AINsight: Bizjet Market Stabilizes, Set for Growth

 - January 18, 2019, 8:49 AM

In the world of near-instant news, and with a fresh round of annual sales meetings already underway, many business aviation industry executives are a little anxious these days. Understandably, they want additional visibility into how business aviation and its players performed in 2018, as well as what the prospects look like as we head into 2019.

From the perspective of aircraft sales and deliveries, the hard and mostly thankless work of sorting through the pen-and-paper and electronic transaction documentation, updating and verifying databases, and filling in the inevitable blanks in between is well underway and mostly completed. With the typical acceleration in year-end aircraft sales activity, leaders from across the industry—from Wall Street to Main Street, from boulevard Côte-Vertu Road to Quai Marcel Dassault, Gulfstream Road, Cessna Boulevard, General Aviation Drive, and beyond—are predictably abuzz, flush with more questions than answers.

Heard on the streets: “I know how we did, but how did we do relative to the competition? What’s coming? What’s up, what’s down? What’s the direction of the market? What’s happening with stocks, GDP, corporate profits, business confidence? What’s the impact on orders…by region?”

To market analysts, strategists, and forecasters, there is rarely a shortage of questions, but often one of resources, including data and prior relevant research, and not much time to do the analyses. The people who do this work best—mixing hard science, creative artwork, and imaginative story-telling—are a very rare breed and among the most valuable players on an organization’s leadership team.

Somehow associated with staring deeply into a crystal ball, forecasting requires a rare combination of intellectual curiosity, statistical analytics and forensics, and a knack for competitive and market intelligence to reveal deep, actionable insights for the benefit of an organization.

Before doing so, let’s review some of the most significant industry developments in 2018. Although final year-end numbers are still being tallied, industry book-to-bill performance was the strongest in 10 years, with most OEMs posting net new orders that matched or even somewhat exceeded factory shipments. This is very good news indeed.

Overall order backlogs stabilized and appear to have actually increased on a year-over-year basis in 2018, at least on a collective basis when considering the “Big 5” business aircraft OEMs: Bombardier, Dassault, Embraer, Gulfstream, and Textron Aviation. There is evidence that aircraft pricing has stabilized, while the rate of diminution in preowned aircraft residual values has slowed, both of which are indicators that industry supply and demand forces are rebalancing.

The extended post-2008 industry recovery period reflects the unprecedented degree of aircraft overbuilding that was going on prior to and to some extent even after the 2008 financial crisis. With so many manufacturers and so many production models, each vying for volume to bolster their top and bottom lines and cover their significant factory overhead costs, is it any wonder that we are where we are today?

Although one major OEM—Hawker Beechcraft—did not survive the post-crisis period, that organization’s brand, product lines, and production and completions facilities remain largely intact under the Textron Aviation banner. With expectations of slower growth rates over the next few years in places that are important to business aviation, we will likely witness further leaning out of OEM production lines, facility footprints, and possibly even brands and producers themselves.

New business jet deliveries in 2018 are still being counted, with the always-anticipated GAMA Year-End Shipments release and press event scheduled for February 20. My best estimate at this point is that there were 685 new business jet deliveries in 2018, or about 630 if the single-engine Cirrus Vision is excluded. Apples-to-apples, this compares to 668 new deliveries in 2017, or 646 units excluding the Cirrus jet.

At JetNet iQ, we estimate that, when the dust settles, the paperwork ink has dried, and all airplanes are accounted for, overall business jet deliveries were up about 2.5 percent year-over-year in 2018, bolstered by 34 additional shipments of the Cirrus Vision. Ironically, and excluding this $2 million aircraft, industry jet shipments look like they ended 2018 down about 2.5 percent year-over-year on the basis of 19 fewer shipments at Embraer and an estimated 12 fewer at HondaJet. Note that these estimates exclude bizliners.

In what may be a sign of the times at the lower end of the light jet market, or simply a challenge facing a single manufacturer, about 14 percent of the in-operation HondaJet fleet is currently listed as for-sale in JetNet, with almost 50 “white tails” (newly built but unsold inventory) sitting on someone’s balance sheet. [Ed. Note: Honda Aircraft said this count also includes aircraft currently in production, flight test and demo aircraft, and some awaiting delivery, which includes fleet sales.]

It is unclear to what extent this situation is being exacerbated by Honda Aircraft’s transition to the new HondaJet Elite model, which could presumably require post-production modifications that might explain at least some of the spike in finished goods inventory. The troubling level of for-sale inventory in the preowned market suggests that it might well be time for Honda to consider accelerating its plans to bring a second and more capable HondaJet to market.

With more than 2,400 preowned retail business jet transactions in the first 11 months of 2018, sales volumes were an almost perfect match with 2017, which by all accounts was a record performance for the industry. Days-on-market for aircraft that sold in 2018 were 289 from January to November, down about 8 percent from the prior year. Transactions from September 1 to November 30 were down about 3 percent year-over-year, which likely reflects the increasingly limited availability of high-quality, low-time, and nearly new inventory.

And more uncertainty lies ahead. Already entering its fifth week and now the longest in history, there is no end in sight to the partial shutdown of the U.S. government, a self-inflicted wound and growing international embarrassment to brand USA. With “essential” air traffic controllers and Transportation Security Administration staff being forced to work with no pay, it is difficult to know what it will take to eventually galvanize the various government factions into action.

As the cold, dark days of winter grip much of the country and Washington D.C. in particular, the likelihood of something as horrific as an aircraft accident or security lapse somewhere in the system has surely increased and should not be casually dismissed—a potential tragedy that could be a Black Swan for our times.

With the FAA aircraft certification among the many vital public services that are now on hold, when does the madness end? The backlog facing FAA professionals (who are considered “private citizens” without the ability to access their offices, computers, and telephones) is growing quickly, and with no end in sight to the current congressional/White House impasse, this could on its own lead to a slowdown in business aircraft development and production.

Expectations are for slower economic expansion, more stock market volatility, higher interest rates, and lower consumer and business confidence in the U.S. in 2019, as the level of uncertainty facing investors and business aircraft buyers—let alone FAA, TSA, and other government employees—has climbed in a stepwise fashion. 

In the face of this turbulence, and with only 49 weeks left in the year, what’s the current outlook for business aviation in 2019? Paradoxically, I expect new business jet deliveries will actually be up year-over-year on both a unit but, especially, on a dollar-value basis, driven largely by production ramp-up at Gulfstream (G500), Bombardier (Global 7500), Pilatus (PC-24), and Cirrus (Vision Jet), all of which are believed to have fully-sold production skylines in 2019. These deliveries will more than offset flat to somewhat lower demand for legacy production models that are at more advanced stages of their product life cycles.

Barring an economic recession in key business aviation markets in 2019, this increase in worldwide delivery units and dollars is sustainable through 2020, at which point growth rates flatten or even decline, driven largely by macroeconomic rather than industry-controlled factors.

In the pre-owned business jet market, I expect transaction volumes to decline from their torrid 2017/2018 pace in line with the reduced availability of young inventory that is most attractive to buyers. All in all, with hopes for an end to the Beltway Madness and barring any Black Swans, we expect 2019 to be a relatively good year for business aviation, albeit with the likelihood of turbulence and convective clouds in the near-term forecast.