Blue Skies Ahead?
Is the cyclical character of business jet deliveries about to have an inflection? Respected forecasters believe that we may have hit the nadir- outlines Jack Olcott.
The need for Business Aviation has grown steadily for many decades and continues to grow in the midst of economic turbulence. The market for new business jets- however- is cyclical. The number of aircraft delivered increases and then drops- with a period of about seven years between one high and the next- as the general economy expands and contracts.
About 20 years ago- in the 1991-1992 timeframe- the national economy was in recession and annual shipments for new aircraft fell by about 8% from the previous year. During the 1992 presidential campaign- many will recall- challenger Bill Clinton defeated the incumbent- George H.W. Bush- with the cry “It’s the economy stupid.”
As companies responded to the mild recession- more attention was placed on downsizing to counter the slow economy. Fewer people were available to do the same (or more) tasks that previously were handled by a larger workforce- and bold measures to improve productivity were widely adopted as a strategy for recovery. Increased use of business aircraft was one such strategy- and the order book for new models grew smartly for the rest of the decade.
Between 1993 and 2001- deliveries of new business jets expanded each year- reaching a new high of 784 units. The community was jubilant- having never seen such activity- and wondered if such volume would be seen again. Then 9/11 happened. Deliveries dropped by nearly 15% in 2002 and by another 23% in 2003 before beginning a steady upward climb that culminated in a record 1-313 deliveries in 2008.
In the mid- to late-years of the 2000s- manufacturers of business jets experienced increasing demand that produced multi-year backlogs. In reaction to long delivery times for new aircraft- prices of used jets rose as companies and entrepreneurs embraced Business Aviation. In the spring of 2008- before the crisis in sub-prime mortgages precipitated a sell-off on Wall Street- a pre-owned aircraft that could be purchased and placed in service immediately sold for a handsome premium over the list price of new equipment.
2008 AND AFTER
In the fall of 2008 the music stopped. Orders for new aircraft plummeted. Because of the significant backlog of aircraft under contract- deliveries slowed but remained deceivingly robust. In 2009- manufacturers placed 870 new business jets with customers throughout the globe- even though some OEMs actually had more cancellations than new orders. Deliveries dropped to 763 in 2010 and are anticipated to slow to between 600 and 650 by the end of 2011.
As orders for new business jets slowed to a trickle- more aircraft became available on the pre-owned market. Some companies placed their jets on the market more for the optics of apparent cost-cutting- asking for a price that was sufficiently above-market to all-but-assure that there would be no takers. For the most part- however- the supply of good- used aircraft grew noticeably and prices fell since 2008. For the last three years- the market for business aircraft has been sliding down the back side of its classical up and down cycle.
BREAK IN THE CLOUDS?
In spite of a continuing spate of troubling economic news- high unemployment and Washington gridlock- the cyclical nature of the business jets market appears to be turning upward- and there is the glimpse of blue skies ahead. At this year’s Annual Meeting and Convention of the National Business Aviation Association- several forecasts predicted that 2012 would be a year of recovery for the manufacturers of business jets.
Perhaps the most respected forecast is provided each year by Honeywell- the Fortune 100 company that includes avionics- engines and systems for Business Aviation among its industrial products. Annually it surveys approximately 1-500 aviation departments worldwide to obtain a prediction of their buying expectations. While recovery is anticipated to be gradual at first- with business jet deliveries increasing to a count below 700 for next year- Honeywell does predict that 2012 will be the beginning of delivery increases that should continue through the next five or so years.
For the decade from 2011 through 2021- Honeywell forecast that about 10-000 new business jets will be delivered- with a total worth of more than $230 billion. By 2016 or 2017- the Business Aviation industry will see a recovery that matches (maybe even exceed) the record units delivered in 2008.
Surely the dollar value of units delivered will exceed previous records- even when discounted for inflation- due to the increased number of orders that are anticipated for larger- long-range business aircraft. (Even in today’s unsettled economic conditions- the backlog for Gulfstream Aerospace models has risen for three consecutive quarters.)
Any notion that Business Aviation has seen its best days is simply wrong. The demand for transportation via business jet is strong as companies seek to increase productivity and achieve success in this era of globalization.
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