Business Aviation on road to recovery

In an executive summary published last year, Bombardier Business Aircraft said that “the economic and market drivers will recover over the next 24 months, leading to a forecast for 2009-18 of 12,550 orders resulting in 11,500 deliveries worth $256B of revenues.

“The worldwide business jet fleet included approximately 13,600 aircraft at the end of 2008. The worldwide fleet is expected to grow by a compound annual growth rate of approximately 6% over the forecast period to some 23,800 units after aircraft retirements.”

These numbers come off a base where around 1800 orders were placed for business jets in 2007. That was an all-time peak, and it spilled into the first half of 2008, when more than 1350 such aircraft were ordered. Of course, things fell apart pretty much after that, with the lighter end of the market most affected through the rest of ’08 and ’09; while the affect on the heavy end (the intercontinental category) was only slight.

Bombardier believes that orders will recover to 2008 levels of around 1400 per year by 2013.

In the same forecast, the Canadian manufacturer rather presciently said that “at the time of publication, order activity remained low, even though encouraging signs on the pre-owned market suggest the situation should slowly improve towards the end of 2009…

“In the longer term, resumption of global economic growth will result in an expected strong recovery in the demand for business jets. The strong fundamentals of the business jet industry are expected to remain unchanged.”

Bombardier forecasts suggest that North America will continue to dominate the market, with deliveries of around 5400 new business jets by 2018, building the total fleet to more than 14,000 aircraft.

Europe will take delivery of another 3000 jets to reach a fleet size of 4500; while the other continents will grow this market in aggregate by around eight per cent a year.

Unsurprisingly, China and India are expected to show the biggest growth.

Figures show that up till early 2008, the percentage of second-hand business jets in operation was slowly declining, reaching 10.4 per cent at the end of ’07. But with the much tighter market, the used aircraft share climbed again to 17.4 per cent.

Now that the good times are hopefully returning, Bombardier reckons that the used aircraft share of the market will again decline until it settles at “historical levels” of 10 to 13 per cent.

 

Who’s in the market?

Bombardier again: “In 2008, high net worth individuals accounted for 10% to 20% of business aircraft sales”.

In March last year, Forbes reported that 70 per cent of the globe’s billionaires reside in North America, but there was also a 30 per cent drop in the number of global billionaires.

The growth of HNWIs in Asia was notable, with Merrill Lynch reporting growth in the number of millionaires in India of 22.7 per cent in 2007, before the global crunch. The number for China was estimated at 20.3 per cent.

Despite all that growth the bulk of the market remains corporate.

But in an average year, more than 60 per cent of orders for new business aircraft are by current aircraft owners.

Fractional ownership arrived in the mid 1990s and now accounts for around 14 per cent of the market, in terms of number of aircraft in operation.

But the big growth has been in charter operations which provide customized services.

Bombardier expects that orders for new aircraft from such charter operators will be between 15 and 20 per cent of all sales over the next decade.

 

Hawker Pacific

Hawker Pacific’s Tony Jones recognizes that 2009 was a quiet year, but he has entered 2010 with confidence built on an increasing flow of orders late last year.

Jones believes that the strong Australian dollar is encouraging aircraft investment – for those who have access to finance.

“Finance remains a significant hurdle,” he says. “It’s getting better but it’s still a big issue.”

Hawker Pacific has experienced a slide in all sectors of the market, but Jones reports that sales have remained strong in the King Air, Bonanza and mid-size Hawker jet sectors.

“Some of the private people are cashed up and are in a position to take advantage of the opportunities that are out there,” Jones says. “Used aircraft went up significantly but indicators are now that the number of used aircraft on the market is contracting, so that’s pointing towards a slow recovery of the market as a whole. There were certainly bargains out there to be had if you were cashed up. But we are seeing fewer of those good buys now.

“There’s still demand out there, but all deals are tough, they take longer to do these days but they are still happening, so that’s the positive thing out of it.

“And South East Asia has done quite well over the last 12 months. It has promised for many years to do well, and it seems to have suffered less than most other markets.

“I think this year will probably see further consolidation with things brightening up towards the latter part of the year. So 2010 will probably be more of the same, but with an improving outlook. People are staring to talk positively now and finance is starting to come back a little as well.

“We have been through some pretty heady times so a bit of consolidation in the market is a good thing. It seems that we will work through the recovery in a reasonable time frame – and it’s not something that will take years to work through.”

 

Dassault

Dassault/Falcon Jet’s Didier Raynard is also confident the good times are on the way back:

“We are very optimistic for this year for this part of the world, because it is where we are seeing most of the activity. We have several deliveries planned for this part of the world, including a few 7Xs.

“Things are not back to normal yet, we are far from being where we were two years ago, and I think it will take time, but the market seems to have picked up in the last three to four months, in both the new and pre-owned markets.

“The economy in China is recovering quickly and I would say that China will account for 50 per cent of our sales into the region this year.

“The Australian dollar came back to a very high exchange rate, so that will definitely help us in the Australian market. I am optimistic for Australian sales this year.”

Dassault will have the new 7X in Australia in early February for a demonstration tour.

 

Embraer Executive Jets

Embraer’s Jose Eduardo Costas, vice president sales & marketing Executive Jets, expects the market to recover this year, though not to the levels of two years ago.

“We expected to deliver 320 jets in 2009, but as a result of the economic crisis in early 2009 we had to revise this target to 242 units. In 2008 we delivered 202 jets. So we would still have delivered a substantially bigger number of jets in 2009 than in 2008 but with a different (product) mix, as the Phenom 100 had started to be produced. Final 2009 figures show that we delivered 244 jets, surpassing the target of 242.

“In 2009, in terms of revenue, about 45 per cent of executive jet deliveries went to the US – and Asia Pacific was about 18-20 per cent. Even three or four years ago the US was something like 60 per cent or more of the total, but even before the global financial crisis this number was reducing for a number of reasons. And GDP growth in other countries has been always a key driver for demand for executive jets.

“The business jet population of Asia Pacific is between 600 and 700 jets, but for this next 10 years we believe that the population of jets in the region will increase at about nine per cent a year, every year, which will more than double the population of jets. Whereas Europe and the US will be maybe flat or perhaps one and a half to two per cent growth per year.

“Within Asia we can say that there may be two main drivers, China and India. However, Australia already has grown at lot and there is still good potential. Australia already has a business aviation culture and decent infrastructure, which is not yet the case in China and India.”

 

Bombardier

Bombardier Business Aircraft reported a tough first half for 2009, but says that the last six months were “significantly brighter” in Asia, with the impact of financial crisis more superficial than in North America and Europe.

“The indicators are very clear that this part of the world is coming good in a different direction and a little bit quicker,” says Bombardier’s man in the region, David Dixon. “In those first six months it was a pretty depressing business to be in, but the last six months have been very encouraging and people seem to be very positive generally.”

Bombardier’s experience is that their larger aircraft are leading the way in Asia.

“But that was always the case in this part of the world,” says Dixon, “because distances here are quite significant. And they tend to be individuals’ aeroplanes, not corporate aeroplanes.

“When I look at this region I see that the numbers are going to grow, because the economies are growing. The issue is how big?”

 

Cessna

“As far as 2009 went, we had a reasonably good year,” says Aeromil Pacific’s Steve Padgett, representing Cessna in Australia-New Zealand and the Pacific Rim region.

“All in all, from a business year perspective, we have had one or two orders drop out, but our forward order book is still good, even well into next year.

“From a marketing perspective, we are seeing a lot of interest generally in aeroplanes, I don’t think that that’s dropped of at all from the year before, but people may be taking a little longer to make a decision.

“From a funding perspective we haven’t been affected at all, assuming that people were financeable in the first place. We are still having aircraft funded quite successfully through both banks and finance companies.

“Looking forward, we have around 15 aircraft to deliver this year, five of which are Mustangs for the Singapore Flying College.”

 

Factors to drive growth

• Globalisation: doing business on a global scale is now the norm, but the trend will continue to acquire mass and sophistication as appreciation of the inherent efficiencies and expanded market opportunities grows. Globalisation was be facilitated by the continuing revolution in communications – and corporate travel is an aspect of that.

• Security: it is abundantly evident that personal and corporate security will remain high profile issues for well into the future. Business aviation offers significant enhancement for both.

• Productivity: it is difficult to argue against the obvious efficiencies that businesses can derive from customized travel. A Bombardier study reveals that the use of a super-mid-size jet saves around 20 per cent of management time, compared to the use of regular airline services.

The only likely counterarguments would relate to cost and climate change – and the former at least can be readily evaluated against benefit.

 

Personal aviation

The addition of a new category of business aviation – owner/operator – has been defined by the advent of the loosely termed ‘very light’ jet, the first of which have emerged from Cessna and Embraer.

These smaller jets have trespassed on turf that was formerly owned exclusively by the higher end piston and turboprop aircraft. They offer single-pilot jet performance at relatively low price points – and they look good too.

The rapidly established success of the Mustang and the Phenoms is clear evidence that this market niche was real. These are aircraft for which the manufacturers continued to take big orders even in the middle of a global financial meltdown. It is likely to become the largest sector of business/private jet operations, and attract other manufacturers.

 

FBOs

Global FBO (and other services) provider Universal Aviation saw traffic slow dramatically for a while.

“The market was probably at its worst between February and July last year,” says Universal’s Lex Den Herder. “The numbers began to recover from around August.

“The rate of recovery has varied by location, and I would say that if you take the region as a whole it’s probably not at the peaks that we had in 2008, but it’s steadily coming up towards that.

“China is probably the brightest star in the whole thing, for obvious reasons. We are back to normal figures in our operations there and growing.

“Others are continuing to grow. India had a dip but it’s coming back up again. And of course acquisition of airplanes in the local market there is picking up again.

Universal won the concession to manage the first FBO in India, in Mumbai, and that opened 1 February. The company is eyeing other opportunities.

 

The New Piper

In May last year Piper Aircraft was acquired by Imprimis, a corporate finance and investment management entity that operates out of Brunei, Singapore and Bangkok. The stated intention at the time was “to invest significant capital in Piper’s current operations to strengthen its position in traditional markets and support the development of key new products…”

Despite the perception that Piper has languished in the deep shadows for some time, it was no shell that Imprimis bought. Piper’s piston-engine aircraft deliveries were up 29 per cent year-on-year in 2008, prior to the global hiccup. And 40 per cent of its sales were exports. The first full-year production of the newest aircraft in the hangar, the Matrix (a successor to the Malibu Mirage), was sold before deliveries commenced in January 2008. And the company was holding in excess of 200 orders for the PiperJet at the time it changed hands.

The downside, stemming from the global environment, was a cut in production in 2009 to 98 aircraft and the delay of the PiperJet until mid 2013.

Now, with added capital (and Brunei is not short of that), new vision and a recovering marketplace, Piper is expecting to see at least a 50 per cent improvement in deliveries this year.

And that new capital is very much focused on Asia as a market for a revitalized Piper.

“…the first such contribution of new capital has enabled us to ramp up our engineering workforce by recruiting top professionals to provide the essential skills required to develop the PiperJet,” said Piper chairman Steve Berger. “Our dealers are telling us that the situation is beginning to turn and that 2010 will see a return to healthier sales. In the meantime, we continue to hire so that our development programs are fully staffed and remain on track.

“Our strategy for Piper is to grow its international activities, especially in Asia where we believe the market for general aviation activities is at a low base but will grow significantly.”

To strengthen that regional drive, the new Piper added former Qantas top executive John Borghetti to its board last year.