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Friday, June 29, 2007

Corporate Profits, Globalization Driving Biz Jet Demand

Increasing globalization and good corporate profits is driving the booming demand for business jets, according to Raymond Jaworowski, senior aerospace analyst for Forecast International, who analyzed the business jet market during AviationToday.com’s latest webinar – An Inside Look at the Business Jet Boom, aired June 28 and archived on the company’s web site. Other factors include the increasing hassles with commercial aviation and the lost productivity that results. Jaworowski also indicated that the ease of entry offered by fractional programs, jet cards and charter outfits has created a demand for orders with new technology accelerating fleet replacement plans. In addition, he said, the used business jet market is even hotter than new-aircraft sales.
Jaworowski said that sales of Very Light Jets, were also a driving factor in painting a booming picture for business aviation, adding, however, if they are taken out of the forecasts, growth rates between now and 2016 would be flat.
“The growth trend is largely due to VLJs who have a high market in terms of units but not in value,” he said, adding he expects the business cycle to soften in 2010 and 2011, impacting business jet sales until it picks up again in 2012. “The growth is now 60 percent, which may sound like a lot but is nothing like the 200 percent growth rate experienced between the mid ‘90s and 2001. The growth of corporate profits tracks closely with business jet growth with fractionals playing a more significant role. Today they account for 12 percent to 15 percent of sales but by 2016 they will be 20 percent of annual deliveries.” The question remains how fast manufacturers will increase production and how many customers will convert to firm orders.
His prediction for VLJs is more conservative than VLJ manufacturers but still accounts for significant growth. There will be a jump in deliveries in 2008 and 2009 when production of the Cessna Mustang and Eclipse 500 hit their stride and then again in 2009 which will see the first full year of production for the Diamond D-Jet and the Embraer Phenom.
“We consider the potential for VLJs to be considerable,” he said, “both for individuals as well as with small companies. Larger companies are expected to supplement their fleet of larger aircraft with VLJs as well as fractional companies. The key market is the much-touted air taxi market which we predict will have a slow start because of insurance, training and regulatory matters.” However, he noted that the lack of infrastructure in such markets as India and Asia will dampen demand, making the North American market the most promising for air taxi operations.
That will also be true, to a lesser extent, in Europe which has other problems including the high barrier for business aviation operations. Access to airports, alone, constitutes a huge barrier since business jets are excluded from the large airports and are now being squeezed out of secondary airports by the success of low-cost carriers in Europe. In addition, he pointed to the success of the heavily subsidized rail systems. Traditional air routes are also being impact by transformation to very high speed rail service which are prompting airlines to drop many of these markets because they can’t compete with the door-to-door train times.
Jaworowski sees a shift from North America being the traditional key market, noting that manufacturers report that non-U.S. customers now account for more than half of all sales, in “a dramatic reversal of the previous trend.” He noted that given the deliveries of the last few years, the North American market has become somewhat saturated with owners pausing before they begin a new round of buying. Dampening demand in North America is the debate about user fees which will significantly drive up costs of business jet operation.
“Offsetting this,” he said, “is healthy growth in other regions such as the Middle East, Western and Eastern Europe and a higher demand for flights across the Atlantic and even the Pacific. But good markets include India, Brazil and Russia.”
The light business jet segment could be hit by competition from both the very light jet and the medium business jet markets, reflected in a dip in unit production. Manufacturers, he said, were modifying the size and comfort of cabins and adding technology to increase sales and to provide a near mid-size aircraft for not much more than the small jets in costs.
“But no matter how much you improve them, these are still derivatives of families that have been in production for years,” he said. “So you’ll see demand start to decline, especially given the inter-class competition. Consequently, we see an opportunity in this segment which is being exploited by Hawker Beechcraft which is expected on the market in 2007. Even with a third competitor in the market, we think there is considerable latent demand, especially if a manufacturer created a clean-sheet aircraft.” The medium business jet market will see a softening of demand after this year, retreating to more sustainable levels although the decline in the business cycle in 2010-2011 will exacerbate the decline expected for the class.
Jaworowski pointed to the super mid-size business jets as the most promising in terms of potential growth. “This is a relatively new niche between the mid and larger cabin offerings,” he said. “Here again, manufacturers are offering a larger cabin and nearly the same performance that is only a little higher in cost.”
The large business aircraft market – once dominated by Boeing (BA) and Airbus, is now gaining more interest with the introduction of the Embraer (ERJ) ERJ 190 as well as new aircraft being planned. “The demand is being driven by the increased globalization of business and increasing requirements for security,” he said. “While the growth rate will be fairly flat it will be double that of the past 10 years.”
Lengthening backlogs are seen as a damper to sales, but Jaworowski said manufacturers are keeping current production aircraft production going in an effort to get an aircraft in customer hands for those who can’t wait. However, he added that this is a problem that will sort itself out.
To hear the webinar and review the forecast charts click here.
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