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2005 AIRCRAFT FORECAST- ANALYSIS & COMPARISONS

December 2005

Category: Aircraft Sales – Forecasts

Author: Mike Potts

December 2005

As the business aviation industry completes the most successful year in its history, the two most prestigious forecasting organizations, Honeywell and Rolls-Royce, are telling us that the best is yet to come. Next year will be better than this one, both organizations agree, and the record of 787 business jet sales deliveries set in 2001 is almost certain to be eclipsed in 2006.

Based on Honeywell’s crystal ball, jet deliveries will climb well above the 800-a-year range in the next two years before settling back slightly in the 2008-2009 time frame. Honeywell then predicts a growth resurgence that will carry the industry above 1,000 business jet units annually near the end of their forecast period in 2015.

Even the settling back, which Honeywell characterizes as a "brief period of cooling," is not expected to be severe. Annual deliveries in the years 2008 and 2009 should still come close to matching 2001’s 787 total. So the worst of the coming decade should be as good as the best of the past decade in Honeywell’s view. That’s great news.

The Rolls-Royce forecast isn’t quite so specific in detail, but the message is fundamentally the same: Look for solid and steady growth over the next ten years and beyond.

Rolls-Royce predicts new business jet deliveries in the decade between 2005 and 2014 will be 32 percent ahead of the total delivered from 1995 to 2004. And the good news continues beyond 2014, at least from the Rolls-Royce viewpoint, which has business jet deliveries continuing to climb by nine percent over the decade that follows – 2015 to 2024.

Honeywell, of course, doesn’t offer an opinion beyond 2015, but at that point in the Honeywell forecast chart the slope of the graph is still pointed sharply upward, so Honeywell doesn’t appear to be in disagreement.

Based on some of the best intelligence and analysis available, the quality of research that goes into these forecasts is so solid, the annual predictions have developed a well-deserved reputation for accuracy. If anything, however, the Honeywell and Rolls-Royce aircraft sales forecasts have erred on the conservative side recently. The recovery that began two years ago in the piston segment and finally began to blossom in the private jets for sale market late last year is now outpacing all predictions.

A YEAR AGO...

A year ago Honeywell was expecting that jet deliveries might reach 650 this year and that 700 would be within reach in 2007. Rolls-Royce was a little more conservative, foreseeing a 600-unit jet sales market this year, with 700 being attainable perhaps by 2008 or 2009. And yet here we are with the possibility of finishing the year with as many as 750 jet deliveries.

Do not mistake this analysis for criticism of last year’s forecasts. It is anything but. Last year’s NBAA was in October, so last year’s numbers were developed with only the first half GAMA numbers for reference. At that time the jet sales market was still comparatively flat. Nonetheless, both Honeywell and Roll-Royce accurately predicted the upturn.

Clearly the aircraft for sale market is advancing a year or two ahead of all expectations, and both Honeywell and Rolls-Royce have ratcheted their forecasts upward accordingly. So what are these forecasts based on?

METHODOLOGY

The methodology used by these two world-class organizations to predict the aircraft for sale market is generally similar, but differs in some important respects. The similarity of the final results lends credence to both forecasts.

Honeywell performs an elaborate survey of more than 1,400 current business jet owners from all over the world, asking about their buying intentions for new and used business jet aircraft for sale. It factors these numbers based its experience with creating its forecast, which Honeywell has been generating for nearly 20 years.

Honeywell then polls the aircraft manufacturers to determine how the airplanes for sale market is performing, and balances this information against the known quantities of the most recent GAMA reports as well as activity in the fractional markets, including activity reports and pilot hiring. Finally, Honeywell factors in its overall expectations for the economy, which this year it has pegged at a 3.1 percent growth rate.

Rolls-Royce, meantime, looks at the market through the lens of its own order book. It then factors in the GAMA shipment report data, as well as information derived from a poll of OEM sales and backlog reports. Rolls-Royce also carefully tracks the used airplane sales market, believing this is an important barometer.

Another factor Rolls-Royce considers is OEM profitability. The rationale here is that profitable OEMs have the resources to develop new products that will stimulate the market. There is a lot of evidence in the current airplane sales market’s strong performance to support this premise.

And like Honeywell, Rolls-Royce looks at the overall economy as well as the performance of the fractional market to round out its forecast.

Both Honeywell and Rolls-Royce have been in the forecasting business for a long time. They have developed considerable expertise and are quite good at it.

SEAS OF CHANGE

Perhaps the most interesting aspect of this year’s surveys, beyond the optimistic growth forecasts, are changes predicted in the fundamental nature of the private jet sales market. Historically, the North American market has accounted for 70 percent or more of the annual business jets for sale market, both in unit sales and in dollar volume. This has been true virtually since the 1940s.

The numbers have varied slightly over the years, depending on exchange rates, the fortunes of the world economy and other vagaries of the private jet sales market from year to year, but they have never deviated by more than a couple of percentage points – except in a few years when the North American market was even larger than 70 percent.

If the trend Honeywell’s survey identified this year proves accurate, however, the North American share of the market will shrink to 60 percent in the coming five-year period. The other 40 percent of the market will be divided among Europe (15 percent), Latin America (14 percent), the Middle East (4 percent) and Asia and the remainder of the World (7 percent).

These numbers are for a market of 3,000 to 3,400 new business jets that Honeywell believes will be delivered to traditional corporate customers between 2005 and 2009. They do not include deliveries to fractional ownership programs.

This is a huge sea of change in the airplane for sale market, reflecting major changes in the demand for and projected utilization of business aviation aircraft around the world in the coming decade. It’s not that Honeywell is expecting the North American market to shrink. Instead, it is expecting the international market to grow more dramatically than it ever has before.

Rolls-Royce turned up a similar trend, although it paints the picture somewhat differently. Rolls-Royce believes that emerging markets in China, India and Russia will expand in the next decade to absorb 500 to 700 business jets. These are markets where business jet sales activity is virtually non-existent today.

The emergence of these markets will apparently be fueled by economic and infrastructure growth – the same factors that are starting to put upward pressure on oil prices as consumption rises in these areas.

Other emerging markets where Rolls-Royce sees market potential are Pakistan, Egypt, Venezuela, Australia, South Africa, Japan, Argentina and Chile. These markets may be underserved by as many as 200 business jet sales even today, in Rolls-Royce’ view. So what segment of the market is going to benefit from all this growth?

There is general agreement between Honeywell and Rolls-Royce that all of the market segments will experience growth, but the biggest gains over existing sales levels will come in the middle to upper range of the market.

DEFINING SEGMENTS

Drawing precise comparisons between the two forecasts here becomes a little difficult because Honeywell and Rolls-Royce view the market differently, and they give different names to different segments of the market. To further complicate the comparison, each company excludes at least one market segment that the other counts in its results.

In Honeywell’s view of the world there are eight categories of business jets, which it classifies as airplanes with maximum gross takeoff weights under 100,000 pounds. These include Ultra Long Range, Long Range, Large, Medium Large, Medium, Light Medium, and Light Jets, as well as the Very Light Jets such as the Eclipse and the Cessna Mustang for sale that should begin to enter the market in a year or two. This year marks the first time Honeywell has devoted special attention to the Very Light Jet category in its forecast (see related story on page 59).

You will note that Honeywell has no category for airliner-based business jets for sale such as the Boeing BBJ or the Airbus A319/320/321 series and doesn’t factor these sales into its projected results.

By contrast, the Rolls-Royce forecast recognizes seven categories, which include airliner-based business jets for sale, but doesn’t include Very Light Jets. The Rolls-Royce categories are Biz Liners, Very Long Range, Long Range, Medium, Light Medium, Light and Entry jets. And while Rolls-Royce does recognize the airliner-based category in its forecast, calling them Biz Liners, its prediction calls for this segment to be a niche market throughout the coming 20-period, with deliveries in the range of 10 to 15 units per year. Based on Honeywell’s survey and market groupings, the majority of the growth in the next decade will be in the Long Range, Large, Medium Large, Medium, Light Medium and Light categories.

The Rolls-Royce forecast and market groupings have the Very Long Range, Long Range, and Medium categories capturing the largest percentage of market growth in the year ahead.

Presumably the above two groupings refer to pretty much the same market segments and airplanes, despite the obvious disparity in the names and categories. It should be noted that Honeywell appears to have higher expectations for growth in its Light Medium and Light market categories than Rolls-Royce does for its apparently comparable Light category.

The reasons for the projected market dominance in the middle to upper ranges of the business jet sales market are largely based on the proliferation of new products in these segments.

Both Honeywell and Rolls-Royce believe these new airplanes for sale offer the customer improved value, including increased cabin comfort, extended range and broader mission capability than previous models. This gives operators a significant incentive to trade up, and this will drive the market to new heights in the coming decade. Judging from sales results so far this year, it’s already happening.

 

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