Recovery elusive in business jet industry
08/02/2012 12:00 AM
08/08/2014 10:11 AM
Under traditional industry wisdom, recovery in the business jet market should be well under way by now.
There’s typically a 24-month lag period between economic recovery and a positive impact on business jet demand.
But the lag time has come and gone and a full-blown recovery has yet to take shape.
So what’s going on?
A number of things, says aerospace forecaster George Tsopeis, vice president of operations of Zenith Jet, a Quebec-based aviation services business.
“It is our view that we are experiencing a ‘new normal’ in terms of the recovery, which is in effect challenging some of the very basic tenets of our industry,” Tsopeis said.
There’s been a disparate market in the narrow-body and wide-body business jet segments.
The assumption has been that manufacturers building wide-body jets have recovered, while narrow-body jetmakers are still feeling the residual effects of the downturn.
To an extent, that’s true, Tsopeis said.
But, while the recession of 2008 and 2009 hit every business aircraft manufacturer, their recoveries have more to do with the competitiveness of their product lines and less with their focus on wide- or narrow-body airplanes, he said.
Corporate profits and the number of used jets on the market have long been key indicators of new business jet sales.
Some think business jet recovery has been elusive because corporations have derived profits through cost cutting and not by growing revenues.
But that’s just part of the story, Tsopeis said.
“It is our view that a huge segment of the narrow-body customer base — that emerged during the last business aviation bull run — has effectively retracted from the market,” he said.
The reasons are many, Tsopeis said.
High net worth individuals, primarily those who were new to aviation during the last upturn, such as surgeons, CEOs, successful entrepreneurs, private equity types and others, took a hit to their net worth in the downturn, found unattractive financing terms or lost their appetite for ownership, Tsopeis said.
“Whatever the reason, the point is that they have since left and have not returned,” he said.
Some industry watchers see it as a positive sign for business aviation that corporations have been hanging onto cash.
But, “we should not be giddy with the fact that companies are ripe with cash,” Tsopeis said.
Instead of buying business jets, they have other ways to deploy the money — such as acquisitions, stock repurchase plans or redistribution to shareholders.
In addition to corporate profits, the industry keeps tabs on the number of used aircraft up for sale.
“We regularly read how industry watchers claim that ‘we’re still x-percentage points above normal inventory levels,’ ” he said.
But today, demand is greater from international markets, where buyers prefer new planes. Those customers tend not to be interested in getting a great deal on a used airplane.
That means that the current state of the used market may be as good as it gets, Tsopeis said.
While it’s not time to write off the metrics of corporate profits and used aircraft inventory, the key to understanding the market is integrally linked to manufacturers’ product lines and strategies.
In a forecast he just released, Tsopeis predicts planemakers will deliver 736 business jets this year.
That number is predicted to grow at 17 percent a year through 2016, when demand will peak.
Tsopeis projects a slowdown in 2017, but a slowdown that’s softer than the downturn that began in late 2008.
He projects deliveries for the 10-year period from 2012 to 2021 to total 10,377 planes, with $265 billion in revenues, based on 2012 pricing.
Cessna is expected to lead in market share with 27.5 percent, while Bombardier will lead in revenue with 29.3 percent over the 10-year period, he said.
The forecast predicts demand for 3,244 light jets, 3,264 medium jets, 3,557 large jets and 312 airliners converted to business aircraft.
The years 2015 to 2017 represent the largest three-year cluster for new program activity, the forecast said.
Here’s what Tsopeis sees for local manufacturers.
Overall, Bombardier is one of the best manufacturers in terms of its product lines, Tsopeis said.
They have mature programs that help with improved margins and products attractive to emerging markets.
The Learjet line is on good footing, he said.
Upgrading the 40 and 45 to the 70 and 75 allows the company to keep the traditional Learjet customer base.
But, he said, “I think the star is going to be the Learjet 85. I think it’s going to bring a lot of new customers into Learjet.”
The performance envelope of the 85 is at the high end for a traditional midsize aircraft, Tsopeis said.
Within the past year, Cessna has announced a number of new products, such as the M2, Latitude and Longitude.
Those will be easy programs for Cessna to deliver.
“They’re relying on a tried and true formula, which is incremental upgrades that are technologically very doable,” Tsopeis said.
Every business jet program in every category is on solid footing, he said. “I think they’re in good shape.”
The only question is what Cessna plans to do with its Citation XLS+ and whether it will incrementally upgrade it or develop a new design.
With Learjet developing the Learjet 75, “it ups the ante on Cessna to come up with something new or at least newer,” Tsopeis said. “That’s a huge moneymaker for them, and they need to address it.”
But the company is taking the approach to do upgrades and derivative products, he said, “so maybe a new wing and Garmin flight deck might just do it.”
It’s too soon to say whether Hawker Beechcraft will emerge from Chapter 11 bankruptcy as a stand-alone company or sell to Superior Aviation Beijing or another party.
As a stand-alone company, it has the opportunity to emerge as the world’s leading turboprop manufacturer, Tsopeis said.
That would do justice to its King Air and Beechcraft lines.
To do that, the company would have to shutter its business aviation programs, he said.
Hawker Beechcraft filed Chapter 11 bankruptcy May 3.
The company has also entered into an exclusivity arrangement with Superior Aviation Beijing to explore a potential sale of the company for $1.79 billion.
It would not include the defense business.
The deal with Superior is far from done, but it does require Superior to fund operations during the 45-day exclusivity period.
That leads Tsopeis to believe the further into the time period the parties go, the more likely a deal will get done.
A sale is a good opportunity or attempt at keeping the company largely intact.
“I think it would be a very good scenario,” Tsopeis said. “Is it the best scenario? No. We all would like somebody from North America to step up and buy the company. … But I don’t think that’s going to happen.”
With Superior, there surely will be some pull of the production line back to China.
Still, Tsopeis said, “I think the Chinese are interested in learning about the industry more than they are moving a production line from Wichita where you have generations of aerospace workers and that expertise. To forego that and move it to China and reset all those learning curves on those difficult programs doesn’t make sense.”
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