GAMA 2Q 2010 SHIPMENT ANALYSIS

This report reads a little better! The General Aviation Manufacturers’ Association released its first half numbers for 2010- and the results are showing some improvement over what we saw in the first quarter. Granted- every category of aircraft is still performing below its 2009 pace: Jets are down 14.3 percent for the year; turboprops down 17.6 percent; and pistons are down 2.1 percent.

Market Insight

Mike Potts | 1st September 2010

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Mike Potts

Mike Potts is a writer and consultant who has been involved in aviation for more than 30 years....
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GAMA Second Quarter 2010 Shipment Analysis
Looking through the mottled effect- could tangible evidence of recovery be visible?

This report reads a little better! The General Aviation Manufacturers’ Association released its first half numbers for 2010- and the results are showing some improvement over what we saw in the first quarter. Granted- every category of aircraft is still performing below its 2009 pace: Jets are down 14.3 percent for the year; turboprops down 17.6 percent; and pistons are down 2.1 percent.

Nonetheless- a careful look at the numbers reveals a second quarter that is moving closer to the market’s 2009 performance in some areas than what happened in the first three months of the year.

The stabilizing of the market I had expected to see last quarter now appears to be starting to occur- at least in some segments. And while there are still some horrific areas of weakness – most notably in the lower-to-middle segment of the jet market – other areas are showing signs of growing market strength.

It wouldn’t take too much improvement over the next six months for this year to finish in a dead heat with the sales levels we saw in 2009. Given the predictions that this year would finish 10 percent or more below last year’s performance- a year-end close matching last year’s levels would have to be counted as a victory. Moreover- such a positive result would position us to begin a nice recovery next year - with the hope of even more improvement in 2012.

Bolstering hopes for some market improvement next year are a series of positive second quarter earnings reports coming from American companies. Corporate America is said to be currently sitting on a lot of excess cash as it waits to see when the economy will turn upwards. Holding them back is a great deal of uncertainty about pending regulation and tax changes. When those questions begin to be resolved- a wave of investment is likely to follow.

The combination of excess cash and improving profits should begin to have a positive impact on aircraft sales. GAMA is still hopeful that a bonus depreciation provision can be incorporated in the U.S. tax code this year. That would provide further incentive to begin spending- and the aircraft market could definitely expect to benefit.

ARE THINGS PICKING UP?
There are actually overt signs in the current GAMA report that things are beginning to pick up. For the second quarter in a row total billings are up- although not spectacularly. As of the first half of the year- billings are 0.2 percent ahead of last year- up from $9.38 billion to $9.40 billion.

As a percentage that doesn’t sound huge (and it’s not). But in terms of raw numbers it’s still $20 million more than was spent in the same period last year – and it’s a lot better than the forecast 10 percent reduction. It means people are spending more money on airplanes this year than they did last year – even if they aren’t buying as many units now. Nowhere is that more evident than in the jet market- where the high-end is doing distinctly better than the low end.

THE JET MARKET
Four of the nine jet manufacturers listed in this GAMA report have better results so far this year than last: These are Airbus- Boeing- Dassault and Embraer. A fifth – Gulfstream - had a better second quarter than last year- but didn’t do quite as well in the first quarter. Nonetheless- Gulfstream is still just one unit off it’s 2009 pace – 56 deliveries this year compared with 57 last year at this time.

By comparison- the companies whose products are distributed more to the middleand lower-end of the market – Cessna- Bombardier and Hawker Beechcraft particularly – are having things much harder. Cessna- the traditional leader in business jet sales- is delivering airplanes at less than half the rate they were going out the door a year ago – 74 in the past six months compared with 153 in the same period last year.

Cessna’s sales in the second quarter were better than in the first – up more than 38 percent in fact- at 43 units (compared with 31 in the first three months of the year). But the second quarter is typically better than the first- and Cessna’s second quarter total- despite being well ahead of the first quarter- was still almost 49 percent below the 84 units the company delivered in the second three months of last year.

The best-selling Citation was the Mustang- with 41 units- but that was off more than 38 percent from the 67 Mustangs sold in the first six months of 2009. Moreover- Mustang sales accounted for more than 55 percent of all Citation sales in the past six months. So far this year- Cessna’s larger models appear to be below the level where customers are actively buying. There are jet customers out there- but they want bigger airplanes.

Bombardier is doing somewhat better- mostly because some of its airplanes are in the size range people are buying. Bombardier delivered 82 jets in the first half of 2010- down a little over 21 percent from the 104 it had a year ago. Most of Bombardier’s shortfall was in its lighter airplanes- primarily the Learjet line. The company’s Learjet deliveries were off more than 44 percent for the year-to-date - 27 units last year to 15 this year. In a sign that things might be picking up- however- Bombardier sold eight Lear 40/45s in the second quarter – the best quarter for Lear 40/45 sales in a year.

Bombardier’s 82-delivery total was good enough to make it the leader in business jets sales for the second quarter in a row- but the company probably felt better last year being at number two with 104 deliveries than it does being number one this year with 82.

Also troublesome for Bombardier is the fact that its second quarter delivery total was lower than its first quarter result by more than 25 percent – 35 units compared with 47 in the first three months of the year. In an industry where the first quarter is traditionally the weakest – sometimes by a wide margin – that is an unusual result.

Third place in business jet deliveries went to Embraer with 60 units- including 40 in the second quarter. Embraer is a company whose status in the jet manufacturing world is rising quickly. Its second quarter delivery total included 35 of its new Phenom 100 light jets. Added to the 16 units in the first quarter- this brings Phenom 100 deliveries to 51 units for the year to date- making it the new champion in the category of “best selling business jet in the world.”

The former title-holder was Cessna’s Citation Mustang. The Phenom 100 is now in its second full year of production. It is not unusual for a new business jet model to achieve record deliveries in its second or third year of manufacture- then settle back into a pattern of steady- but somewhat reduced deliveries that will continue for several years afterwards.

What is unusual- however- is for a company to have so many new models in development at one time as Embraer does today. The Phenom 300 has just entered the market- a little more than a year behind the Phenom 100. The company is also working on new midsize and super mid-size models.

The current GAMA report lists five Phenom 300 deliveries – one in the first quarter and four in the second. Just five quarters ago- Phenom 100 deliveries totaled just six units. If the Phenom 300s delivery history proves to be even close to what the 100 has achieved- Embraer will be the number one seller of business jets by this time next year. This is a huge achievement for a company that was in the number seven position in business jet deliveries as recently as 2008. Bombardier continues to be the leader in business jet billings at $2.66 billion – or more than 28 percent of the industry’s $9.4 billion total. Gulfstream was second- with $2.15 billion.

Today these two companies – Bombardier and Gulfstream – account for more than half of the total industry’s billings. Dassault was third in billings with $1.85 billion- with a unit delivery performance that far outstripped what it recorded last year. At 45 units- Dassault was more than 73 percent ahead of last year’s total of 26. In fact- Dassault delivered more airplanes in the second quarter of this year – 28 – than it did in all of the first six months of last year.

Like Cessna and Bombardier- Hawker Beechcraft’s jet sales are below last year’s – by more than 30 percent- at 27 units compared with 39 in 2009. The company also delivered fewer jets in the second quarter (13) than it did in the first (14). Market weakness was spread all through Hawker’s product line- with only its top-of-the-line Hawker 4000 model showing better results than a year ago.

At the highest end of the jet market- things are looking pretty good. Airbus has doubled its 2009 total to date- at eight units to four- while Boeing is 50 percent ahead of last year- with three units to two. (Note: Between the time the 2nd Quarter GAMA report was issued in August of 2009 and the time the GAMA 2009 Year End report was issued in April 2010- the Airbus delivery total was amended to add 2 deliveries in the second quarter of 2009).

Also listed among GAMA’s jet producers is Emivest- which had no deliveries in the first six months of both this year and last. Emivest says it still expects to deliver three airplanes this year. If its forecast proves correct Emivest will finish 50 percent ahead of last year- when it recorded two deliveries- including one in each of the last two quarters.

In summary- then- while the total jet market is 14 percent behind where it was a year ago- more than half the companies are ahead of- or very close to last year’s performance. Some of them are ahead by a wide margin. It wouldn’t take too much boost to put things back in the positive column and mark the beginnings of a recovery.

What are the chances of that happening in the final six month of this year? I’d say the odds are fair-to-good. With the Phenom 300 coming into production- Embraer’s results will probably improve. Hawker Beechcraft’s second quarter results were better for every model except the Hawker 900XP. If that trend continues and Bombardier’s light-end also picks up the pace – which its second quarter results also suggest might be happening – then there’s a strong possibility the overall jet market might pick up enough to close the gap between 2009 and 2010.

Moreover- I don’t foresee Cessna Citation sales staying below par for long either. There is a reason the Citation is the world’s most popular business jet.

On balance- then- I think you will see the jet market improve in the third quarter- then benefit from an overall surge in the fourth quarter that will see us finish the year in the 800- to 825-unit range. A finish above 850 seems unlikely- but I think a total above 800 is distinctly possible.

THE TURBO MARKET
In some respects- the turboprop market is doing a little better than the jet market- but a true reflection would be that the signs of recovery are mixed at best. After a catastrophic first quarter that saw sales drop by more than 32 percent over last year- the second quarter’s results were markedly better – down just 4.9 percent from the 2009 total.

Even so- things aren’t rosy in the turboprop market. Of eight manufacturers reporting to GAMA- only two – Cessna and Socata – had better results than a year ago- while a third (Quest) was level with last year. And while the overall market shows signs of stabilizing- some of the large turboprop makers are still well behind their 2009 totals.

As per last quarter- Cessna is the leader in turboprop sales so far in 2010 with 56 units - displacing traditional market leader Hawker Beechcraft which finished the first six months with 34 King Air deliveries. In fact- during the second quarter Cessna widened its margin- and now stands 22 units ahead of Hawker Beechcraft- up from 6 at the end of the first quarter.

Pilatus was in third place in turboprop deliveries with 25 units- well behind the 44 sales it reported in the first six months of 2009. Socata was the only other turboprop maker to record double-digit sales this year- with 18 units- up from 15 last year. Reporting fewer than 10 units each were Quest with nine- equal with last year’s total; Piper with eight- down from 14 last year; Pacific Aerospace with five- down from six; and Piaggio with two- down from 11 last year.

There still seems to be a lot of structural weakness in the turboprop market- with five of eight companies off their 2009 pace – some of them well off. But the overall size of the market is relatively small- so it wouldn’t take a really high volume turnaround to make this year look successful.

I believe we are going to see turboprops pick up in the second half to a level that matches 2009 second half deliveries. Look for gains particularly from Hawker Beechcraft and Pilatus – both companies with strong products that are currently under-performing in the market. If that happens- I expect the turboprop market to finish in the 400 to 425 unit range for the whole of this year.

THE PISTON MARKETS
The piston market is showing the strongest signs of stabilizing- with second quarter sales of 259 units actually coming in at 1.5 percent- ahead of the 255 piston sales recorded in the second three months of last year. It’s not much- but it is an improvement. It was a similar small improvement back in 2003 that heralded the following five years of record sales we saw during the last recovery.

As in the jet and turboprop markets- the new market leaders that emerged in the first quarter held their leads through the second quarter as well. In piston singles Cirrus retained its leadership position with 127 units- although its margin shrank some in the second quarter. Cessna was second with 110 units. Cessna actually experienced a rather startling gain in the second quarter with 80 deliveries reported- up 267 percent from the 30 units it reported in the first quarter of this year.

Piper’s total of 59 units put it comfortably in third place- leading Diamond which recorded 44 single-engine deliveries. Following were American Champion with 18- Hawker Beechcraft with 10- Gippsland with eight- Liberty with seven- and Maule and Mooney with two each.

It was nice to see Hawker Beechcraft’s piston totals pick up again. Its iconic Bonanza model had nine deliveries in the second quarter- up from just one in the first quarter. A year ago Bonanza deliveries totaled 36 units- so nine per quarter should be enough to sustain continued production.

AND FINALLY: THE PISTON TWINS
Piston twins actually showed a significant gain over last year’s totals- rising 31 percent from the first quarter to the second. Piston twin makers Diamond- Piper and Hawker Beechcraft combined to deliver 38 units- up from 29 last year. The twins are helping to lead a piston products surge that should see them finish a little ahead of last year’s results.

In 2009 the piston market totaled 965 aircraft – the worst since 1996. This year I believe the piston total will push back over 1-000 units – not a great performance- but nonetheless the beginning of a recovery that should lead the rest of the market back into the good times again.

To view a full reproduction of GAMA’s Second Quarter 2010 shipment report- see overleaf.