Bursting Bubbles

That whooshing sound you hear is the air escaping from our punctured bubble economy — and with it, everyone’s expectations for business jets. Until recently, most analysts were predicting that the maintenance, repair and overhaul (MRO) market for bizjets would grow substantially into the foreseeable future.

What a difference a financial collapse makes. Optimistic forecasts for bizjet MRO spending have been undermined by the grim fate of several once-powerful financial titans — gold-plated brands such as Bear Stearns, Fannie Mae, Freddie Mac, Merrill Lynch, Lehman Bros., and American International Group. The vast $700-billion bailout of the foundering American financial system has rendered all previous predictions about aviation as worthless as the sub-prime mortgage-backed securities that got us into this mess.

(Quick aside: I’ve scrutinized my own checkbook and proclaimed myself: "Too big to fail." Due to unforeseen liabilities tied to stagflation and a weakened dollar, I need a bailout. I expect funds from the U.S. Treasury to be wired into my checking account any day now.)

It was only a few months ago that AeroStrategy, the highly respected consultancy in Ann Arbor, Michigan, was proclaiming that the business aviation MRO sector would grow at a robust five to six percent per annum over the next decade. AeroStrategy calculates that corporate flight departments generate up to 50 percent of this $1.8 billion MRO spending.

But the storm blowing through Wall Street also is buffeting aviation. The defense sector is somewhat immune from the credit crunch, but little else is escaping the financial contagion. Notably, International Lease Finance Corporation (ILFC), the world’s largest aircraft buyer, is on the selling block as its owner, the beleaguered American International Group, desperately tries to raise cash to pay back its $85 billion loan from the U.S. Federal Reserve.

ILFC is the world’s biggest plane lessor by fleet value, with almost 1,000 planes on its books that are worth $55 billion. It’s also a debt-heavy operation. Based in Los Angeles, ILFC is a crucial customer for aircraft OEMs, such as Boeing and Airbus.

ILFC depended on AIG’s blue-chip credit rating for access to inexpensive capital with which to purchase aircraft, but when AIG’s rating went down the tubes, ILFC was shut out of the debt market. ILFC’s woes have in turn depressed the stock prices of manufacturers throughout commercial aviation.

Business aviation is the first to feel the pinch, when profits (and C-level executive compensation) take a hit. These issues dominated the agenda during a recent Aviation Today webinar, entitled: "Business Jets: Winners and Losers in the Shakeout", recorded October 16 and available for access on www.AviationToday.com.

Today’s global financial meltdown is the worse economic crisis to hit the United States since the Great Depression. In trying to figure out the bizjet sector, uncertainty abounds. One thing is certain, though: a brutal shakeout in this sector is imminent. This timely webinar sorted out the winners, from the losers.

However, great opportunities in the business jet sector still abound — for those who know how to spot and exploit them. Our webinar cut through the "white noise" and hype about business jets and provided the clear-eyed interpretive analysis that aviation decision-makers need to make the right choices.

Many inherently strong qualities still apply to bizjets, and by extension the business jet MRO market. For example, Honeywell’s Business Aviation Outlook, released at NBAA 2008 in October, contradicted concerns that aviation is entering a new recession. For the fifth year in a row, Honeywell’s closely followed outlook pointed to an upward trajectory for deliveries and sales, forecasting up to 17,000 new jets from 2008-2018, worth more than $300 billion.

Other favorable factors include the business community’s growing embrace of business jets as a productivity tool. What’s more, increasingly popular fractional programs are lowering the cost of entry and ownership. However, with the cost of fuel at ruinous heights, the credit markets in chaos and corporate profits declining, all bets are off.