Bizav sees recovery on horizon beset with hills and troughs
Eighteen months ago, the business aviation industry was happily floating in a sea of black ink. Now, a year-and-a-half later, it’s drowning in red ink. And it’s debatable whether the end of the economic recession is in sight or whether it’s a good idea to hang onto the life preservers just a little longer.
It was a year ago that it became frighteningly apparent that the good-times express was headed over a cliff, and at that point, nobody was quite sure how long the descent would last. In the year since then the industry has seen more than 30,000 jobs disappear, either through layoffs, furloughs or the normal process of attrition.
As cancellations and order deferrals grew, backlogs, once healthy, dropped. The number of unsold “white tails” sitting on OEM ramps grew, and deliveries began to slide.
In January, the UBS Business Jet Update noted that of the inventory of 2,564 used business aircraft, 176 were new aircraft delivery positions. And it went on to point out that the rapidly growing used-aircraft inventory would stall new-aircraft orders, even as the backlog was shrinking.
In the face of politically expedient and public criticism of “fat cats” in their private jets, orders for new and used aircraft dropped and the inventory of used jets for sale grew to an all-time high of more than 3,100 aircraft in June 2009. As a result, prices dropped to all-time lows. A pre-owned, low-time Gulfstream IV-SP that was selling in the neighborhood of $29 million in August 2008 could be found for about $19 million in August 2009.
Reality Has a Way of Catching Up
Last year was a high-water mark for business jet deliveries. A total of 1,315 business jets were shipped in 2008, 325 in the last quarter. But in the first quarter 2009, that number dropped to 297. And when the first half 2009 numbers came in, they were still more shocking; 412 deliveries compared with 663 in the first half of 2008. By December, revised delivery forecasts were prompting production cutbacks and forecasts for personnel cuts as well.
Going into 2009, many OEM executives were publicly expressing confidence. “We continue to have faith in a healthy, long-term systemic global demand and we have a robust new product pipeline over the next ten years as well,” said Lewis Campbell, chairman and CEO of Cessna parent company Textron.
But reality has a way of catching up. “The OEMs have grown fat, dumb and happy with their current order backlogs and are oblivious to how quickly things will change,” said Brian Foley of Brian Foley Associates, a Sparta, N.J.-based investment consultancy. “We’re warning our clients to expect double-digit percentage order cancellations, depending on the manufacturer.”
And as that used-aircraft inventory grew, prices began to plummet. Steven Rogers of the Guernsey, Channel Isles firm Aradian Aviation in the UK, reported the sale of a new G550 for $52 million, considerably less than the $59.5 million the owner had been asking.
Adding new depth to the hole into which the industry was sinking was the credit crunch. A UBS report from December reported that “roughly one third” of respondents said financing had dried up, compared with 6 percent of those responding to a September survey.
According to Rogers, more lenders were basing loan approvals on the client’s wealth rather than on the company balance sheet.
In January Cessna announced the layoff of 2,000 workers by the end of the month, in addition to 665 layoffs in December. By summer, the job losses at Cessna would be close to the 8,000 mark. In early 2009, Brazil’s Embraer confirmed reports that it planned to lay off 4,000 workers.
Bombardier followed suit in February, starting with the layoff of 350 full-time employees, and engine manufacturer Pratt & Whitney Canada announced it would lay off 1,000 in coming months. Duncan Aviation announced a reduction in employee hours and wage cuts, a first in the history of the 53-year-old family-run company.
Gulfstream, which had laid off “a number of contract employees” in December and warned of the possibility of full-time employee layoffs, announced in March
a reduction in force of 1,200 workers, including approximately 600 more contract personnel. And from Bombardier came an additional announcement that the cut in production of its Challenger 605 and Learjets was prompting the layoff of 1,360 workers.
More bad news came from Cessna in April when chairman, CEO and president Jack Pelton announced, “To ensure our focus is on our strong products in existing markets, we are suspending our development of the Citation Columbus.”
By late spring, Dassault Falcon’s order backlog had dropped from $8.52 billion in 2007 to $7.9 billon in 2009. Sales went from $5.54 billion to $5.09 billion, and profits from $518.9 million to $506.7 million.
The only bright spot in the business aviation industry seemed to come from the narrow- and widebody bizliner segment. Neither Airbus nor Boeing reported any significant order cancellations, and new orders, if not overwhelming, were comforting. Embraer, which delivered its first Lineage 1000 bizliner, saw the order book for the reconfigured executive/VIP model of its EMB 190 airliner continue to climb.
Some Small Signs of a Recovery
Not until late summer was there any sign, however slight, of a recovery. The stock market had begun recovering and new unemployment filings declined, but as one analyst put it, “The business aviation market is still bouncing along the rocky bottom.”
Today, analysts and industry observers are speculating that the U.S. economy is in recovery. Housing starts are up, if just slightly, and the stock market continued a steady if not spectacular move upward. And there are signs that the business aviation industry may be on what is described by most as “a long slow road back.”
Most of the industry analysts speculate that the recovery is unlikely to be precipitous, but rather a slow climb, with the possibility of a setback here and there. Only in an industry this beaten down, said one analyst, would suggestions that the boat isn’t sinking as quickly as it was be taken as a positive sign of recovery.
As September dragged to a close, there was almost a feeling of relief on the part
of many in the industry, though perhaps not so much the result of good news as
the fact that the month was ending and they were still in business.
While there were still white tails on the ramps, they were selling and numbers were slowly dwindling. Bombardier reported that its white tails had been reduced from 25 in the previous quarter to 16 as of early September. A few brokers reported the sale of these airplanes at “eyebrow-raising” prices. But as one analyst put it, “It’s doubtful any discount to a new buyer amounted to a loss, as the manufacturer almost certainly kept as liquidated damages all or a good part of the money put up by the original buyer.”
And while the number of used aircraft for sale remains somewhat staggering, that number also is slowly starting to shrink.
According to the September UBS Business Jet Update, “Available business jet inventories stepped down two percent in August, the second sequential decline in three months, following 18 months of consecutive increases.”
Mark Bloomer, president and owner of Bloomer deVere Group Avia, offered some confirmation. “We expect to close on seven airplanes within the next week and we went to contract on both our Gulfstream 550s in just the past few days,” he said in mid-September.
Bloomer deVere and other brokers also noted that what is selling first are the low-time, large-cabin aircraft, and “virtually all of it involving international buyers. If buyer activity continues,” he added, “we expect prices will be up 10 percent by mid-2010.”
The September report from JP Morgan’s “Aerospace and Defense: Business Jet Monthly,” added a cautiously positive look at the state of the industry. “In a sign that conditions are improving modestly in the market for used jets, inventories fell 40 [basis points] in August, the first material decline of this cycle.” The monthly report also noted that although August flight operations remain depressed, they have “perked up a bit.”
Most analysts and industry watchers agree that demand for new business aircraft is unlikely to begin growing until the supply of low-time and low-priced used aircraft drops sufficiently so that the prices begin to rise again.
Nevertheless, the OEMs will survive the extended drought, and are planning accordingly.
Bombardier president and COO Guy Hachey recently described the industry as “stabilizing” and said that the sale of new, large-cabin jets will trend upward. Hachey also noted that despite order cancellations exceeding orders, Bombardier’s backlog of Globals (Global Express XRS and Global 5000) still spans 29 months. The Montreal OEM’s Learjet 85 program has been slowed, however slightly, but the new facility in Queretaro, Mexico, will be finished and fully operational when the big, eight-passenger twin-jet goes into service in 2013.
As mentioned earlier, in the spring Cessna canceled its large-cabin Citation Columbus, but the Wichita OEM is moving ahead with the new Citation CJ4, and in a recent statement, Textron CEO-elect Scott Donnelly said the company may revisit development of the Columbus. Meanwhile, he added, Cessna will continue to invest in its “core set of products” to keep the existing customers loyal.
Dassault Falcon continues to press ahead with its Falcon 900LX upgrade, due to enter service in late 2010. And this year the company opened two new Falcon- owned service centers, one in Reno, Nev., and another at Sorocaba Airport in São Paulo, Brazil.
Embraer said its new Phenom 300 will be certified by year-end, and in combination with the already certified Phenom 100, the Brazilian company expects to deliver 110 aircraft in 2010, a revision upward from early 2009 estimates. Embraer is also continuing development of its Legacy 450 and Legacy 500 midsize business jets.
Gulfstream’s new $58.5 million G650 ultra-large cabin jet was rolled out in a public ceremony on September 29, with deliveries expected to begin in 2012.
Hawker Beechcraft took a hit when fractional operator NetJets canceled orders for 12 Hawker 4000s and deferred all deliveries for the rest of this year and next. The company continues development of its follow-on Premier II but with a delay in certification of about two years.
Benefits for Fractionals
A relatively optimistic forecast comes from Brian Foley. He expects more turmoil before the end of 2009, but offered the following:
• Given all the recent negative business jet publicity, the market will lean more toward ownership structures that will keep the jet under the radar, to the advantage of leasing, jet card, charter and fractional programs.
• Fractional companies that can adapt and survive will eventually end up with less competition, which will increase the ability to raise prices, a must for long-range viability.
Double-digit, year-over-year percentage gains in fractional activity are likely later this year; a healthy sign the slump has bottomed out and the industry has turned the corner.
Public perception and credit remain something of a wild card, according to Bloomer. “Since the meltdown of a year ago, the domestic market was in a duck-and-cover mode as a result of bad public relations quotients,” he explained. “It will take some time and some effort by the industry to overcome that negative view.”
As for credit, it’s a two-edged sword, he said. “It’s available, but the market is slow to respond. “Two years ago my high-net-worth clients had multiple credit relationships, but because of all the bank consolidations, those relationships have gone from being spread among as many as four banks down to two, or even one. And in some of those cases, the banks are responding to a request for credit by saying, ‘Sorry, but I can’t afford that much exposure in a single client.’”
Yes, there are signs of improvement, according to analysts and industry observers, as well as company executives. But they’re not inclined to break out the champagne anytime soon.