Bizav industry in holding pattern

 - August 1, 2010, 7:49 AM

“I’m ready for the times to get better,” sang Crystal Gayle. So is the business aviation industry.

It has been two years since the U.S. economy began its slide into recession, with business aviation close behind. And if the times are getting better, and there are some signs they are, they’re improving slowly, and in fits and starts. Now in the summer months, traditionally slow months for the industry, what had seemed like a recovery appears to have stalled.

“Those people who sat out 2009 were stepping up in early 2010,” said Janine Iannarelli, founder and president of Houston-based aircraft broker Par Avion. Iannarelli, who has been in the business for more than 25 years, described today’s aircraft buyers as people who had flown on private jets and came to the realization that this was an unprecedented opportunity to fulfill a long-held dream of owning one. “And they were primarily cash buyers. A lot of the people we’re still dealing with are cash buyers,” she said.

Not that credit isn’t available, she explained, “But it will never be as loose as it was during the IT [Internet technology] boom and the peak around 2005.

“I do see lenders reaching out, but they want qualified clients, and the conditions vary from one lender to another. Today, they want 20 percent down, and it’s not asset lending; they expect collateral outside the aircraft.”

Iannarelli contends that a tighter hold by lenders is not a bad thing, and the way it should have been all along. “It’s good for the entire industry.”

But credit remains a factor in the decision to buy, she said, noting that if a company needs credit to keep the business running, or a line of credit to buy raw goods and keep good employees working, it will do that rather than invest in a business jet.

JPMorgan Research in its July 2010 report noted that used jet inventories had declined again, and the airplanes that were selling were primarily heavy and medium jets.

“As a result,” said the report, “production cuts for [new] large jets have been relatively modest.”

While noting that business jet operations saw another first-half 2010 double-digit increase from the previous depressed levels, the report said that any recovery has lost some of its strength recently, with flight operations falling sequentially for two consecutive months.

Also indicative of a stalled market, a Wichita State University survey shows that Wichita aviation executives who responded do not expect employment to surpass 2008 levels until 2015.

The university’s Center for Economic Development and Business Research said 60 percent of those responding believe the recession trough will not appear until after the next year’s first quarter. The study cited dropping employment and income nationwide as factors smothering demand, in addition to economic uncertainty and tight credit.

Manufacturers Cautiously Optimistic

Last year Bombardier Aerospace executives referred to the European Business Aviation Convention & Exhibition (Ebace) as “the cancellation show,” noting that customers would come in, but primarily to renegotiate contract terms, cancel, defer or restructure the deal. At Ebace 2010, according to president and COO Guy Hachey, activity was far more positive and an indicator that the market is stabilizing.

Gulfstream Aerospace, on the eve of the Asian Business Aviation exhibition in Macao, expressed confidence in market growth in the People’s Republic of China and the region. Quoted in the Beijing-based People’s Daily, Gulfstream v-p for international sales Roger Sperry said of China, “The market is robust, the business culture is dynamic, and more companies are discovering the flexibility and advantage provided by business aviation.”

In Brazil, one of the so-called bric nations (Brazil, Russia, India and China), where business aviation growth seems assured in both the near and long term, the discovery of deepwater offshore oil has helped spur the economy and business aviation. 

Organizers of the Latin American Business Aviation Conference & Exhibition (Labace), scheduled for August 12 to 14 in São Paulo, anticipate a record 15,000 visitors, some 1,500 more than last year. (See Focus on Latin America, page 36.) 

Speaking at the Aero Club in Washington, D.C. on June 21, Cessna Aircraft chief Jack Pelton told his audience, “Market conditions have stopped freefalling; new orders are starting to come in again, cancellations have slowed, flight hours are going in the right direction and the pre-owned business jet inventory is down from 18 percent.”

Embraer released its second-quarter numbers last month, and while the value of the firm order backlog (commercial and executive aircraft) dropped 5 percent to $15.2 billion this year from $16 billion last year, deliveries of executive jets jumped from 19 in the first quarter to 40 in the second quarter.

Pratt & Whitney Canada does not expect a return to peak production levels before 2015. Speaking to Bloomberg Businessweek in mid-June, president John Saabas made note of the fact that OEMs such as Bombardier and Gulfstream are considering new larger models, while Cessna might revive its canceled Citation Columbus program. He also noted that Cessna “doesn’t typically see demand rebound following economic recessions until about eight quarters after corporate profits return.”

Several months ago, when the Greek economy hit the skids and it appeared Italy, Ireland, Spain and Portugal might be close behind, there were analysts who wondered what a rising dollar might do to the European market, which had been strong and had provided considerable support to the business aviation industry in the U.S. Now the European Union seems to be on the mend.

Most recently, business aviation industry growth has appeared to be in a holding pattern. But Iannarelli points out that the summer months are traditionally slow, even in the best of times. 

“We’re starting to see early signs of a slowdown, kind of a speed bump,” said Foley. There was some market restraint from April into late June, but it wasn’t a dive. I was more like a stall.”

Helping drive growth into this fall, Foley predicts, is the Europeans’ sorting out their economic troubles and the recovery in the rest of the world, which is happening faster than in the U.S. 

“Europe and the markets will adjust themselves–they always do–at which point the recovery can resume in synch,” he concluded.