Ten years ago, there was much talk about “bifurcated” business jet markets, with demand for higher-end business jets being sustained and actually growing in the post-2008 period, while sales of light and very-light jet models slipped and fell quite markedly. Today, this bifurcation remains an important, albeit less sharply defined, feature of the demand environment, as OEMs collectively and for the most part individually come off of their best order intake performances in the last 10 years.
It is true that demand for products at the top of the market remains solid, as customers are drawn to the latest and greatest designs that have been the subject of so much of the industry’s R&D expenditures at the OEMs and their suppliers post-2008. Today, customers are blessed with a wide choice of all-new and recently refreshed business aircraft models to choose from.
Collectively, business jet OEMs are coming off some of their best performance in the last 10 years, whether measured by net new orders, backlogs, and book-to-bills above 1:1. In fact, when totals are added up, unit deliveries of new business jets and order backlogs will likely end 2019 up by more than 10 percent year-over-year—the first time this has occurred in the post-2008 recovery period.
More recently, and particularly evident over the past 12 to 18 months, another feature of the market has emerged, namely a dichotomy between new and preowned sales, with important implications for industry stakeholders in 2020 and beyond.
Although year-end transaction paperwork and details are still being recorded in the various industry databases, it has become apparent after the first 11 months of 2019 that preowned business jet sales were off about 16 percent year-over-year. During that time, inventory began to rise in both nominal and fleet-for-sale percentage terms, while prices mostly softened.
Young inventory (aircraft up to five years old) has begun to enter the marketplace once again, which would normally be a welcome sign in an environment where buyers have found the shelves emptied by others who were quicker to seize the opportunity than they were. I’m expecting this to have driven some additional sales last month, but nowhere near enough to reset the overall preowned sales results for the year.
It was a tough period for many aircraft brokers and dealers, as signs of caution and concerns about value diminution sidelined many would-be buyers.
Meanwhile, the market sentiment of the owner/operator community has clearly downshifted, in what looks to be a reaction to a multitude of complicating factors—both externally and within the industry itself—that have clouded forward visibility. These include a deteriorated macroeconomic and trade environment in an evolving “me first” world; diminished business confidence; concerns about climate change and environmental sustainability; Middle East tensions; caustic rhetoric in the buildup to another bitterly-fought U.S. Presidential election; unresolved Brexit issues regarding the Irish border and Scottish pro-European sympathies that challenge the very notion of a “United” Kingdom; and a strong U.S. dollar, limiting purchases by customers who earn most of their revenues in weaker local currencies.
Within the industry, the challenges of an aging fleet, diminished aircraft residual values, sluggish aircraft utilization patterns, and the loss of talent to higher-paying aviation sectors and other industries are compounding to increase the level of uncertainty facing existing and prospective business aircraft owners and operators.
With year-end earnings reports due to be filed in the next days and weeks, we are expecting a variety of performances to be detailed, some stronger than others. Dassault Aviation reported 40 net new orders and 40 deliveries of new Falcon jets, for a book-to-bill of 1:1, with backlog remaining at 53 aircraft, or about 15 months of production at recent output rates. Leadership at Dassault Aviation highlighted the “difficult market,” as the company had guided to a higher level of output (45 new jets), implying at least some unsold inventory slid into the new year.
Yesterday, Bombardier announced deliveries of 142 jets, about 5 percent below investor guidance, with essentially unchanged backlog year-over-year, implying a book-to-bill of about 1:1 on a dollars basis. Eleven shipments of the flagship Global 7500 occurred in 2019, below guidance of 15 to 20 for the full year, as the production and completions ramp-up continues. Bombardier’s EBIT margins before special items were about 7 percent, about 50 basis points below expectations.
Its preliminary 2019 results also included numerous indications that surprised investors: looming write-downs on the Airbus A220 partnership and indications that other large announcements will be forthcoming. Most analysts see this as an early indication of additional asset sales, which could even include the sale of the entire aviation business, with Textron, Mitsubishi, and perhaps one or two other organizations seen as likely suitors. Stay tuned—things will be interesting, as the chess games are set for what could be a much-needed round of consolidation in the business aircraft industry.
With many organizations relying on an annual planning and budgeting cycle, we are convinced of the benefits of a more continuous assessment and understanding of the state of an ever-evolving market. In business and in business aviation, and as recent development confirms, things change, sometimes quickly and with important ramifications that need to be understood, evaluated, and factored into business plans.
I recall a conversation I had several years ago with a senior and very successful business leader and investor. He was extolling the virtues of one of the BRICS markets, which had been experiencing rapid GDP growth, strong export success, impressive inflows of foreign direct investment, and a growth spurt in its business jet fleet and flight operations.
Despite this well-documented success story, at JetNet iQ, we had been examining this market and determined that things had in fact changed. Our team had just completed a quarterly state-of-the-market report and reached near-opposite conclusions about the current and evolving state of this particular market. In effect, the business environment had changed more quickly than the refresh cycle of the investor’s market intelligence.
There is an expression that life is what happens to us while we are making other plans. In our experience, life also has a nasty way of changing things in between preordained events locked into the corporate planning calendar.
With many organizations structured around annual budgeting and business planning cycles, a once-a-year look at the macroeconomic and operational environment is both inadequate and inherently risky, as the recent downturn in the customer mood, dichotomy of new and preowned business aircraft markets, and industry consolidation pressures seem to highlight. We would argue that continuous awareness and regular what-if scenario evaluations are both prudent and, in fact, vital given the rapidly changing business and competitive environment organizations are facing as we proceed into 2020.
Call it Darwinian, but business—and business aviation—have a way of separating the savvy and the prepared from everyone else. With ready access to computing power, we already have tools and databases today to generate unprecedented market, customer, and competitive insights. With the likelihood of an economic slowdown looming larger on many organizations’ radars, industry consolidation pressures have mounted, as we expected.
These will likely result in fewer in-production aircraft models and fewer OEM competitors in the months and years to come. The future, as always, will belong to the well prepared and the well-positioned.