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GAMA Third Quarter 2008 Shipment Analysis

A confusing quarter from a numbers perspective. The General Aviation Manufacturers Association (GAMA) released its third-quarter shipment and billings report on November 13 and the news is… confusing.

If you lived in a cave and your only news came from the GAMA report- you’d conclude that everything is just fine. In fact- better than fine. At the end of the third quarter total billings were $18.2 billion- or 19.9 percent ahead of last year – which was the most successful year in the entire history of business aviation. So we are headed for yet another record year.

Deliveries through the third quarter totaled 2-977 aircraft – up two percent over last year- which was the best year for business aviation aircraft deliveries since 1981. Business jet sales reached 990 units for the first nine months of the year – 30.1 percent ahead of last year at this time. In fact- if there were not a single business jet delivered in the fourth quarter- 2008 will still be the second most successful year in the history of business jet sales.

Turboprops are 13.7 percent ahead of last year- with 341 units delivered in the first nine months of 2008 – and 2007 was the most successful year for turboprop deliveries since 1981. How can it get any better than this?

Only the piston market is lagging- with deliveries totaling 1-646 aircraft – 211 units or 11.4 percent off the pace from last year- when 1-857 piston deliveries were reported. Even the piston performance is not all that gloomy.

After a disappointing first quarter that saw deliveries drop 28 percent from a year ago- piston sales have been only slightly off the pace set in 2007. In the second quarter- the 2008 totals lagged 2007 by just 5.5 percent- or 37 units – 635 compared with 672 last year. For the third quarter the gap was even narrower – 612 units this year against 631 in 2007. That’s down just three percent – hardly a disaster.

So only looking at the GAMA numbers we see a record performance in both billings and deliveries – with 2008 shaping up to be the most successful year in the history of our industry. Light the candles. Pour the champagne. Let the party continue… Except we don’t live in caves - and the GAMA report is far from being our only news source. Moreover- the reports coming in from virtually every other quarter paint a far different picture.

On a global level- much of the world is experiencing the worse financial crisis since the late 1920s. Banks and major financial institutions are on the brink of failure. Credit is much harder to obtain than it was even two months ago and most of the world’s economies appear to be in recession.

And it is obvious that these economic problems are spilling into the aviation world- where we are seeing lay-offs among major manufacturers including Cessna- Hawker Beechcraft and Piper; companies suspending operations- including Mooney and AAIA (formerly Adam Aircraft) while Eclipse was recently unable to make payroll. Despite record sales so far this year- all is clearly not well with business aviation manufacturing.

And yet the GAMA numbers are still showing sales happening at a record pace. So- in light of all the other news- that’s confusing.

One is reminded of the man who fell from a very tall building and called out to friends when he was about half way down- “so far- so good.”

UNLIKELY TO LAST
GAMA’s leadership doesn’t expect the good news to last. “Notwithstanding these positive third quarter numbers for turbine powered aircraft deliveries- our industry is experiencing difficulties due to weakness in the global economy-” said GAMA President and CEO Pete Bunce. “Reacting to the lead and lag nature of this economic slowdown- several companies have announced layoffs and are working very aggressively to retain orders and encourage new ones.”

This reflects an interesting phenomenon. In the past in this industry- there has been a tendency to continue to build inventory even when there were strong signs that markets were softening. This was driven by a strong desire not to tinker with manufacturing line rates- because changing build rates is both expensive and very hard on operating efficiency. In the long run- though- all this does is to defer the pain- and create huge amounts of work-in-process inventory that can’t sold – which is very hard on the bottom line.

This time- things are different. Both Cessna and Hawker Beechcraft described their layoffs as preemptory moves- designed to adjust line rates to match anticipated changes in the market. This appears to reflect a more market-based operations approach in contrast to the manufacturing-oriented philosophy that prevailed in the past.

Nonetheless it can be difficult in an industry with long lead times to adjust to market conditions that sometimes seem to change almost overnight.

The changing financial situation is producing some interesting results. Worldwide demand for petroleum-based fuel is way off and this has driven prices down dramatically. In the U.S.- automobile gasoline is half the price it was two months ago- and while aviation fuel prices haven’t dropped this sharply- they are coming down. This should help aircraft utilization- particularly in the lighter end of the market.

GAMA is clearly worried about the potential for increased government regulation that could put a damper on aircraft sales. In its news release accompanying the third quarter results- Bunce said we “urge U.S. government entities- as well as the European Commission and Parliament- not to enact new regulation or implement policies without a full assessment of the economic burden that would be imposed on aviation operators- manufacturers or their employees.”

The U.S. government still hasn’t resolved how the FAA will be funded- and the airlines that pushed so hard last year to impose user fees haven’t lost any of their enthusiasm for shifting costs away from themselves. There is some thought- however- that a U.S. Congress immersed in trying to stave off financial disaster may not be interested in confronting this contentious issue again this year. There will have to be legislation to reauthorize the FAA- but it may not have to include changes in how the agency is funded.

Bunce also said “GAMA is committed to working with the U.S. Congress and the Administration to utilize measures that in the past have helped stimulate aircraft orders.” The industry would certainly welcome tax incentives or any other measures that would help sustain the market- but with industry billings and delivery numbers at record levels- this will be a hard sell. It remains to be seen how a Barack Obama administration will view business aviation- but the Democratic Party has historically not been as supportive as the Republicans.

All of this only adds to the confusion. We really haven’t seen an economic situation like today’s for more than 75 years- and even then the parallels are only approximate. A majority of the aircraft companies operating in the mid 1920s were out of business by 1932 – but most of those were thinly capitalized start-ups. Moreover- there was no business aviation infrastructure in the 1930s.

So there’s no meaningful history on which to build a prediction of how the industry will respond to an unprecedented financial crisis. We have to know that the current record sales and delivery pace can’t be sustained indefinitely while our customer base is in financial trouble. We do know- however- that the fundamentals of our industry are strong. The market that has generated record sales and deliveries over the past five years isfueled by a solid demand for business transportation that really can’t be answered in any other way but today’s turbine-powered business aircraft.

IMPENDING TROUBLE?
Taking a close look at the GAMA report- are there signs of impending trouble? Maybe. In the jet market- while most of the companies have strong numbers- some are not delivering airplanes as fast as they did earlier in the year.

Bombardier continues in its leading position in the business jet billings race with $1.486 billion in sales for the third quarter and $4.876 billion for the year- although its numbers are off slightly from the first two quarters- when it had $1.635 and $1.753 billion. As you’d expect- Bombardier’s delivery total of 59 units was off slightly- too – down from 67 in each of the two previous quarters- although it was still up 18 percent from the third quarter of last year- when it delivered 50 jets. For the year- Bombardier’s delivery total was 193 units- making it the second most prolific business jet builder- behind Cessna.

Gulfstream is in second place in jet billings- with $1.372 billion for the quarter and $3.98 billion for the year. Unlike Bombardier- Gulfstream sales showed no falloff from the previous quarters- either in unit delivers or sales totals. If this trend continues- Gulfstream could regain the number-one position in jet billings it traditionally held for so many years during the 1980s and 1990s. Gulfstream delivered 39 aircraft in the third quarter - the same total as in the second quarter and up two units from the first quarter. Billings were up three percent over the second quarter’s $1.329 billion total- and up more than 7.25 percent from the $1.279 billion recorded in the first quarter of 2008. Compared with a year ago- Gulfstream billings were up 10 percent over last year’s $3.617 billion total for the nine-month period- while total unit deliveries were up more than 11 percent – 115 this year compared with 103 in 2007.

Cessna led the jet delivery derby with 123 units for the quarter and 336 total aircraft for the year. This represents a gain of more than 17 percent over the same quarter last year- when Cessna delivered 105 jets- and 25 percent over the year-to-date last year when it reported 268 deliveries. Because the company sales total includes both turboprop and piston products as well as jets- it’s impossible to determine from the GAMA report the total value of the company’s jet deliveries. Based on unit deliveries and known model pricing- however- it is a virtual certainty that Cessna is in third place in business jet billings.

Third place in jet deliveries- for both the quarter and the year- was Eclipse- with 43 in the third quarter and 155 for the nine-month period so far this year. This represented a gain of nearly 60 percent for the quarter- compared with 27 units delivered in the third quarter last year- and almost 223 percent for the year-to-date- up from 48 units a year ago. This was something of a pyrrhic victory- however- since the company has struggled financially this year and (as mentioned above) was unable to meet payroll in October. Beset with technical problems- the collapse of its largest customer and with financing increasingly hard to find- it remains to be seen whether Eclipse will be able to deliver any more airplanes. Some sources think not.

Hawker Beechcraft totaled 34 jets for the third quarter and 104 for the year to date- up more than seven percent from the 97 it recorded for the same nine-month period in both 2006 and 2007- although off slightly from the 35 it delivered in the third quarter of 2007.

Hawker Beechcraft’s billings were up almost 29 percent from a year ago- at $1.696 billion compared with $1.315 billion in 2007. (The $1.315 billion figure includes the first quarter 2007 billings of predecessor Raytheon Aircraft).

Dassault delivered 14 aircraft in the third quarter and 48 for the year to date- an increase of nine percent over the 44 units it delivered in the same period last year. Like Bombardier- Dassault did not deliver as many airplanes in the past quarter as it did in the first two- although its third quarter total matched last year’s. Dassault’s billings were up more than 18 percent at $1.687 billion- compared with $1.422 billion a year ago.

And Embraer reported delivery of 10 of its Legacy 600 models for the quarter- bringing its total to 26 for the year- up almost 24 percent from the 21 it reported in the first nine months of 2007. The company’s billings were up 27 percent- from $519 million last year to $660 this year. With its new Phenom 100 scheduled to begin deliveries next quarter- Embraer’s position in the business jet manufacturing market is likely to change significantly in the next year. The company is forecasting delivery of 100 or more Phenom 100s in 2009 – assuming the financial crisis doesn’t impact their backlog too badly.

At the highest end of the business jet market- Airbus continues to lead Boeing in the year-to-date race to deliver airliner derivatives by eight units to five- although Boeing did better in the third quarter- with three BBJs reported compared with two Airbus units. Boeing’s year-to-date sales are up slightly- from four units to five- while Airbus’ total is down from 10 to eight.

Emivest Aerospace- nee Sino Swearingen- has a new name- new investors and apparently significantly improved prospects over last year at this time- although it still hasn’t delivered any airplanes in 2008. The company’s prospects for deliveries in 2009 are better.

THE TURBOS
In the turboprop market- as in the jet segment- some companies did better this year than they did a year ago- while others did not. Hawker Beechcraft continues its decades-long dominance of this segment with 31 deliveries for the quarter and 110 for the year to date. This represents a 7.8 percent increase over the 102 units it delivered in the same nine-month period in 2007- but the quarterly total is actually down. A year ago Hawker Beechcraft delivered 40 of its King Air models in the third quarter.

Cessna and Pilatus were locked in a tight battle for second place in the turboprop segment- with Cessna leading in the nine month total with 66 units compared with 61 for Pilatus- while the Swiss company was ahead in the third quarter by 26 units to 25 for Cessna. Compared with a year ago- Cessna was ahead of last year in both categories (20 for the quarter and 54 for the first nine months of last year) while Pilatus was slightly off its 2007 pace- when it had 27 units for the quarter and 68 year-to-date.

Socata was well ahead of its 2007 performance this year- however- with 42 deliveries year to date compared with 29 a year ago and 18 for the third quarter alone- against 11 a year ago. That’s an improvement of almost 45 percent for the nine-month period and almost 64 percent for the quarter.

Piper- by comparison- pretty much matched its 2007 numbers in 2008. The company reported 13 turboprop deliveries in both third quarters- and 33 for the first nine months of 2008 against 34 the year before. Other companies reporting turboprop deliveries in the third quarter included Pacific Aerospace (4)- and Quest (2). Neither company reported deliveries in 2007.

THE PISTON MARKET
The piston market is also sending mixed signals- with some companies appearing to be doing alright while others are clearly struggling- and a few are failing.

Compared with a year ago- the leadership position in piston-powered single-engine aircraft has changed. Cessna now tops the market with 218 deliveries for the quarter and 542 for the first nine months. Cirrus- last year’s leader- has 186 for the quarter and 425 for the year so far. This is off slightly from the 193 that Cirrus reported in the third quarter of 2007- although at the time that was the most successful quarter Cirrus had every enjoyed. For the year-to-date in 2007 Cirrus had 461.

Cessna’s total actually represents a gain. In 2007 it delivered 155 singles in the third quarter- although this number was skewed somewhat by avionics and production problems. Its nine-month total in 2007 was 507 units- although it would go on to finish the year with 807 deliveries- including a most remarkable 300-unit fourth quarter performance.

In assessing Cessna’s performance- it is necessary to remember that this year’s numbers include production from the former Columbia Aircraft- which Cessna went on to acquire late last year. During the third quarter of 2007- however- Columbia’s deliveries only amounted to 30 units- so even with the Columbia production factored in- Cessna’s quarterly total for this year (218 units) is still almost 18 percent ahead of the combined 185 piston singles Columbia and Cessna delivered during the third quarter of 2007.

Diamond- the number three piston-single producer is somewhat off its third-quarter 2007 performance- with 47 deliveries this year compared with 66 last year. For the year Diamond is also down- with 196 deliveries compared with 220 in 2007. But Piper’s single-engine deliveries this year are actually ahead of last year- (122 units versus 116). For the quarter Piper is also ahead- with 48 units this year against 39 a year ago.

Next in piston deliveries is Mooney- where the news is not good. In spite of delivery numbers that are not markedly different from last year- the company has reportedly laid off most of its workforce and suspended production. For the quarter- Mooney reported delivery of 22 airplanes- compared with 19 a year ago. Mooney’s year-to-date total is 55- off just slightly from the 59 it reported in 2007.

Deliveries of Hawker Beechcraft’s venerable Bonanza model were off somewhat- at 13 units for the quarter and 44 year-to-date- compared with 18 and 54 a year ago- but Liberty was among the companies reporting improved deliveries in the third quarter- with eight units against two a year ago.

Those were the highlights of this past quarter- which also featured a new entrant in the single-engine piston category: Quartz Mountain Aerospace- of Altus- Okla.- formerly known as Luscombe Aircraft.

The multi-engine piston market is well off its 2007 performance- due partly to the difficulties that Diamond- the segment’s leading producer- is having with its engine supplier. The total twin market in the third quarter totaled 41 units- compared with 78 a year ago. The year-to-date total for 2008 is 148 units while 2007 had seen delivery of 188 in the same period – a reduction of more than 21 percent.

Diamond reported delivery of just 19 diesel Twin Stars (compared with 54 for the quarter last year). Piper had 16 twin deliveries in the quarter and 40 so far this year. This is an improvement over 2007. Hawker Beechcraft delivered six twins this quarter and a total of 27 in the first nine months compared with 13 and 27 in the same periods a year ago.

Two companies that had piston deliveries in 2007- Adam Aircraft and Alpha- reported none in 2008.

On balance- then- this latest GAMA report shows us a jet market still doing well but showing some potential signs of softness. It is not encouraging that a high percentage of the growth in the market is clustered in a company (Eclipse) that apparently can’t pay its bills. Likewise- turboprops are holding their own- but the fact that some companies are not doing as well as they did in previous quarters is unsettling.


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