AINsight: Year Set to End on a High Note

 - December 19, 2018, 9:48 AM

With December days slipping by, aviation professionals of many stripes are moving at Mach 0.925 to finalize last-minute details and ensure that customers are in the final on-boarding process on the way to ownership of their new or preowned business aircraft. Evidence is mounting that a measurable proportion of U.S. sales in the last weeks and months of 2018 have been brought forward by customers who have found themselves in a position to take advantage of the tax and accelerated depreciation benefits afforded by the December 2017 federal tax law changes. Given the high capital and operating costs associated, it is clear that few if any customers buy airplanes simply for the tax benefits that are associated with them; rather, they buy airplanes because they or their organizations have a need or desire for business aircraft. The associated tax or depreciation benefits can help take the bite out of writing those big checks to purchase an airplane, but the checks need to be written nevertheless.

Forecasters—and those who look to dust off their crystal ball once a year at about this time—are busy as elves at this time trying to make sense of the various forces that drive demand in what has become a much less predictable business aviation marketplace. On the new aircraft sales front, 2018 ended with most OEMs recording book-to-bills (a ratio of new aircraft orders to new factory deliveries) near or in most cases just above 1.0, the best such performance at an industry-wide level in 10 years. 

Why is that important? After years of declining order backlogs, C-suite executives at the various manufacturers can today sleep more easily knowing that, more and more, aircraft being built have customers already assigned to them. Industry leaders also have better forward visibility into the health of their businesses, which is good news indeed for stakeholders including employees, investors, suppliers, and perhaps especially customers. And who isn’t looking for a little more of that, either in their crystal ball or Christmas stocking?

But is book-to-bill performance at the business aircraft manufacturers an indicator that all is well?  As with the operation of an aircraft, or most pieces of complex machinery, there are numerous other performance indicators that need to be monitored and managed. Overall backlogs at the “Big 5” business aircraft OEMs—Bombardier, Dassault, Embraer, Gulfstream, and Textron—finished 2018 at around $31 billion. Backlogs stabilized in 2018 on a year-over-year basis for the first time in 10 years. This is great news indeed, and firm orders today represent the equivalent of about 1.5 years of production based on 2018 production rates. To put the news about backlog stabilization into perspective, consider that over the 2015-2017 period, the value of the “Big 5” backlog dropped by double-digit percentages each year.

A bevy of highly anticipated new business aircraft in all shapes and sizes is a surefire way to bring excitement—and eager shoppers—to the market in search of the latest and greatest tools and toys. Today’s airplane marketers have become adept at slicing and dicing market segments into finer and finer wedges, perhaps in search of the Holy Grail known as a unique, defensible market space. From “Personal Jets” with a single turbofan and just-in-case parachute to “Super Versatile Jets” with the ability to land with Harley and Tumis on a dirt strip in the middle of the Australian Outback, to “Ultra Long Range Super 4-Zone Cabin Jets” with a dedicated kitchen, stateroom, shower, and crew-rest area for a couple and their pooch for that 1,200 nm flight to West Palm Beach, the choices have truly begun to boggle the mind. With more than 40 new and countless pre-owned business jet models available for sale, is anyone else thinking that we may be making this too complicated?  Are there too many models from too many manufacturers chasing too few customers to make the math work and all our businesses profitable? The answer is: yes, almost certainly. 

As we wind up the year 2018, let’s look at some key performance indicators – how is the industry doing at this time?

Christmas “Six-Pack” Check-List for the business aircraft manufacturing industry:

  1. Book-to-bill at 1.0 or above? Check!
  2. Stable to somewhat improving order backlogs? Check!
  3. Newly available products in different price categories? Check!
  4. Limited availability of good pedigree preowned aircraft? Check!
  5. Stabilized new aircraft pricing (the gauge keeps jumping around, but we’ll call it good, we think)? Check!
  6. Newly available engines, avionics, flight control, Wi-Fi, and other systems to enable new aircraft designs?  Check!

This is good performance. As an industry, we can take pride in knowing that we have come a long way forward from the dark days of the global financial crisis in late 2008/early 2009, although the road to recovery has been long and winding. And what’s ahead?  Most economic forecasters are concerned about higher interest rates, heavy public and private debt, the strong U.S. dollar, and volatile stock and bond markets. They are forecasting broadly slower economic growth across business aviation’s key country markets in 2019 and 2020. How will this impact the business aircraft manufacturing industry?

In keeping with the spirit of the season, we would like to offer up the following wish-list from Santa himself, based on conversations we have had with industry experts from all corners of the world. 

Santa’s 2019 Wish-List for the business aircraft manufacturing industry:

  1. Avoid being naughty—educate your elected representatives to help them realize that trade wars and tariffs are not nice, and they make tools and toys more expensive, even in business aviation.
  2. Be kind to the planet—beyond the fact that elves work more productively on a stable foundation of thick ice than when floating around in warming Arctic waters, business airplanes and engines need to be designed and operated to be much more environmentally friendly; as an industry, business aviation can do much, much better if we put our minds and hearts to it.
  3. Share the wealth—be happy with your many blessings, and help others experience business and general aviation in the New Year; as my reindeer and I can attest, flying privately is the best way to fly.
  4. Don’t be greedy—be prudent about new airplane production rates, remembering that what goes up always comes down; be careful to avoid whipsawing the supply chain, and chasing market share.
  5. Expect a fair price for your work—strive to avoid giving away airplanes at prices that may seem justifiable at the time but that serve to lower the market value of the asset and frustrate your other customers.
  6. Take care of your customers and your people—they are your most precious assets, not the cash sitting on your balance sheet.

Best wishes to you and yours for a splendid Christmas, happy holidays, and a successful start to 2019!