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Friday, October 1, 2010

Bottomed Out, Bouncing Back

While economic uncertainties persist, the global business aviation sector this year saw the first ‘green shoots’ of industry recovery

By Ann Keeton

Airframers and suppliers are ready for a rebound in global business aviation next year, although views differ on the timing and shape of the industry’s recovery. When business does pick up, larger aircraft and new technology are expected to boost sales.

The global market is bottoming out this year, as new business aircraft deliveries in 2010 are expected to fall below the dismal results of 2009.

Bombardier President and CEO Pierre Boudin told investors in September that the Canadian transportation giant’s sales and earnings fell in the first half this year, mainly on the weakness of business aircraft.

“The uncertain economic environment continues to be reflected in Aerospace’s financial results. However, the group is starting to see signs of recovery as shown by the significant reduction in business aircraft order cancellations,’’ Boudin said.

“We still see a global recovery in 2011,’’ said Greg Irmen, Rockwell Collins’ vice president and general manager of business and regional systems. “I’m seeing the market stabilize, but with a lot of angst and worry, especially in the mid-range segment of aircraft.’’ Things that could slow a market recovery include weak economic growth in the United States and other countries, poor corporate profits and a tough climate for bank financing.

A shrinking inventory of used aircraft is an early indicator of a market on the mend. Rockwell Collins estimates 15 percent of owned aircraft are up for sale, compared to 18 percent late last year.

“But the number still needs to come down,” Irmen said, adding that, “I always equate this market to the housing market. In business jets, there was the same kind of speculation as in housing.’’ Customers, including corporations and wealthy individuals, were buying slots for aircraft yet to be built, expecting demand to keep prices high, he said.

JP Morgan analyst Joseph Nadol said there is still “a large supply of used jets at attractive prices.’’ With economic uncertainty weighing on many parts of the world, “renewed demand for new aircraft could be some time off,’’ which could lead manufacturers to cut more production late this year, Nadol wrote.

Gulfstream Aerospace expects to see “a little softness in the second-half order book,’’ Jay Johnson, chairman and CEO of parent company General Dynamics Corp., told investors in a conference call. Gulfstream accounts for more than one quarter of the business aircraft market, measured by dollar value.

Johnson said customer interest in business aircraft remains high, with a “solid and sustainable backlog’’ that is two-thirds represented by large cabin jets and one-third by midsize jets. The company reported good growth in its services business so far this year, as flying hours are increasing.

There is some pent-up demand for new planes, said business aviation consultant Brian Foley, based in Sparta, N.J.

“Just as some individual investors regret having sold their stocks at a market low, there’s likely a degree of remorse among one-time buyers who canceled orders prematurely.’’

Foley sees stronger demand in the United States this year, as wealthy buyers in Asia recently have snapped up the most desirable used aircraft. New models on the market are catching buyers’ eyes. They include the Cessna Citation CJ4, Dassault Falcon 900LX, the Embraer Legacy 650 — unveiled at the National Business Aviation Association (NBAA) annual conference and exhibition in 2009 — and the Gulfstream G650, expected to enter service in 2012.

Long-Term Forecasts

Long-term forecasts call for steady, if not spectacular, increases in business aircraft sales in the next 20 years.

“During the first half of 2010, the ‘green shoots’ of industry recovery were evident,’’ although Europe remains especially weak, Bombardier said, when it released its first 20-year industry forecast at the Farnborough Airshow in July.

The worldwide business jet fleet was approximately 14,200 aircraft at the end of 2009, and is expected to grow by a compound annual growth rate of 3.6 percent, with 26,000 deliveries by 2029, the manufacturer predicted. The forecast is based on long-term global GDP growth of an average of 3.2 percent per year, and includes aircraft up to 149 seats in size.

Honeywell’s widely watched industry forecast last year predicted that the business jet market cycle will take years to recover to the peak delivery year, in 2008, when 1,139 new aircraft reached customers. Honeywell will release a new forecast this month at NBAA in Atlanta.

A year ago, Honeywell said it expected demand in the next five years to be “fairly evenly balanced across most business jet segments,” with light and light-medium jets accounting for 24 percent of the market; medium and medium-large aircraft 23 percent; and long-range, ultra-long range and large cabin business jets at 18 percent.

Teal Group analyst Richard Aboulafia says the most unusual aspect of the market now is “the unprecedented bifurcation of market behavior. The top half of the market — jets costing $25 million and above — barely felt any pain last year, with deliveries falling a mere 4.1 percent. The bottom half — jets costing $4 million to $24 million — fell by a catastrophic 42.8 percent.’’

Over the next decade, Aboulafia expects a permanent shift toward sales of bigger-ticket aircraft.

Bombardier cited one reason for the changing sales pattern: “the recent shift in demand toward more international customers has driven the sales of larger aircraft,” the company stated. “Contrary to U.S. customers, who generally enter the business jet market in the light category and then trade up, many international customers acquire their first aircraft within the large category. Customers in this category also seem more willing to pay a premium for additional comfort and technology than those who purchase light and medium category aircraft.’’

Cessna Aircraft Co., a unit of Textron, has felt the pain in the lower end of the market. The company continues to believe that 2010 will be the “trough’’ year for Citation deliveries, Scott C. Donnelly, Textron chairman, president and CEO, told investors during a mid-year review of the business.

In the second quarter, overall deliveries of all Citations, Cessna’s core business aircraft model, fell nearly 50 percent to 43 aircraft, from 84 the previous year. The company recently cut production of the smallest member of the family, the five-seat Citation Mustang, for the second half of this year. Cessna hasn’t cut its current outlook for deliveries in the next four years, but Donnelly said “we think the Mustang is a 70 to 75 unit-per-year run rate.’’ In the peak year of 2008, Cessna delivered 467 of the aircraft.

After ceding ground to emerging global markets, North America has taken back some market share in business aircraft sales this year, by most accounts holding more than half the total market. Europe, still reeling from Greece’s financial troubles, remains weak.

Near-term, manufacturers expect strong business aircraft sales in Latin America, the third-largest market by installed base behind the United States and Europe. Brazil continues to be a bright spot. The Asian market also is growing, although China and India are constrained by a lack of smaller airports favored by business travelers.

Financing for business aircraft is available around the world, said Greg Cirillo, a partner specializing in aviation at Wiley Rein LLP in McLean, Va. But he said banks are picky, with little appetite for repossessing planes on bad loans.

“Last year, aircraft values were falling, so banks had a hard time putting a value on the asset,” Cirillo said. Earlier this year, banks were encouraged as aircraft values stabilized, but lenders remain cautious. Typically, banks required a 20 percent down payment.

“They are also looking carefully at the customer,’’ Cirillo said. “Is it a stable corporation, or a small company with a short track record?’’

Suppliers selling technology upgrades are finding customers mainly in the aftermarket, but they expect sales to aircraft OEMs to increase as the market gets back on its feet.

The business aircraft industry, along with other aviation sectors, is committed to shrinking its carbon footprint, looking at everything from fuel-saving engines to more efficient air-traffic management tools, to alternative fuels.

Two major trends in the cockpit include upgrading old CRT displays to modern LED technology, and adding new air-traffic management equipment to cut flight times, said Rockwell Collins’ Irmen. Clayton M. Jones, Rockwell Collins chairman, president and CEO, forecasted this summer that the overall business aircraft market likely will grow 7 percent in the next few years, and the company expects its sales in the sector to grow twice that fast, with greater avionics content on newer models.

In-flight communications provider Aircell has had success with its in-flight broadband Internet system, which was introduced for business jets last year. The company in August rebranded its offering for business aviation as “Gogo Biz.’’ Aircell offers the same Gogo technology for major airlines, using a network of ground-based cellular towers.

“People who own business aircraft have been asking for the same Gogo service they enjoy on commercial flights,” said John Wade, Aircell executive vice president and general manager.

The rebranding followed news from fractional ownership company NetJets in July that it will equip 250 of its midsize and large-cabin business jets with Aircell high-speed Internet. Aircell said the NetJets program represents the largest order for high-speed Internet service in the history of business aviation. In September, Flexjet said it will offer Gogo Biz as a standard feature on its fractional Challenger 300 and 604/605 fleet.

NetJets may be rolling out in-flight Internet across its fleet, but cost-cutting in 2009 led the Berkshire Hathaway unit to cancel $2.6 billion in aircraft orders with troubled Hawker Beechcraft, representing 90 percent of its orders with the Wichita, Kan.-based manufacturer.

Reporting second-quarter results in August, Hawker Beechcraft said backlog had declined from $3.1 billion in March to $2.4 billion in June, reflecting a $400 million cancellation notice from NetJets. “As a result of this cancellation,” it said, “the company no longer has any backlog with NetJets.”

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