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Honeywell issued its annual business aviation forecast on the eve of the National Business Aviation Association’s annual convention on October 17 and it was - in the words of former baseball great Yogi Berra - “déjà vu all over again.”

Mike Potts   |   1st December 2010
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Mike Potts Mike Potts

Mike Potts is a writer and consultant who has been involved in aviation for more than 30 years....
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Déjà vu all over again.

Honeywell issued its annual business aviation forecast on the eve of the National Business Aviation Association’s annual convention on October 17 and it was - in the words of former baseball great Yogi Berra - “déjà vu all over again.”

Basically- this year’s forecast looked remarkably like last year’s- with just one difference: the recovery in business aircraft sales was postponed for one year. The improvement in business jet sales that Honeywell had thought last year would be starting in 2011 is now predicted to begin in 2012.

Instead of a recovery- Honeywell now believes 2011 will see a jet market below 700 units- which (if the forecast proves accurate) would make it the low-point of the current downturn. Honeywell is also forecasting that the 2010 jet market will be in the 675 to 700-unit range. Based on known first-half sales- however- the actual jet market will probably be somewhat better than that.

The General Aviation Manufacturers Association reported 355 jet deliveries in the first six months and with a new bonus depreciation clause in the U.S. tax code this year- it seems that the second half may yet exceed the first.

Looking to the decade ahead when Honeywell believes recovery will blossom- the forecast predicts sales of 11-000 business jets by 2020.

That’s exactly how many Honeywell’s 2009 forecast was expecting in the period ending in 2019. One difference- however- is that Honeywell now believes those 11-000 business jets will generate billings of $225 billion - an increase of 10 percent over the $200 billion in billings foreseen in last year’s forecast.

That means (in addition to some inflation) that buyers are expected to select a greater percentage of airplanes from the higher end of the market – a trend that has been occurring throughout the past decade and apparently can be expected to continue. Rob Wilson- president of Business and General Aviation for Honeywell Aerospace who presented the forecast results at the company’s pre-NBAA media briefing- said the prediction for continued downturn is based on reduced enthusiasm among international customers. Demand among US customers is about the same as it was last year- Wilson observed- which would have had the market on track to begin recovery in 2011.

He claimed the softening of demand on the international side is going to produce a market similar to what we saw leading up to 2007–2008 over the next five years – better than the slow recovery after 9/11- but not as good as Honeywell was expecting last year - and definitely not as fast.

If that prediction holds true- we can expect jet deliveries to perhaps approach 900 units in the 2013 timeframe and top 1-000 by 2014. Honeywell expects that 5-000 jets will be delivered between now and 2015.

Wilson notes that- despite the extended soft market there have been relatively few program cancellations among the major manufacturers- so the industry will be positioned to take advantage of a market upturn once it begins to happen.

In fact- with the notable exception of the Cessna Columbus- many of the jet manufacturers seem to be charging ahead with new product development in anticipation of a healthy recovery. There were more new product announcements at this year’s NBAA than we have seen in a long time.

I find it a little difficult to square Honeywell’s rather droll outlook with the very upbeat attitude that permeated the NBAA Convention itself. The aisles were crowded with people who seemed enthusiastic and confident.

Wilson did note that- as a percentage of sales- billings haven’t fallen as far as unit deliveries- because the high-end of the jet market has held up better than the low end. Honeywell sees this trend as a long-term sea change in the jet market- which it describes as a slow but steady shift in buying patterns from small to large-cabin aircraft. This may not bode well for the companies whose product lines are rooted in the lower ends of the jet market. Over the next decade they could find themselves battling over a market segment that is not growing- or worse- beginning to shrink.

Also somewhat buried in this year’s forecast is a subtle warning. If things don’t start to pick up pretty quickly after next year- the prospect of the whole recovery (as forecast) could be in doubt. That- Honeywell says- is because a high percentage of jet buying is expected to come after 2011.

“Acting on these purchase plans in 2011 and 2012 is critical to give the recovery momentum-” Wilson said- “as current backlogs will not sustain delivery levels indefinitely. If this occurs- we will start back on the path toward recovery and expansion in the industry.”

The unspoken implication- however- is that if things don’t start to pick up- the jet manufacturers will have to scale back their production capacity- and if that occurs it would take a while for the industry to return to a position where it could support a 1-000-airplane annual market. For now that’s too ugly a scenario to seriously consider- but if things don’t start to pick up pretty quickly after next year- it would become a possibility.

Based on everything we saw at this year’s NBAA- I really believe things will pick up a little faster than Honeywell expects- not more slowly.

In the North American market Honeywell finds purchase expectations are actually up from last year- but only by a single percentage point – from 25 percent last year to 26 percent this year. This means that over the next five years Honeywell expects new jet sales to total 26 percent of the current North American fleet.

In last year’s forecast Honeywell thought five-year jet sales would total 25 percent of the fleet. Given the potential error margin in forecasts such as Honeywell’s this difference could be real- but it might also be a statistical anomaly.

Either way- it doesn’t represent significant growth. Nor does it predict a downturn. Honeywell annually conducts a random sampling of approximately 1-200 flight departments- which is about eight percent of the industry’s total. This is twice the four percent most serious polling organizations believe is necessary to get a statistically valid sample- so it’s not surprising that Honeywell’s forecast has a strong history of accuracy throughout the 19 years it has been made public.

Over the next five years Honeywell believes the North American market will account for 58 percent of business jet sales- up from the 48 percent share Honeywell was predicting for North America in last year’s forecast.

As noted above- the market softness that has put the recovery on hold for a year is coming from the international segment- Honeywell says. Over the next five years international jet sales are expected to total about 42 percent of the overall market- down from the actual market performance we were seeing two years ago- when international sales had risen slightly above the North American market for the first time ever.

At that time the general expectation was that the international market could account for 55 percent of sales into the foreseeable future. Some thought that North American dominance of the business jet market had come to an end. The recession tempered that expectation somewhat- but even in last year’s forecast Honeywell was predicting international sales would account for 52-percent of the market over the next five years. So this represents a fairly serious cooling of demand - although Honeywell doesn’t couch it in quite those terms.

Breaking down the international market into segments- Honeywell expects Europe to be the second largest consumer of business jets after North America- as per last year. Honeywell doesn’t- however- expect Europe to play nearly as big a role in the near-term market as it expected last year.

In this year’s Forecast- Honeywell predicts that 34 percent of the business jets in Europe will be replaced in the next five years – a number it notes is “off from the all-time high level recorded in 2009- but still well above the 25 percent levels that prevailed from 2001 to 2006.” (The all-time total was 59 percent – a number that probably reflected irrational exuberance or perhaps- as sometimes happens in even the best-conducted surveys- was simply a statistical error.) For whatever reason- Honeywell chose to not mention the 59-percent figure in this year’s Forecast text.

What that means- though- is that this year Honeywell expects only about half as many business jets to be sold in the European market over the next five years compared with what were forecast a year ago. And that’s a good part of why Honeywell expects the recession in business aircraft to continue into next year.

That’s not to say Honeywell doesn’t still expect good things from the European market. It does. Driven to some extent by strength in local currencies- including the Euro- Pound- Swiss Franc- and the Ruble against the U.S. dollar- Honeywell also believes business expansion will drive demand- and that a preponderance of European purchases will come in the 2011 to 2013 timeframe.

Interest in larger airplanes is also very strong in Europe- with customers reporting they will be buying large or mid-size cabin models over small cabins by a rate of five to one.

Africa and the Middle East are also areas where purchase expectations have declined from last year. Traditionally sales expectations for these areas- particularly the Middle East- have been somewhat immune to market fluctuations- but this year is different- Honeywell notes. It cites oil price uncertainty as a factor in reduced customer confidence.

Last year purchase expectations for the Africa-Middle East region were in the 55-percent range. This year Honeywell reports purchase expectations at 30 percent. While this represents as big a percentage drop as in the European segment- Africa and the Middle East only account for about four percent of the total jet market- as calculated by Honeywell- while Europe totals 19 percent.

Purchase expectations in the Latin American market- which is expected to account for 13 percent of business jet sales over the next five years- are down slightly in this year’s Forecast- from 40 to 35 percent. This is still the strongest the Latin American business jet market has ever been. Unlike some other markets- the focus here is on range and modern avionics rather than cabin size.

The Asian market- meantime- has the highest purchase expectation as percentage of existing fleet with a 40 percent prediction. This is also down from last year’s 59 percent total- although with Asia representing only about six percent of the forecast five-year market- the sales reduction is not too significant.

In a marked change from previous years- Honeywell does not address in much detail how the upcoming market will be segmented among the various business jet classes. Previously this had constituted a significant portion of the forecast.

This year Honeywell simply says medium to large aircraft will account for almost 32 percent of projected demand by 2015; light and light medium about 22 percent; and long-range and ultra-long-range about 21 percent. The remaining 25 percent- it says- will be in the very light segment (but this will represent only about five percent of the market’s billings).

The message to manufacturers is pretty clear – adjust your product line to focus on the larger-end of the market if you are not there already.

Last year Honeywell said medium to large aircraft would total 34 percent of the market from 2010 to 2019- light and light medium 24 percent and long- and ultra-long-range jets 15 percent. The very light category last year was predicted to total 28 percent of the market.

It will be interesting to see what effect this shift to larger business jets has on the longer-term prospects for the industry and its manufacturers.

Honeywell further notes that the fractional market is continuing at a very reduced rate from what existed before the current recession. The forecast predicts no growth in this segment- but does predict a replacement market aimed at maintaining a good customer experience. Honeywell thinks this could have at least some impact on 2011 sales- although it doesn’t specify how much.

Interestingly- while it doesn’t closely address the traditional business jet market by class in the way it has done previously- the forecast does address two categories it purports not to track: Personal Jets and Business Liners. The Personal Jet category is significantly off from previous years due to “disruption of several high profile projects.” Honeywell predicts 500 to 1-000 Personal Jet sales over the coming decade- but notes this might pick-up if plans to restart some of the disrupted projects come to fruition. In the Business Liner category- Honeywell sees the market pretty much unchanged- with 200 to 220 units adding about $17 billion to billings over the forecast period.

On balance- I found this year’s Honeywell forecast something of a disappointment. This isn’t Honeywell’s fault- who can only report what its research tells it. I had simply expected the recovery to be coming a little more quickly than Honeywell thinks it is going to. I’m still putting some hope in the fact that Honeywell’s numbers have tended to be a little conservative over the past decade. Based on that- perhaps this year and next will prove to be a little more positive than Honeywell expects.

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