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In Business Jet Industry, a Downturn That Was Not Evenly Shared
May 23, 2011
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  • May 16, 2011 By: Daniel Solon
    During the recent economic downturn, sales of business aircraft fell off a cliff. A five-year string of record growth from 2003 through 2008 ended in a precipitous drop of 28 percent in the value of business aircraft delivered from 2008 to 2010.
    The pain, however, has not been evenly shared. Within the overall business jet industry, the upper half of the market – measured by value rather than aircraft numbers and consisting of business jets priced at or above $26 million each – saw growth of 1.5 percent.
    By contrast, the lower 50 percent – jets costing $4 million to $25 million apiece – took a 57.1 percent dive.
    This sharp split in the market is unprecedented, said Richard Aboulafia, an aviation analyst at the Teal Group in Fairfax, Virginia.
    Now, however, the worst may be over, Mr. Aboulafia said this month. The overall market has stopped falling and 2011 deliveries are likely to be about level with last year. For next year, leading indicators are pointing to renewed growth, with the pool of available aircraft in the used jet market shrinking, although prices for used planes are still soft.
    Tim Barber, managing director of Jet Brokers Europe, a dealer of used planes, also said that the market looked poised for a turnaround. “Global pre-owned business jet inventory has fallen somewhat in the last 12 months,” he noted in mid-April. Typically, as recovery sets in, returning buyers first hunt for bargains on used planes, then start to look at new models.
    In the depths of the 2008-9 financial meltdown, high profile corporate jet users set off a surge of public fury directed against perceived elitism, misuse of shareholders’ resources and abuse of the environment. The iconic image of the period was the spectacle of the chief executives of Detroit’s Big Three automakers flying to Washington in their corporate jets to hold out metaphorical tin cups for taxpayer bailouts of General Motors and Chrysler.
    Still, time is a healer of sorts and those concerns have shifted to the background as new concerns about the global economy, the cohesion of the euro zone and the stability of the Middle East have come to the fore.
    In this changed context, business aviation has been able to showcase its value in situations ranging from the essential movement of executives and technicians struggling to deal with Japan’s earthquake, tsunami and nuclear catastrophe, to the evacuation of wealthy refugees from the upheavals of the Arab Spring.
    After protests toppled the governments in Tunisia and Egypt this year – and unrest spread across the Middle East and North Africa, disrupting commercial airline services – business jet operators reported that their phones were ringing off the hook, with corporate clients, wealthy private customers and government officials willing to pay as much as $18,000 for an hourlong private flight.
    Aoife O’Sullivan, a partner at Gates & Partners, a London law firm that specializes in the business aviation market, said the firm had seen a positive start to this year.
    Like Mr. Aboulafia, she pointed to a narrowing in the split between the two ends of the market. “Demand for the mid to heavy jets is still high, but the lighter end of the market is also picking up pace,” she said.
    Aircraft financing sources remain quite strict about the caliber of buyers to whom they will lend, she said, “but they are looking at deals they would not have considered six months ago. There is general acceptance that the industry is regaining value.”
    Ms. O’Sullivan said buying interest was strengthening in both the corporate sector and among high net worth individuals. In particular, she said, cash buyers from the Middle East, Asia and Russia were continuing to add to their aviation assets.
    At the same time, “the pre-owned market is doing well, and we are seeing certain patterns across Europe, which is definitely a more steady market than this time last year,” she said. “There are interesting leasing options through Ireland; Germany remains big on leasing, and the United Kingdom is beginning to pick up again.”
    One cloud on the horizon is the lack of uniform tax treatment across the European Union. A change in British tax regulations in January introduced a 20 percent rate of value-added tax, a form of sales tax, on some business jet purchases but interpretation of the new rules remains unclear. Denmark, the Isle of Man and Malta are also changing their tax rules, which could add further confusion, Ms. O’Sullivan said.
    Still, whatever the potential tax issues, the stigma that in recent years has discouraged corporate jet purchases has eased, with a returning recognition that the planes are business tools to raise productivity, rather than luxury management toys. “Less than 3 percent of business aviation activity is leisure-led,” Ms. O’Sullivan noted.
    In forecasts prepared for Teal, Mr. Aboulafia is predicting a six-year cyclical recovery, starting in 2012, with growth averaging 10 percent, compounded, annually.
    That rate, while sounding high, would still be below the 16 percent to 17 percent seen during the 2003-8 cycle. At 10 percent, manufacturers would have to wait until 2016 to see deliveries back up to their 2008 level, measured by value.
    Yet even at the low point last year, which is expected to be repeated this year, the business jet industry remains twice as large as in any year before 1997.
    During the 10 years from 2011 through 2020, Teal anticipates deliveries of 14,905 business aircraft valued at $296.8 billion. These totals include 11,167 purpose-designed business jets, worth $237.4 billion; 585 corporate versions of regional jets and full-size jetliners like the Boeing BBJ, Airbus A319 and Embraer 190, worth $41.2 billion; and 3,153 business turboprop aircraft, worth $18.2 billion. All values are in 2011 dollars.
    Within the category of purpose-designed business jets, 62 percent by value are predicted to be larger aircraft, a gain of 50 percent in market share compared with 2008 and earlier years.
    This, said Mr. Aboulafia, may point to excessive manufacturing capacity in the market for lower-priced, smaller aircraft which in turn could lead to restructuring of the industry, with possible mergers and the elimination of some existing aircraft lines.
    For comparison with the recent past, during the 10 years from 2001 through 2010, a total of 10,886 business aircraft were delivered, costing $190.2 billion. Among them were 7,872 business jets, worth $155.7 billion; 426 corporate versions of regional and mainline jetliners, costing $20.4 billion; and 2,588 turboprops at a value of $14.1 billion.
    Eurocontrol, the European air traffic control authority, recently reported that across the whole of European airspace last year the growth in business flights was second only to the growth in low cost flights by carriers like Ryanair and easyJet. European business flight operations rose by 5.5 percent compared with 2009, despite the economic squeeze, and were close to the peak numbers of 2007-8, it said.
    Yet for all the returning optimism, relatively few new business jet types are in development. One new entry to the market, the HondaJet, a diversification play by the automaker Honda, could become a serious contender in the very light jet market niche, in Mr. Aboulafia’s view.
    Embraer, of Brazil, traditionally a maker of regional and mainline jetliners slightly smaller than the planes made by Boeing and Airbus, has broadened its lineup in recent years with a full range of business jets, from the “entry-level” Phenom 100 and its slightly larger sister, the Phenom 300, to the corporate version of its E-190 airliner.
    Since the first customer delivery at the end of 2008, Embraer has handed over more than 200 Phenom 100s to buyers, and the company now claims global market leadership in the very light jet category. In a recent, somewhat unorthodox, produ
    ct enhancement, government regulators approved the fitting of seat belts in the Phenom 100’s onboard toilet for takeoffs and landings, raising its capacity to seven people, including crew.
    At the upper end of the market, Gulfstream’s G650 model, introduced in March 2008, and first flown in November 2010, is now in its test phase. Following in the company’s tradition as a builder of spacious, high performance long-range aircraft, it is expected to be certified to fly at a maximum speed of Mach 0.925, close to the speed of sound and faster than any other passenger aircraft, at altitudes as high as 51,000 feet, or 15,500 meters.
    At a more fuel-efficient Mach 0.85, it will have a maximum range of 7,000 nautical miles, or 12,500 kilometers, enabling it to link nonstop nearly any pair of major business centers around the globe.
    Gulfstream says that the aircraft is on schedule to start deliveries in the second half of 2012, despite a crash in testing this year that killed all four crew members.
    Introduced in October 2008, just as Wall Street was in free fall, Gulfstream’s smaller “large cabin, mid-range” G250 model flew for the first time in December and should be ready for delivery by the end of 2012, the company said.
    Bombardier, of Canada, which also competes in the large business jet market, is meanwhile developing its Global 7000 and 8000 models, scheduled to enter service in 2016 and 2017, respectively. The company says that the Global 8000 will be the world’s longest-range business jet, capable of flying 7,900 nautical miles at Mach 0.85, carrying eight passengers nonstop from New York to Mumbai or Hong Kong.
    Commenting on Bombardier’s results for the financial year that ended Jan. 31, Pierre Beaudoin, the chief executive, said: “In aerospace, we seem to have turned the corner, with business jet orders picking up substantially in the fourth quarter.”
    The company delivered 143 business aircraft in the year, down from 176 in the preceding year, but expects a modest recovery to 150 business jet deliveries this year.
    With a 32 percent share of the business aircraft sector by value and a 28 percent share measured by aircraft numbers, according to its estimates, Bombardier recently delivered its 100th Global 5000, the top model of its range, and in March received it largest-ever single order for business jets, from the NetJets subsidiary of Berkshire Hathaway. The firm order for 50 aircraft, including 30 Global 7000s and 8000s, was worth $2.8 billion – a sum that could rise to $6.7 billion if options for as many as 70 additional aircraft are exercised.
    Among makers of smaller business jets, Cessna reported 31 aircraft deliveries in the first quarter of 2011, exactly level with a year earlier. A richer mix of light and midsize jets, however, raised sales revenue by $123 million to $556 million, a figure that brought little satisfaction to Scott Donnelly, chief executive of Cessna’s parent company, Textron.
    “Our underlying operational performance at Cessna was disappointing,” said Mr. Donnelly, who took direct charge of Cessna this month in a boardroom reshuffle. Production of the Citation CJ4 model, introduced in 2006, with first deliveries last year, was “going well technically, but is above our production cost targets,” he added.
    Cessna’s sales of used aircraft, meanwhile, rose and the number of used planes on offer dipped, but only modestly. “The market is coming back slower than we would like,” Mr. Donnelly said.
    For David MacDonald of Air Partner, a charter brokerage firm based outside London, the trends and events of the past year make a strong case for carefully managed business aviation.
    “Recent events such as the Arab Spring, Japan’s disasters, or the New Zealand earthquake, demonstrate the limitations of the scheduled airline service network,” Mr. MacDonald said. Using business jets, “the customer becomes the schedule and route planner, flying when he wants from and to the specific airports he wants.”
    Still, the financial crisis showed that there are flexible and inflexible ways of using business jets: “Ownership and fractional shared ownership can lock in the customer’s costs when an economic downturn means less flying, whereas charters avoid that problem,” Mr. MacDonald said.
    NEW YORK TIMES2011-05-16false