Bitter-Sweet Symphony: An overview of Business Aviation Forecasts.
The news coming out of Las Vegas wasn’t very cheerful. The latest version of Honeywell’s annual Business Aviation Forecast contains a sobering downward revision of projected business jet deliveries by nearly 10 percent over the next decade.
Honeywell released its forecast - as is its long established custom - on the evening before Press Day at the opening of the National Business Aviation Association’s annual convention. In addition to telling us the coming decade’s market won’t be as big as expected- Honeywell also said the sales slump we’ve endured for the last three years could last for another year or more.
There’s good news- though: Not everyone agrees with Honeywell. In fact- most other forecasts are rather more optimistic than Honeywell’s latest outlook (although the difference is mostly in the detail). Nobody thinks things are going to get a whole lot better very quickly.
One of the other forecasts is Bombardier’s- which foresees the short-term market recovering a little more quickly than Honeywell expects. Bombardier- does see the total market over the next decade in about the same way that Honeywell does. Embraer- on the other hand- seems to share Honeywell’s pessimism about the short-term- and is expecting the market to be flat (or worse) until next year- or perhaps longer.
Coming somewhere between Bombardier’s optimism and the darker outlook of Honeywell and Embraer is JETNET- the Utica- New York-based company that has tracked aircraft sales transactions for the past 20 years. JETNET has now decided to direct its substantial database and market experience into the somewhat inexact science of market prediction.
Even as one new firm lends its voice to the forecast market- though- another has mostly withdrawn. Rolls-Royce- which for years issued a comprehensive Business Aviation forecast during the NBAA Convention- is now releasing only general market overview figures that provide a basic outline of its expectations. The limited Business Aviation outlook Rolls-Royce does publish is available online.
HONEYWELL: VALUE OVER UNITS
Honeywell attempted to soften its news by noting that the predicted retail value of business jet deliveries over the next 10 years will be higher by about two percent than what it forecast last year. It expects the increase to occur based on a steady increase in the percentage of more expensive jets sold.
In detail- the situation is as follows: A year ago- Honeywell predicted that business jet sales would total 11-000 units worth approximately $225 billion by 2020. In this year’s forecast its 10-year outlook is for 10-000 units worth $230 billion by the end of 2021. So where did 1-000 business jets go? It’s hard to tell exactly because Honeywell offers only percentages - and those cover only a portion of the total time span. You can’t dependably balance the percentages against the total deliveries for the period. But if we take that approach anyway - since these are the only numbers Honeywell gives us to work with - here’s what it comes up with:
• Honeywell expects aircraft in the Medium-to-Large category will account for 35 percent of the deliveries over the next five years.
• Long-Range and Ultra-Long-Range aircraft will constitute 25 percent of the market (so the largest and most capable business jets will total 60 percent of total sales).
• Light and Light-Medium jets will total 21 percent- and the Very Light category just 19 percent.
• Factored against a 10-000-unit decade- that would produce a market of 3-500 Medium to Large jets; 2-500 Long-Range and Ultra-Long-Range models; 2-100 Light and Light-Medium aircraft; and 1-900 Very Light jets.
By comparison- in 2010 Honeywell predicted Medium-Large jets would total 32 percent (3-520 units); Long-Range and Ultra-Long-Range 22 percent (2-420 units); Light and Light-Medium 21 percent (2-310 units); and Very Light jets 25 percent (2-750). Based on these numbers- the Medium- Large total is essentially unchanged. The Long- and Ultra-Long-Range segment actually grows by 190 units while the Light/Light- Medium category loses 210 units.
Most significantly- the Very Light segment is off 950 units. While the total reduction from last year’s forecast is 1-000 units- the collective Light/Light Medium and Very Light categories are actually down by an even greater number. That’s a very significant trend.
Applying Honeywell’s category system the Very Light Jets include some fairly large airplanes (up to about the Citation XLS+ and the Hawker 400). Honeywell recognizes another jet category below the Very Light Jets- which it calls Personal Jets. If Honeywell is right about this market breakdown- the coming decade could be very difficult for jet makers whose product lines are heavily biased toward the lighter end of the market. The market has been performing just this way ever since the onset of the current recession in 2008.
Honeywell says that “sustained interest in the Long- and Ultra-Long-Range segment has been present for several years and reflects increased need for aircraft capable of trans-Pacific flight- as well as growth in demand in other regions requiring more long-range operations.”
These models will account for more than 50-percent of the total billings during the 10- year period - says Honeywell - while the Very-Light category will total only four percent of billings. Thus billings will grow even as the market shrinks. For the very-near-term- Honeywell revised its total jet delivery forecast downward- predicting this year will bottom-out in the 600- to 650-unit range. Honeywell also predicts the market will struggle to reach 700 units in 2012 – a timeframe when many of us are expecting the market to be in a fairly robust recovery.
BOMBARDIER & JETNET: NEAR-TERM DISSENTERS
It’s in dealing with the very-near-term that other forecasts tend to disagree - at least a little - with Honeywell’s pessimism. Bombardier thinks 2012 jet deliveries could approach 750 units (although it agrees that the lighter-end of the market will be the slowest to recover. Bombardier cites a higher percentage of used aircraft being available in the light and light-medium categories as the predicted drag on new aircraft sales.
JETNET’s expectation for 2012 is more in line with Bombardier’s- but its overall estimation of the coming 10-year market is bigger. JETNET foresees total jet sales coming in around 11-380 units over the next decade with a retail value in the range of $258 billion. That’s an almost 14 percent bigger unit market than Honeywell expects- with a retail value slightly more than 12 percent higher.
The difference is that JETNET expects the Light and Light-Medium segments to recover better than Honeywell does. Honeywell and JETNET use similar methodologies to reach their conclusions- with Honeywell surveying more than 1-500 flight departments around the world to reach its conclusions. JETNET’s forecast is based on an on-going series of quarterly surveys of approximately 500 owner/operators spanning 50 countries (not the same group every time). Consequently- by year-end JETNET talks to as many as- if not more operators than Honeywell.
Honeywell also factors statistical model analysis- insights from the manufacturers- backlog levels and the potential impact of new aircraft models on the market. It’s a system the company has used to develop its market outlook for more than 20 years- with substantial refinements over the period.
Like Honeywell- JETNET gathers more data than just purchase expectations- including information on purchase criteria and inhibitors to purchases- as well as on customer perceptions of aircraft and engine brand reputations and valuations. JETNET also gathers data on how much flying its respondents expect to do in the coming 12 months.
JETNET’s findings on purchase criteria also differed somewhat from Honeywell’s results. Respondents to JETNET most frequently cited reduced operating costs (19 percent) and purchase price (13 percent) as the key criteria driving their purchase decision- followed by range (10 percent)- cabin comfort and number of passenger seats (both 8 percent).
Leading the list of ‘Inhibitors to Purchase’- as JETNET calls it- is lack of need for an additional aircraft (26 percent)- followed in descending order by purchase price (13 percent)- inability to sell current aircraft (11 percent)- balance sheet consideration (nine percent)- operating cost (eight percent)- availability of financing (seven percent)- trade up cost (seven percent)- and lack of capital (six percent).
JETNET’s respondents’ index of intention to buy new aircraft has been rising throughout 2011 and is 12 percent higher than it was a year ago – a factor it says points to developing recovery even now- which should be readily identifiable in delivery numbers by 2012. The strongest category of intention to buy in the jet market today is in the Medium category (although JETNET’s definition of ‘Medium jet’ is not precisely identical with Honeywell’s). One of the most difficult factors in comparing forecasts is that almost none use the same categories of business jets over the same timeframes.
Honeywell- Embraer and JETNET all forecast the market over a 10-year period- but Honeywell’s decade starts and ends a year later than JETNET’s. Bombardier and Rolls-Royce forecast over a 20-year period- and again the start and finish times can vary. Making the matter still more complex is a general disagreement on aircraft categories.
There has been a move toward simplicity - with Honeywell moving from eight categories to four- and Bombardier from eight to three for the airplanes it builds- plus two more for categories where it has no entry. JETNET recognizes 10 categories of business jets plus two categories of turboprops.
On the topic of JETNET’s turboprop categorization- its data shows the strongest indication of buyer interest is with turboprops – a category the other forecasts don’t cover. Based on my own experience with GAMA delivery trends- I would point out that historically- signs of recovery among the turboprops bode well for the prospects in the lighter-end of the jet market too.
THE GLOBAL PERSPECTIVE(S)
In addition to forecasting the size and value of the jet market- the Honeywell forecast also offers insight into changes in the geographic distribution of the market and some of the trends that are driving change in the airplanes customers are planning to buy. Honeywell highlights that the previous trend toward an increasing international-based buying market appears to have stalled.
Prior to the economic crisis and accompanying worldwide collapse of the business jet market in 2008- there had been a growing international market that had begun to exceed the size of the business jet market in North America for the first time. Since then- that trend has reversed with the North American market accounting for a fairly steady share of about 55 percent of sales. Honeywell believes that trend will continue over the next five years before international demand brings the ratio closer to 50/50.
Interestingly- the limited Business Aviation numbers Rolls-Royce still makes public appear to disagree with Honeywell’s assessment - although owing of dissimilar forecasting periods and a lack of detail it’s hard to say precisely where the difference arises.
Rolls-Royce believes there will be a business jet market totaling 32-900 units worth about $690 billion over the 20-year period from 2010 to 2029- and expects 46 percent of those sales to come from North America; 25 percent from Europe; 12 percent from Asia- Pacific; and 17 percent the rest of the world. How does that square with Honeywell’s forecast of 10-000 units worth $230 billion between now and 2021? Either Rolls-Royce is much more optimistic about the coming decade than Honeywell- or the period from 2021 to 2029 is going to see historic levels of business jet deliveries- and a much higher share than today (probably 60 percent or more) will come from customers outside of North America. Without more detail from Rolls-Royce- we can only speculate!
Bombardier’s forecast also covers a 20-year period- although it concludes in 2030 (as opposed to 2029). Bombardier expects 24-000 business jet deliveries during the period- with a value of $626 billion (rather less ambitious than the Rolls-Royce prediction- but nonetheless looking for either a better performance than Honeywell expects for this decade- or a strong increase in demand between 2021 and 2030 - or better still- both).
Both the Bombardier and Honeywell forecasts offer detail about where they expect business jet sales to come from- and why. Over the next five years Honeywell expects Europe to account for 17 percent of the jet market; Latin America about 13 percent; Asia nine percent; and the Middle East/Africa about six percent. Within those regions- Honeywell believes the European segment will be constrained by debt and currency issues (to some degree offset by business growth in Russia and Eastern Europe).
Customers in the region cite Large and Mid-cabin aircraft over Small-cabin models in purchase plans. Bombardier’s forecast is more specific about economic trends- referencing a “two-speed Europe” to differentiate between those countries such as Germany and France with healthy economies and those mired in debt.
In Latin America- Honeywell says customers most often cited a desire for improved range and reduced operating costs as leading drivers to replace existing aircraft. Most Latin American customers (93 percent) told Honeywell they expect to defer purchases until 2012 or after. Bombardier notes that the Latin American Business Aviation fleet has a high percentage of light business jets- making them strong candidates to upgrade to larger and more capable equipment.
Honeywell lumped Asia- Africa and the Middle East together in this year’s discussion of business aircraft markets- noting that purchase expectations in these regions are higher than anywhere else- with Asia at the top of the list. Customers in Africa and the Middle East are more likely to act sooner than their Asian counterparts- but Asian customers should be active in the market by 2013- based on Honeywell’s findings.
Bombardier observed the “Arab Spring” mostly served to create uncertainty in aviation markets in the Middle East/North Africa. For the first time in its forecast history- Honeywell cited the BRIC countries – Brazil- Russia- India and China – as a separate subset based on their emerging economic strength. While the fleets in these countries are small- fully 49 percent of those operators that Honeywell polled cited replacement or expansion purchase plans- with 60 percent of those saying they will buy Medium or Large Cabin aircraft.
Bombardier also treats India- Russia and China separately- noting the cultural acceptance of Business Aviation in China and forecasting a market of 960 aircraft in China between now and 2020 (and 1-400 more by 2030).
From the above overview of the various Business Aviation forecasts it is clear that there are high expectations for the next decade or two. Unfortunately- it is not quite so clear when we will find the bottom of the market in the current recession and begin to experience the growth that all the forecasts tell us surely lies ahead.
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