Business & GA

Business Aviation Confronts Slowdown

By Bill Carey | January 1, 2009
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The outlook for business aviation today might look different in the cold light of a new morning.

Three months ago, despite the drumbeat of bad economic news that preceded it, there was still cause for hope, if not optimism, as some 30,000 registrants gathered for the 61st National Business Aviation Association (NBAA) convention in Orlando, Fla. Mindful of the bear market on Wall Street, NBAA, one of the industry’s glitzier events, was noticeably subdued but not restrained from celebrating new aircraft starts (the Gulfstream G250), new product launches and major contract awards.

Corporate jets are a byproduct of corporate profitability and therefore are symbolic of a nation’s economic vigor. At the time of the convention, the United States economy was losing lift and nearing a stall situation. But on Oct. 1, days before the Orlando gathering, the U.S. Congress approved an extraordinary $700 billion bail-out of financial markets that seemed to offer hope of recovery.

Honeywell delivered its authoritative Business Aviation Outlook on Oct. 4 to kick off NBAA. Its survey of 1,866 corporate flight departments worldwide suggests a strong long-term market of up to 17,000 new business jet deliveries worth $300 billion through 2018.

"Purchase expectations [remain] steady with the record levels we announced last year," said Rob Wilson, president of Honeywell Business and General Aviation. "Conditions for long-term growth continue to look positive, even in spite of more recent financial turmoil." Still, the inventory of used jets for sale, a counterweight to new sales, was expected to climb with the addition of light and Very Light Jets (VLJ).

While the North American market represents the largest growth in absolute numbers of business aircraft, the industry is increasingly globally diversified, Wilson said. "Historically business aviation was North America," he said. "More and more it is becoming a global industry…. In fact, when we look back to the year 2000, we’ve now doubled the fleet of business jets outside the U.S."

Three-Year Backlog

Honeywell estimates an industry backlog of 2.5 to three years, with 5,000 aircraft on firm order. In unit terms, this is twice the level that existed before the 9/11 terrorist attacks and "should help buffer the industry from any pronounced cyclical adjustments as we move through a period of financial uncertainty," Wilson said.

The survey was conducted last summer, Wilson noted, but took into account the slowing U.S. economy and high fuel prices. Nevertheless, he was asked if the forecast might be overly optimistic given the current state of the economy.

"We did have that debate, but we felt very strong in the process," he said. "We also felt very strongly that the events in the U.S. are having some global impact although at this point [it is] somewhat limited. If in fact it becomes a global economic slowdown, then we’re back looking at a different forecast in a different time frame anyway."

The Bombardier Aerospace business aircraft market forecast for 2008-2017 predicts that economic growth will support business jet deliveries in the next decade above the peak of 863 units reached in 2007. Over that period, Bombardier forecasts demand of 13,200 aircraft, worth $300 billion, in the light jet to converted airliner segments.

"The weakening of the U.S. economy and, to a certain extent, of the global economy is expected to cause a significant reduction in the demand for business jets as the number of orders will reach a low point of 960 in 2009," Bombardier said. "This low point will still be stronger than every year prior to 2005."

Forecast International projects 15,936 business jets will be produced through 2017, worth $223 billion. The forecasted unit production is more than double the number of business jets produced in the preceding decade. "Non-U.S. customers now account for more than half of business jet sales, and this diversity of geographic demand will help shield the business jet industry from much of the effects of a slowing U.S. market," says the firm.

But these and other forecasts could not foretell that the financial bail-out in the United States, at least initially, would fail to defibrillate the economy and that other global economies would follow in domino fashion. In mid-November, the 15-nation euro zone was described as being in recession, followed by Japan, the world’s second largest economy. Both satisfied the definition with two consecutive quarters of negative growth.

For business aviation in the United States, it didn’t help that executives of the Big Three automakers, seeking a financial bail-out of their own from Congress, flew to Washington, D.C., "in private luxurious jets," according to ABC News.

Offering a somber assessment of the business jet market is Brian Foley, president of a Sparta, N.J., consulting practice by the same name. Formerly marketing director with Dassault Falcon Jet, Foley issued a press release in September saying the next business aviation downturn would be steeper than predicted and the recovery longer. "A lot of those other forecasts done by OEMs might be a little biased toward the high end just to please shareholders and leaders and what have you," he said in a telephone interview.

Foley contends the order backlogs that airframers are relying on to sustain them through economic penury are not as robust as believed. In part due to increased speculation in the market, he predicts "double-digit percentage order book cancellations will be the norm" among manufacturers. The manufacturers will respond by moving up deliveries for customers at the end of the line.

"Initially, we’ll still see deliveries going strongly this year and even [in 2009], but after that, the wind is kind of out of the sails," Foley said in November. "The manufacturers will have moved up all the out-year delivery positions."

Delivery Trough

The various forecasts are aligned on certain points. Those mentioned here predict a trough in deliveries beginning around 2010 (with the exception of Bombardier, which sees a rebound beginning then). The last such downturn was in 2003. In the near term, Honeywell predicted 2008 deliveries of nearly 1,200 units, up 16 percent from 2007, with even better numbers in 2009.

"The large backlog supports near-term momentum, even in the face of financial uncertainty," Wilson said. "Then, based on the timing of many projects that are in the pipeline, new product service entries and slower economic growth, we project a lull to occur in the 2010-2011 time period, but still at a very healthy delivery rate of between 1,200 and 1,300 units."

After that lull, new product entries should stimulate demand, and with more favorable global economic conditions, annual deliveries could approach 2,000 units, Wilson said.

Among the new arrivals, the Gulfstream G250 super-midsize jet unveiled at NBAA 2008 is planned for delivery in 2011, the G650 ultra-large jet in 2012; the Embraer Legacy 500 mid-size jet in 2012, the Legacy 450 "mid-light" in 2013; and the Cessna Citation Columbus super-midsize jet in 2014.

Forecast International predicts a three-year decline in annual production beginning in 2010. Starting in 2013, build rates should begin rising again, and exceed 1,700 units in 2017, it says.

"It’s not going to be a one-year trough," Foley surmised. "I think we’re going to be on the bottom for probably a couple of years before we start inching our way back up. Opposed to other forecasts, we drop a little harder and faster."

The international market, he said, may not support the anticipated growth. With other world economies in decline and the dollar strengthening, international demand will cool from more than half of orders to perhaps 40 percent. "We just super-accelerated demand overseas and got tons of orders," Foley said. "But I submit that the demand has been satisfied pretty much now."

There is agreement among forecasts that the larger end of the market — led by longer-range, higher-value Gulfstream, Bombardier and Dassault models — will weather a downturn better than the lower end. Airframers with more exposure to smaller companies and charter and air-taxi operators will be challenged. The market for VLJs, representing potentially one-third of the business jets built over the next decade, is variously described as "dynamic" and "turbulent," and dependent on the success of the air-taxi business model.

Softness already is evident at the industry’s midsection. Hawker Beechcraft on Oct. 31 informed employees that layoffs were coming, a response to "the weakness in the global economy and overall economic outlook." The Wichita, Kan.-based manufacturer planned to reduce its workforce by 5 percent, or about 490 employees. Cessna Aircraft, also based in Wichita, in November revised down its 2009 production schedule for high-end Citation jets, from the 535 targeted to the 2008 level of 475.

Troubled Eclipse Aviation, manufacturer of the Eclipse 500 VLJ, missed payroll for the first two weeks of November and then filed for Chapter 11 bankruptcy in Wilmington, Del. Eclipse’s largest customer, air-taxi pioneer DayJet, discontinued operations in September.

Suppliers too were hurt by their exposure to Eclipse. Innovative Solutions & Support provided the primary flight and multifunction displays for the Eclipse 500 Avio NG avionics suite. In a fourth-quarter 2008 earnings call with analysts, IS&S reported $6 million in charges associated with suspending the contract.

Grob Aerospace, developer of the spn light jet, in August declared its German manufacturing arm insolvent. A month later, Grob was dropped by Bombardier as the supplier of composite structures for the new Learjet 85.

Foley posited that Cessna’s Citation Mustang and Embraer’s Phenom 100 are the only VLJ "shoe-ins" to endure in the coming market, at least under present ownership. He speculated that automaker Honda "will lose courage" and cancel the HondaJet VLJ, slated for delivery in 2010, but retain the GE-Honda HF120 engine for other platforms.

"The people who survive the best are those positioned more toward the top end of the [market]," said Foley. "Gulfstream will do fine; Dassault will do fine. As far as backlog contraction, [they] will probably contract the least, but it’s still going to be double digit."

More recently, Honeywell was asked if it had altered its forecast in light of the economic developments since NBAA. Charles Park, Honeywell’s director of market analysis, "stands by the forecast" for 2008 and "thinks the industry is still on track" to deliver 1,300 to 1,400 units in 2009, said a company spokesman.

"The [future delivery] range is in there for a reason, but everybody tends to look at the big number, not the range," the spokesman said of the forecast.

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