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Nobody really expected the bubble to go on forever - many marveled at how long it stayed intact. From the rosy tone of the forecasts of just a few weeks ago- an expected plateau and slight decline weren’t expected for another year or two. That was then. Recent signs point toward a business aviation bubble decidedly leaking air – which- in truth- sure beats a bubble suddenly bursting altogether. Still- ...

Dave Higdon   |   1st December 2008
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Dave Higdon Dave Higdon

Dave Higdon writes about aviation from his base in Wichita Kansas. During three decades in...
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From The Horses’ Mouths:

Wonder where the market’s going? OEMs have their suspicions.

Nobody really expected the bubble to go on forever - many marveled at how long it stayed intact. From the rosy tone of the forecasts of just a few weeks ago- an expected plateau and slight decline weren’t expected for another year or two. That was then.

Recent signs point toward a business aviation bubble decidedly leaking air – which- in truth- sure beats a bubble suddenly bursting altogether.

Still- the market expansion of about five years appears near its end. Buyers are struggling in unexpected ways from just a couple of months back. Now all signs point toward an industry attempting to make a landing as soft as possible.

But despite the many positive words- signs and hopeful indicators- signs of the slippage have been in the air for many- many months.

Among the more-recent signs of the adjustment were ones that came in October- when the first of the smaller piston aircraft companies announced production reductions and reduced work weeks. By the first week of November- the same week as the U.S. Presidential elections- layoffs had started at business turbine planemakers- with signs of production plan cutbacks already acknowledged for 2009.

Reduced sales of pre-owned business turbine aircraft continues to feed the expansion of the unsold fleet- which has begun to ripple through the delivery plans of buyers who planned to move up.

Customers are adjusting delivery positions and- in turn- planemakers are adjusting production rates- and making defensive efforts to shield themselves from the possibility of a global economic downturn of a scale not seen since the start of the Great Depression in 1929.

Cessna and Cirrus- Hawker Beechcraft and Mooney all depend on a significant share of business-oriented sales for their annual bottom lines- and all- in the space of a little more than a week- announced plans to cut staff- adjust production and take other steps to avoid the worst impacts of an expected fall in new orders- as well as ongoing deferrals and cancellations.

It’s not- as some predicted- a case of the industry overselling to the point that there were no more customers willing to wait four- five- even six or seven years for their just ordered airplane to deliver.

While arguably an element in the changes coming- much of what the business aircraft community is working to overcome stems from influences outside their control and unrelated to their years of successful order growth – order growth that so outpaced production that backlogs of record proportions will remain for a couple more years- at least. For how long depends- in part- on how much orders lag outputs – the opposite of what’s happened in recent years.

There are many sides to this downturn and many thoughts and words about its genesis. In talks with executives of brokers- dealers- planemakers- FBOs and trainers- you almost get a sense that each segment has been comparable to the story of the three blind men encountering an elephant for the first time. Each has a better feel for its own part of the anatomy but only a limited sense of the whole animal.

In this case though- the blind men started bumping into one another and sensing others’ impact shortly after getting their first touch of the downturn. Those hints started stacking up earlier in the year – far ahead of the dual deep market drops and severe credit crunch that piled on in mid-September.

Despite the glowing forecasts of industry seers and soothsayers developed before the signs started standing out- the aircraft manufacturing industry is on the brink of a struggle. Planemakers and service providers were starting to decipher the tea leaves months back- as the ripples waved through from those market and credit crunches.

Just into November- executives at several of the larger players started to act in an effort to prevent an approaching dip in the runway from turning into a ditch for their companies. Still- these actions so far stand far away from seeming responses to fear or panic. Instead- they seem measured and balanced responses to worsening conditions that belied even the earlier signs of a market squeeze. And if these measures cover current concerns and conditions stabilize- these actions will help preserve profits and jobs as well as continue a long-running expansion of the business aviation community for years to come.

The earliest signs weren’t a slowing in advance orders- a shrinking of delivery numbers or even a drop in interest. Through the end of 2007- all signs pointed toward continued expansion- with backlogs growing on orders that exceeded deliveries – a phenomenon going back several years.

But even as the business aviation community met for its annual conclave of collaboration at the NBAA convention in Atlanta last year- manufacturers knew that their ever-expanding backlogs would not- could not- continue to expand forever. At the same time- no one seemed ready – or maybe prepared – to say when the summit might come and the pace of orders would decline.

Forecasts predicted continued growth through 2009- 2010- before a small drop to a plateau equal to about 2006/2007 in deliveries – with growth resuming in 2012/2013 but at a rate more modest than the 2004-2008 time frame. Yet the signs were already emerging.

The first ‘canary in the coal mine’: an upward trend in the pool of pre-owned aircraft for sale. The slow expansion of the pre-owned aircraft fleet for sale – in both the percentage of the total fleet and- even more troubling- the total number – began to do to values what excess product availability does to most markets. Depress values – particularly values for older light jets- the very jets that tend to top the churn: An existing operator orders a new jet and- within a comfortable timeframe ahead of its delivery- offers for sale the jet to be replaced – which- in turn- gets picked up by an operator moving up in business aviation- or a new operator moving in.

By the count of several brokers approached- the inventory of pre-owned jets for sale grew as a percentage of the total fleet during the past 12 months – from under seven percent last fall to upward of 11 to 12 percent today… and growing still.

As the resale market slowly- perceptibly- lost air- values steadily started to decline. For some would-be sellers with pending orders for something new- this drop in value impacts their finance plans. But even with a good deal and solid resale prospects – such as the factory guaranteeing to take your old airplane off your hands – all bets are off if finance options begin to evaporate.

With the collapse of several large investment and commercial banks this summer and fall came a near seizure of the credit markets and a sudden drop in business dependent on access to credit. Auto sales for the third quarter suffered among their largest drops in decades- with the industry’s largest players enduring drops of 45 percent- 40 percent- 33 percent- 25 percent and the like spread across domestic and foreign badges- alike.

Housing construction- another capital-intensive- long lead-time business- like business aircraft- slowed tremendously as a crisis in so-called sub-prime mortgages helped precipitate the bank collapses that triggered the wider credit crisis.

Couple these industrial-strength issues with an unprecedented spike in petroleum prices and you get slower consumer spending- less business flying- reduced travel overall- and the spread of ripple effects that made what might have seemed a small wave feel more like a ride inside a washing machine.

As this was being written- Hawker Beechcraft reported a third-quarter loss and began layoffs of about 480 employees- most of them in Wichita. Across town- Cessna warned its employees of a pending tightening and a reduced production schedule for 2009.

Exactly what form other belt-tightening measures may take are still unknown- though steps such as hiring only for critical positions and leaving empty other slots are being considered. Cessna is also adjusting its production plans. Previous to the economic upheaval- Cessna expected to deliver a record 475 jets in 2008 and about 535 in 2009. While 2009 deliveries are still expected to exceed 2008- it now appears that the 500 mark won’t be cleared next year.

Conversely- Cessna remains on track to finish certification next year of two aircraft now in development: the new Light Sport Skycatcher 162 and the Citation CJ4- both in the second half of the year. Cessna also reports that progress continues unabated on the new large-cabin Citation Columbus.

Bombardier- however- says it plans to continue its development of the Learjet 85 and that sales of its business aircraft lines remain strong enough that no immediate changes are expected. And Piper Aircraft is continuing development of its PiperJet single and appears to be holding its own with its other business-oriented products- like the Meridian turboprop- and the Matrix and Mirage turbocharged piston singles.

Cirrus is on track with its SJ50 single-engine jet- and Diamond is progressing with its new D-Jet- while sales of its piston products – often from which new turbine owners step up – have slowed sufficiently for the company to reduce staff and cut back to three-day weeks.

Out in Colorado- AAI Acquisitions Inc.- the Russian-owned successor to Adam Aircraft- has started and stopped efforts to renew progress on the A700 VLJ in the past three months. The reversal came shortly after NBAA concluded in Orlando. Eclipse Aircraft- meantime- staffed its NBAA booth minimally and then pulled out of exhibiting at November’s AOPA Expo in San Jose- Calif.- to preserve cash.

With at least two analysts predicting the demise of the company- Eclipse continues to build jets while seeking an additional $200 to $300 million investment so it can survive the period in which it’s building Eclipse 500 VLJs at a loss – airplanes which will need further improvements to meet final standards.

Business aviation indicators continue to decline- according to firms such as UBS Investment Research and Forecast International. Utilization is down and with it sales of fuel and maintenance services. The continuing slump in demand for pre-owned aircraft continues to impact residual values – a fact you need no analyst to detect- only a periodic Internet search.

While finance money remains broadly available- some firms are hedging their bets in terms of required down payments and even imposing age limits on the business turbine aircraft they will finance. Planemakers with access to their own finance vehicles are also working to protect their flanks. Those with trade-in programs in place are taking a more-restrictive approach with new customers- limiting the lineage- the age or both on what they will accept.

In some instances we’ve heard about- the age limit for same-badged trade-ins from one major manufacturer has moved from 15 years to 10 and now five in the past few months. And thus we see the problem circle back onto new aircraft sales and deliveries. If an existing owner can’t be sure of moving the old bird in time to take delivery of the new one- he is likely to ask to defer that new-plane delivery.

Like a homeowner with one to sell and one about to close- no aircraft operator willingly puts himself or her company in a position of having to carry two planes when only one is needed.

But the news- sobering and unsettling though it is- is not bleak- say analyst and marketing executives. First off- they say- the industry is not – at least- not now – seeing signs of a wholesale pull back by customers with aircraft on order.

That means those huge five- six and seven-year backlogs of some planemakers can weather some slippage and still do better than the did at the turn of the century. The business aviation fleet will still grow at around or more than 1-000 units for some years to come – even as new orders slow and backlogs shrink to a more-typical two to three years.

If every cloud has a silver lining- this storm has several for companies engaged in support for business aviation these folks point out. Maintenance and upgrade businesses will see their businesses return as operators of older aircraft decide to hold on to- and improve- their airplanes. Some of the available upgrades can turn that old business jet into something competitive with new – particularly when you eliminate the cost of new. The need for maintenance and crews will continue to grow modestly as the fleet continues to grow. And though some old jets are candidates to get parked and salvaged- their numbers are expected to still lag the fleet’s total growth.

Of course- we can’t neglect the folks charged with the task of moving the older hardware that’s increasingly available. Opportunities to handle re-sale aircraft are going up and with those opportunities the support structures that are needed to successfully sell pre-owned aircraft.

That means interior refurbishers- painters- brokers and their in-house staffs- are all looking at increases in work – with- on the other hand- increased competition- some more reluctant buyers as well as some savvy enough to see the depressed values as an ideal opportunity to move into business aviation at a cost lower than they ever expected.

That’s where- many say- the recovery will start to show – when attractive models in the pre-owned inventory start moving briskly off the for-sale lists and back into use.

If- as many expect- the nation and the world start to rebound from today’s financial distresses- the bubble will begin to grow again – hopefully- analysts and forecasters say- in 2010 or 2011. Count on one thing. We’ll be around to see how it all plays out.

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