Market has not dodged impact of financial dip

Dubai Air Show » 2009
November 12, 2009, 7:00 PM

In the business aircraft market, the oil-rich Middle East has been an extremely important source in recent years of wealthy customers with a seemingly insatiable appetite for the largest, most sophisticated (and expensive) business jets available. As the economic slowdown turned into recession in the more mature North American and European markets over the past year, the Middle East was looked to as the region with the greatest prospect for weathering the storm relatively unscathed. However, the unprecedented scale of the financial crisis has impacted the Middle East harder than expected.

With all of the focus on the Middle East’s burgeoning growth in recent years, it is important to keep the actual size of the market in perspective. In reality, the region still amounts to only a tiny fraction of worldwide business aviation–at least for now.

The Ascend Online Fleets database prepared by London-based air transport information and consultancy group Ascend counts more than 30,000 business aircraft– jets and turboprops–in service worldwide. Aircraft registered in the Middle East account for just over 1 percent of this total, with 356 aircraft, although it is important to bear in mind that a significant number of aircraft operated in the Middle East may be registered elsewhere (often offshore or in the U.S. and Europe). Nonetheless, it is evident that the Middle Eastern fleet is still relatively small compared to those in other geographic regions (see Chart 1: Business Aircraft Global Fleet–Regional Share).

However, when the focus is narrowed to larger business jet aircraft, the Middle East as a region becomes more important (see Chart 2: Large Business Jet Global Fleet–Regional Share). To further illustrate the preference for larger business jets in the Middle East, the following charts (Chart 3: Middle East Business Aircraft Fleet–Breakdown by Category, and Chart 4: North American Business Aircraft Fleet–Breakdown by Category) illustrate the relative proportion of different business aircraft size categories for the Middle East and the largest market, North America. It can immediately be seen that while in North America the overwhelming majority of business aircraft types are small business jets and turboprops, they make up less than half of the Middle Eastern fleet. At the other end of the size spectrum, airliner-sized bizliners and long/ ultra-long-range types account for a far greater share of the Middle Eastern fleet.

The preponderance of larger types in the Middle East is due primarily to geography and customer characteristics. The Middle East relies heavily on international trade with North America, Europe and Asia (most obviously with regard to its major export commodity–oil), travel to all of which requires medium- to long-range capability. It should therefore come as no surprise that the lion’s share of business aviation activity in the Middle East is generated by the oil-exporting states of
the Gulf Cooperation Council (GCC), particularly Saudi Arabia and the United Arab Emirates.

That being said, Jordan is also an important business aviation market, particularly flights to and from Europe. However, for lower-income Middle Eastern countries outside the GCC, the picture is far different: fiscal deficits, high public debt and political instability pose a challenge to attracting foreign investment, deterring economic growth, and consequently, growth in the business aviation market.

Research by Ascend indicates that, in the GCC, status is an important consideration, which means that an aircraft’s aesthetics–  the size and appearance of its cabin, as well as its perceived sophistication–are strong criteria against which a prospective operator, whether a wealthy individual or a charter operator, evaluates an aircraft.

Commercial charter customers have a significant aversion to turboprops, based on a perception (however inaccurate) that turbo-props are less up-to-date and therefore less safe. Aircraft age is also a major concern, with overwhelming preference given to nearly-new or new aircraft.

The Middle East as a region has enjoyed above-average economic growth in recent years, although other emerging economies have shown even higher growth rates and are expected to continue doing so in the foreseeable future. However, the scope of the current global economic recession is such that no region is immune (see Chart 5: Regional GDP Growth Rates).

Negative Growth This Year
Economic growth prospects in the Middle East are strongly tied to crude oil prices. The sharp drop in oil prices in recent months has impacted economic prospects severely, with the International Monetary Fund expecting negative (albeit mild compared to the U.S. and Europe) growth in 2009 for Saudi Arabia and the UAE, the two most important centers of business aviation activity today. The global financial crisis and resulting curtailment in international trade activity has further exacerbated the situation, affecting non-oil exporting nations such as Jordan (see Chart 6: Middle East GDP Growth vs. Crude Oil Price). Ascend’s research indicates that the result has been a significant drop in demand for commercial business flight activity recently.

The uppermost segments of the business jet market–long- and ultra-long-range business jets, as well as the bizliners–had historically shown greater resilience in the face of economic turbulence, particularly given their appeal to governments, heads of state and high-net-worth individuals. However, the softening that had previously been evident mainly among older, out-of-production types and smaller aircraft categories has spread to the top end of the market.

In addition to precipitating severe curtailment in flows of capital worldwide, the U.S. financial crisis in September 2008 has sparked serious public criticism in recent months in the U.S., as the business jet has quickly become a symbol of the “corporate excess” widely blamed for the current financial malaise. In response, many large corporations, including Citigroup, Starbucks and the U.S. Big Three automakers, have deferred deliveries or placed their corporate aircraft up for sale, and there is increased caution regarding making large corporate jet purchases (in order to limit public criticism as well as to conserve cash). While the public outcry has been largely limited to the U.S., the effect has been global: there has been a large influx of large-cabin aircraft on the used market, delivery positions that 18 months ago would have commanded significant premiums are now available, and large long-range jets are experiencing significant downward pressure on values (see Chart 7: Historical Market Value Performance–Selected Larger Jet Types).

Early indicators appear to show that, on a global scale, the worst of the decline is over and signs of recovery are anticipated in the near future. However, recovery in the near term is expected to be fragile at best, and unevenly distributed across major economic regions. For the Middle East, on one hand, crude oil prices have been rising since the beginning of 2009; on the other hand, international trade remains sluggish, constrained by restricted flows of capital as a result of the financial crisis. The financial sector’s return to health is a critical prerequisite for a global recovery, and while there are tentative signs that this is beginning to occur, it is too early to discern the timing and strength of the recovery.

The near-collapse of the U.S. financial system and resulting freeze in lending worldwide has meant that the availability of financing, on which the acquisition of many business jets of any category (as well as the wider economy) depends, has been severely restricted. Prospective customers for whom financing may be relatively unrestricted appear to be choosing to wait as aircraft values fall, in hopes of values falling still further, compounding the difficult sales environment. As a result, the business jet market has experienced swift and significant decline over the past 12 months.

That being said, it is important to keep in mind that the business jet market is softening from an extremely inflated scenario in 2006-2007, particularly when one is talking about the upper end of the segments that are overwhelmingly preferred in the Middle East. Opportunities for cash-rich customers to walk away with deals that would have been unheard of 18 months ago are increasingly available, and there are hopes that the bottom of the market is near, although it is impossible to predict with certainty.

Opinions vary as to the timing and strength of the eventual recovery; nonetheless, the industry’s longer-term outlook remains overwhelmingly positive. Development of Gulfstream’s flagship G650 large-cabin jet continues on schedule for a service entry date of 2012, underscoring the U.S. manufacturer’s confidence in the long-term prospects for the sector. Ascend expects to see a competitive response from archrival Bombardier, either in the form of a Global Express XRS upgrade or a clean-sheet design. Ascend also expects that Middle East-based operators will continue to be an extremely important customer source for these aircraft.

Gary Crichlow is an analyst with aviation information specialist and consultancy Ascend.

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