Honeywell Forecast: Part Two

Global Purchase Expectations Stable
The 2008 Honeywell Aerospace survey indicates record aircraft deliveries will continue into 2009 with a likely peak next year or in 2010. North American purchase expectations improved slightly, but expectations in several other world regions softened to some extent. In total, respondents to this year’s survey said they expect to replace or expand the equivalent of about 32 percent of their fleets over the next five years, within one percent of the level recorded in the 2007 survey.
Purchase expectations trended up in North America and Latin America, declined moderately in Europe and the Middle East and fell more noticeably in Asia. Aggregating all regions, five-year purchase expectations equaled the 2007 levels and remain well above the 24 percent average recorded for several years prior to 2007, said the company. Between 2009 and 2013, the 2008 survey indicates a demand for 5,200 aircraft globally, excluding demand from fractional ownership or branded charter start up businesses and piston aircraft owner trade–ups into jet aircraft. The 2008 survey projection represents a 14 percent increase over the five-year demand estimated from a year ago.

North America Expectations
In North America, 2008 survey respondents said they expect to replace or expand about 25 percent of their fleets during the next five years. “The improved level of purchase expectations in North America is a pleasant surprise,” said Rob Wilson, president, Business and General Aviation, Honeywell Aerospace. “Despite slower economic growth and recent credit and stock market fluctuations, survey purchase plans gained five points over their 2007 levels, reflecting the value and productivity these aircraft deliver in today’s more challenging business environments.

“However, we continue to hear concerns about high fuel costs, taxes, user fees, noise regulations and ease-of-use issues such as temporary Flight Restrictions in the United States,” he continued. “Despite these concerns, overall buying plans in the region posted an increase, with replacement plans increasing while plans for fleet expansion remained flat. Honeywell’s baseline forecast assumes lower than two percent U.S. Gross Domestic Product growth this year and in 2009. Should the U.S. economy outperform those estimates purchase expectations could strengthen.

Regional Purchase Expectations
In other regions, five-year purchase expectations were mixed. In Europe, purchase expectations of 41 percent were off about seven points compared with record levels posted in 2007, but are well above the 25 percent-or-better levels that have prevailed between 2001 and 2006. “Eight consecutive years of strong purchase intentions in Europe is evidence of the value operators place in using business jets,” Wilson said.
The strength of the Euro, Pound, Swiss Franc and Ruble against the dollar are acting as purchase incentives for new aircraft, as does the increased wealth and business expansion enjoyed by Eastern Europe and Russia. However, the dollar strengthened recently which may dilute future sales.
Overall, European operators maintained a healthy desire to replace their existing fleets compared to 2007 findings. A great deal of interest in moving into larger and more technologically advanced models was reported by European respondents. Concerns voiced closely correlated to those expressed in North America, centering on operational and noise regulations plus cost of operation including fuel, taxes fees.

Asia, Africa and Middle East Expectations Remain High
The Asia, Africa, and Middle East regions still rank as the areas with the highest purchase expectations despite some reductions compared to 2007. Purchase expectations of 44 percent recorded in Africa/Middle East were off just under six points from the 2007 record high of nearly 50 percent. Nearly all the decline in purchase plans came from the fleet expansion category. Replacement demand was virtually unchanged compared to last year. Middle East and selected African economies continue to benefit from high oil prices, burgeoning trade with China and Asia and expect to be active buyers.

Asian Purchase plans posted the largest drop in the 2008 survey, but remain high compared to other regions and from a historical perspective. Total replacement and expansion plans totaled just over 50 percent for the region in 2008 after approaching 80 percent last year. Since the fleets are relatively small in this region some volatility is to be expected. As in the other regions, the majority of the change came from reduced plans for fleet growth rather than lower replacement plans. Confidence in Asian and Middle Eastern economic growth in the long term remains high boosting interest in larger, longer-range aircraft with state-of-the-art avionics.

Latin America
In Latin America, operators reported stronger levels of purchase expectations in 2008. Slightly less than 45 percent of current fleets are expected to be replaced or added to over the next five years. Purchase plans improved from the 2007 level by six points, and interest is still high in historical terms, exceeding all recent survey levels. Latin American purchase plans were influenced in the 2008 survey by continued reflection of the positive impact of elevated energy prices on regional economies, including those of Mexico, Venezuela and Brazil. Stronger currencies have added purchasing power in the area as well. Typical concerns cited by operators again echo those in Europe, North America and the other global regions and center on taxes, cost of operation and operating restrictions.

Used Jets and Flight Operations Levels
Five-year purchase expectations for used jets slackened several points below 2007 levels. Interest in used aircraft has been at relatively high levels for several years, resulting in firm prices and a declining inventory of late-model jets. That environment is now changing. Over the last year, increases in asking prices have drifted lower and lower, with average price levels now heading into negative territory. At the same time, supply as measured by share of active fleet for sale has trended upward, gaining momentum more recently and moving in line with the 2008 survey results. Recent inventory increases have been particularly strong with lighter jets pushing up the levels. Current average pricing is running about even with levels from the same period a year ago after posting several years of gradual increases. 2008 survey recorded mixed signals regarding operators planned usage rates of current Business Jets in the near future. North American and Asian operators reported clear intentions to cut utilization to some extent. These actions are already being implemented, based on reduced jet cycle counts recorded by the FAA in the U.S. so far in 2008. Declines in the level of flight activity have been reported in various media and are consistent with Honeywell’s own analysis indicating a five-to-six percent business jet cycle reduction overall through the first half of 2008. Flight activity declines are largest in absolute terms in Light Aircraft; however most aircraft segments are posting reductions in the four-to-twelve percent range over 2007 levels of activity. Long range and VLJ activity levels are notable exceptions with both classes showing cycle growth so far in 2008. Obviously a contributing factor in these classes is the surging fleet growth in the VLJ segment and the strong recent levels of demand for Long range models at the top end of the spectrum. Honeywell also monitors broader measures of Business and General Aviation activity in Europe and while monthly flight counts are still growing, the trend for the past 18 months has been toward slower rates of increase. This trend is well aligned with the more ambivalent European survey findings in which the respondents were split with a number planning more utilization and a number planning less usage. Latin America was the only region in which the survey found unambiguous intent to fly more in the near future. The implications of these Used Aircraft and Jet utilization trends are significant for service providers and dealers. Economic and operating cost concerns are clearly affecting the desire to own and operate older jets as extensively as in the past. The most pronounced effects appear to be more prevalent in the smaller classes of Jets and extend down into the general aviation segments.

“World economic conditions are a key component of recent global business aviation expansion, but steady gains in aircraft value offered to operators also support industry growth,” Wilson said.

“Value to the operator takes the form of improved aircraft reliability, mission flexibility, cabin productivity, comfort and convenience,” said TK Kallenbach, Vice President, Marketing and Program Management. “For many years Honeywell Aerospace’s Business Aviation Outlook has noted that increases in purchase plans and subsequent aircraft deliveries tend to be highly associated with the introduction of new aircraft.”

Global Economy and New Product Pipeline Favor Long-Term Growth
Economic factors impacting demand for business jets are mixed but tend to support positive though somewhat slower industry growth in the near term. Estimates of growth in U.S. gross domestic product have weakened from a year ago, with current projections calling for very slow growth over the next 18 months, followed by a resumption of stronger growth in 2010. Regional economic growth rates remain generally favorable for the industry, especially within Central Europe, Asia, the Middle East and Sub-Saharan Africa. Another positive factor is the large order backlog of Aircraft already in place. Finally, Honeywell Aerospace’s “Customer Benefit Index,” a key component of the long range forecast, which tracks the perceived value offered by business jets to fleet owners and operators, also has a favorable trend based on many new production models and development programs in the pipeline. “Evaluating these factors along with the purchase plans from the 2008 operator survey still supports a positive outlook for the industry,” Wilson added.

Fractionals
Owners of fleets serving fractional shareholders and Jet Card purchasers continue to provide a substantial portion of total industry demand. Fractional fleet operators still account for about 10-12 percent of the backlog for business jets but have seen inroads made in their overall share of backlog and new deliveries by the large number of orders placed by traditional operators and Charter providers over the last several years. New deliveries to fractional fleet operators should range between 90 and 150 aircraft annually through the forecast period. Sales of new ownership shares have flattened significantly since 2004. While 2007 saw strong net share gains, 2008 year to date activity has been flat to slightly negative on a net basis. Sales of jet cards, which offer business jet access in smaller blocks of flight hours without a long-term financial commitment or equity stake appear solid and continue to augment the demand for new aircraft from this segment. New branded charter operations also continue to place sizable aircraft orders adding to total aircraft demand. Honeywell estimates that Charter operations account for an additional 10-11percent of current jet backlog levels.

“Shared ownership and charter fleets likely should continue to have higher utilization rates than traditional corporate operators in this environment,” Wilson said.

Replacement demand for new aircraft contributes significant share of new jet purchases in the fractional segment. Higher utilization and the desire to maintain consistent passenger experience and hold down operating costs leads to fractional aircraft replacement rates at shorter intervals than typical for many traditional operator groups.