morgan analysts see market dip in 2010

 - October 7, 2008, 3:12 PM

The business jet market is headed for a 15-percent downturn following a peak in deliveries in 2010, according to J.P. Morgan industry analysts. However, the downturn will be shallower than the previous slowdown in 2001 and 2002, which resulted in a 31-percent decline.

The effect of the financial crisis will be buffered by the industry backlog, one of the main reasons the downturn won’t be as severe as the earlier decline, according to Joseph Nadol, head of the J.P. Morgan Aerospace and Defense equity research group. “This industry has a massive backlog,” he said. “We’re going into this recession in a much better position than before.”

In addition, deliveries are up 11 percent from 2003, and profits have increased 36 percent, Nadol said. The “fragmented” state of the industry will also help prop it up. “There are a lot of players in this industry, much more so than in the commercial industry,” he said. “And there will continue to be a lot of players.”

International business will also help keep the industry afloat, but he said analysts are altering their predictions regarding China and India. “We’re seeing massive declines in air travel in China,” Nadol said. “It’s like nothing we’ve ever seen before. It looks like things are shrinking, and it’s happening in India, too.” Nadol  added that the analysts are puzzled because the countries’ economies are growing, a fact that should point to a corresponding increase in aviation. “There’s obviously some sort of disconnect somewhere,” he said.

Business will increase in the Middle East, Eastern Europe (including Russia) and Latin America. “There’s a lot of cash out there,” said Stephen Tusa, executive director of J.P. Morgan Securities. “There’s been a pickup in demand, which will make the downturn less brutal than the one in 2001 and 2002.”

Despite the strengths of the industry, there are a number of signs that point to a definite downtown, however. Tusa said corporate lending standards have tightened, which usually precedes an economic downturn by three or four quarters. Corporate spending and profits have a direct impact on business aviation. “Next year is going to be a tough year,” he said. “We’re already hearing reports of small business owners using credit cards and home equity loans to pay their payrolls.”

Business jet flight activity (based on recorded takeoffs and landings) has also dropped significantly. “It’s shocking,” Nadol said. “We’ve seen a double-digit decline in the last few months. We’re at lows we haven’t seen since 9/11.”

Lastly, used inventory levels have “spiked” in the last few months. Analysts look closely at used inventory levels when gauging the state of the industry, Nadol explained. “We’re now approaching levels we haven’t seen since the last downturn.”
As a result of the downturn, the industry might begin to see more consolidations, Nadol said. “Downturns are when consolidations occur,” he said. “But it’s too early to start thinking about that. No one knows how bad it’s going to get.”

OEMs are also keeping a close eye on the market and hoping the downturn won’t affect their backlogs. “We have heard of one aircraft not being delivered because the customer’s financing fell through,” Nadol said. “OEMs have a wait-and-see attitude.”
Regarding the problems with Eclipse, Nadol said the company’s collapse is not indicative of the entire VLJ market. “I don’t think it’s a sign of the long-term viability of VLJs,” he said. “It’s not a commentary on the product.”