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The twentieth Teal Group Business Jet Overview has been circulating- and comments that Business aircraft have been hit harder by the economic crisis than any other aerospace market. After unprecedented growth- the market fell by 24.3% (in value of deliveries).

Richard Aboulafia   |   1st June 2010
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Richard Aboulafia Richard Aboulafia

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Teal Group Business Aviation Overview

The twentieth Teal Group Business Jet Overview has been circulating- and comments that Business aircraft have been hit harder by the economic crisis than any other aerospace market. After unprecedented growth- the market fell by 24.3% (in value of deliveries).

The good news is that the market has stopped falling- author Richard Aboulafia observes- with some of the leading indicators offering encouragement. The bad news- he adds- is that this is a three-year downturn. The key driver- corporate profits- show only limited signs of a recovery. Used aircraft prices remain weak. Also- it will take some time to reduce high inventories of available jets. “We do not see deliveries growth resuming until 2012-” he explains.

Among the other key points to come out of the Business Jet Overview:

• The most unusual aspect of the market right now is the unprecedented bifurcation of market behavior. The top half of the market – jets costing $25 million and above – barely felt any pain last year- with deliveries falling a mere 4.1%. The bottom half – jets costing $4-24 million – fell by a catastrophic 42.8%. The market has never seen bifurcation like this in any previous downturn or growth spurt.

• After 2012- Teal’s forecast then calls for a six-year recovery period with 10% growth per year starting in 2012. Compared with prior market recoveries that have exhibited 16-17% compound annual growth rates (CAGRs)- this is a conservative forecast. Teal’s conservatism is largely based on the likelihood of greater financial caution in the aftermath of the global credit crisis of 2008/2009. Unfortunately- with this growth rate we won’t see a recovery to the 2008 peak deliveries level until 2016/2017.

• Using these assumptions- Teal forecasts production of 13-965 aircraft worth $233.1 billion (in 2010 dollars) over the next ten years (2010-2019). This includes 10-285 business jets worth $184.1 billion- 649 corporate versions of jetliners and regional jets worth a combined total of $36.4 billion- and 3-031 business turboprops worth a total of $13.2 billion.

• For comparison- the last ten years (2000-2009) saw production of 10-874 business aircraft worth $170.7 billion (also in 2010 dollars). This includes 7-889 jets worth $143.4 billion plus 397 jetliners and RJs worth $16.1 billion and 2-589 turboprops worth $11.2 billion.

• Of the traditional business jets in Teal’s forecast- 58% of these (by value) will be Class Four and Five (high-end) models. This is up from 50% before the 2009 market drop. This change reflects Teal’s belief that the bottom half of the market will not recover faster than the top half- implying a permanent shift in favor of more expensive models.

• The current downturn threatens new product development at the established manufacturers. Several important new products have been shelved- most notably Cessna’s Columbus- Hawker Beechcraft’s Hawker 450 and Dassault’s Falcon SMS. Two manufacturers have begun shifting product development cash to different priorities – Bombardier with its CSeries jetliner- and Embraer with its KC-390 military transport. This implies a de-emphasis of this once-crucial growth market.

• With few hopes for new market entrants- and reduced expectations of new product development at the established manufacturers- the market will benefit less from new technology stimulants. For the next few years- however- Gulfstream’s 250 and 650 are proceeding as planned. As a company that derives the bulk of its revenue from defense- General Dynamics has an advantage in funding new products- and Teal expects it to displace Bombardier as market leader. Also- Teal expects the market’s return to growth after 2011 will embolden manufacturers to increase new product development funding. In particular- Bombardier should be able to create some kind of competitor to the 650 using a major derivative of the Global Express.

• Looking at traditional business jets- Gulfstream and Bombardier will be the market leaders (28% and 26.3% respectively- by value of deliveries)- followed by Dassault (15.9%)- Cessna (12.7%) and Hawker Beechcraft (8.1%). Embraer will have 8.2%- which is up from almost nothing in the last ten years. Embraer's impressive achievement is particularly impacting Cessna- which had enjoyed a 20.3% market share over the past ten years. Honda will have the remaining 0.8% in Teal’s forecast. These figures exclude turboprops- jetliners- and corporate regional jets.

• Some good news. Teal does not believe the anti-business jet cultural environment we saw in the downturn will persist as a damper on demand. Preference for- and acceptance of- business aircraft will return as world economic growth resumes. Also- the past 14 years have seen business aviation transformed from a backwater market to a key part of the aerospace industry. This transformation will not be reversed. Even at the low point of Teal’s forecast- the business jet industry will be well over twice as large as it was in any year prior to 1997.

Richard can be contacted on (703) 385-1992 ext. 103 (office); raboulafia@tealgroup.com

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