The Corporate Jet Market in Turbulence

by Don Gies November/December 2010
The year of 2009 turned out to be one of the toughest years the corporate aviation industry had ever experienced. The General Aviation Manufacturers Association (GAMA) reported that only 870 new business jets were delivered that year, a drop of 33.7%. Expressed in dollar terms, total sales were $19 billion, down $3 billion (14%) from 2008’s record year. 
Are better times ahead?

The National Business Aviation Association (NBAA) recently concluded its 63rd Annual Meeting and Convention in Atlanta. This gathering has long been viewed as a bellwether of the health of the business aviation industry. The last time the NBAA met in the capital of the Peachtree State was in 2007, and the times were much better. Back then:

  • Aircraft manufacturers enjoyed large backlogs of aircraft on-order
  • Financing for aircraft was readily available at competitive rates and under flexible terms
  • New aircraft models were being introduced — including the very-light jet (VLJ) segment
  • Interest from aircraft buyers around the globe was growing faster than in the already healthy U.S. market

By the end of the following year, deliveries of new business jets had reached an all-time high, with 1,315 new jets, valued at nearly $22 billion, delivered to customers worldwide. This was an increase of 15.6% over the 1,138 new jets delivered in 2007 and marked the fifth year in a row of record sales.

Market Downdrafts and a Rapid Decent
Given the time between new orders and their subsequent deliveries, these record figures for 2008 were more representative of the health of the economy in prior years. Indeed, the financial crisis and resulting stock market free-fall occurred right in the middle of the NBAA Convention in October of that year. The private aviation market then took a dramatic turn for the worse.

The drop came with a suddenness and severity that no one foresaw. Unable to secure financing, large numbers of aircraft buyers either deferred their delivery date or abandoned their deposits and walked away, in some cases forfeiting millions of dollars. A significant blow to the aircraft manufacturers came from the order cancellations by the various fractional aircraft programs. In response, the aircraft builders slowed production rates significantly, while their layoffs mounted. Cessna was forced to lay off over half its workforce, a figure representative of some of the other aircraft manufacturers. Eclipse Aviation, the pioneering builder of the VLJ aircraft of the same name, filed for bankruptcy and ceased production.

The year of 2009 turned out to be one of the toughest years the corporate aviation industry had ever experienced. The General Aviation Manufacturers Association (GAMA) reported that only 870 new business jets were delivered that year, a drop of 33.7%. Expressed in dollar terms, total sales were $19 billion, down $3 billion (14%) from 2008’s record year. This reflected the fact that the larger, more expensive business jets fared better than their smaller, less expensive brothers.

While these difficulties were emblematic of the dire straits the world economy was experiencing, for business aviation, there was even more at stake. The corporate jet itself was being pilloried. A case in point was when, in November 2008, the CEOs of the big three U.S. automakers traveled to Washington, in their private jets, to ask Congress for financial assistance, Congress and the media had a field day. Instead of being viewed as an important business tool to better manage the time of busy executives, and to provide them with a secure way to travel, the growing view was that corporate jets were largely an extravagant waste of money. In 2009, Citicorp was forced to cancel the order for its new Dassult Falcon Jet. It is understandable why a large bank receiving $50 billion of taxpayer funds could not justify to Congress the need for the new jet. Beyond the difficulty of getting financing, a number of businesses, forced to lay off many employees, could not see how they could justify taking delivery of a new business aircraft, for either economic or public relations reasons.

The Pre-Owned Market
As challenging as things were in the new aircraft market, it was no picnic in the pre-owned jet market either. The difficult economy, lack of financing and public criticism of the “fat cats” in their private jets combined to put the pre-owned market into a near free fall. The inventory of used private jets for sale grew dramatically, rising from about 1,637 in November 2007, to a record 3,110 by July 2009, almost doubling the supply in only 20 months. This represented 18% of the fleet, or about one in every five pre-owned business jets being on the market. As a result, sale prices dropped precipitously. A number of aircraft stayed on the market for a year or more without a sale, while others were pulled off the market by sellers not interested in competing under “fire-sale” conditions. Depending on the model, used aircraft were selling for 30% to 50% less than the price of a comparable model new from the factory.

During the second half of 2009, the bargain hunters came out and the total number of aircraft for sale began to decline. By the fall of 2010 however, the supply of pre-owed aircraft leveled off at about 2,750 aircraft, still well above the number for sale during the fall of 2007. Lack of financing is identified as one reason for continuing slow sales, especially for the older aircraft.

Aircraft Financing
The 2008 financial crisis was especially difficult for the U.S. banking sector. Many banks were taken over by the FDIC and then forced to merge. Most had to be provided with billions of dollars from the government’s TARP fund to ensure their solvency. There were now fewer lenders interested in financing a corporate aircraft acquisition. This contributed to a “credit crunch” that exacerbated the difficulties faced by the corporate jet market. Lenders watched, with some astonishment, the rapid drop in the value of the corporate jets in their portfolio that served as collateral for their multi-million-dollar loans. Credit underwriting standards toughened and lenders became much more choosey about which aircraft to finance. In addition, terms and conditions became more stringent. Higher down payments were required, amortization terms were shortened and banks started to insist on loan-to-value covenants. Reportedly many of the new aircraft order positions were canceled by the buyer because of the more stringent financing terms imposed on them, as much as for an inability to garner financing.

Leveling-Off at a Lower Cruising Altitude
A year into this financial crisis, the aviation industry downturn has affected aircraft manufacturers in different ways. All have had to adjust to a difficult market and some are starting to see an end to the free-fall and a leveling off at a lower rate of business activity. Each aircraft manufacturer has its own story.

The Canadian-based manufacturer of both the mid-sized Learjet series out of Wichita, KS and the long-range, large-cabin Challenger and Global Express family of aircraft, felt the recession hit primarily in the deliveries of its Learjet products. During the first nine months of 2010, only 39 new Learjets were delivered, compared to 65 during the same period in 2009 and 104 in the first three quarters of 2008. The larger brothers in the family fared better, yet still saw delivery declines. For the first nine months, the figures were 81 in 2008, 76 in 2009 and 68 in 2010. In dollar terms, total business jet sales during these same periods were $4.8 billion in 2008, $3.95 billion in 2009 and $3.5 billion so far this year.

Cessna Aircraft
The last two years have been very tough on Cessna Aircraft of Wichita, KS. The company has suffered significant order cancellations and declining sales for the nine Cessna Citation Jet models that dominate the light cabin jets segment, the very segment hardest hit by the downturn. This has led to significant production cuts and extensive layoffs. Actual and announced layoffs to date will bring the workforce by year-end to about 7,600 company-wide, down sharply to less than half the 16,000 who worked there in November 2008. That year, Cessna delivered a record 467 Citations jets, 336 of which had been delivered during the first nine months. During that same period in 2009, there were 221 new deliveries, and this year only 100, a drop of 70% from 2008. Unfortunately, these financial challenges forced Cessna, in May 2008, to cancel the development of its latest model, the large-cabin Cessna Columbus. Ironically, industry analysts believe that it would take a new program like Columbus to better secure the company’s future.

Dassault Falcon Jet
Despite the difficult economic climate Dassault, the French builder of large-cabin, mid-to-long range business jets, has fared better than most. During 2009, its order backlog suffered 163 cancellations, including 65 from the NetJets fractional ownership program and from 98 other customers including Citigroup and Royal Bank of Scotland. For six quarters in a row, cancellations exceeded new orders. More recently, things have improved. During the first half of 2010, Dassault had a net gain of two new orders. More impressive is the company’s production and delivery rate. Capitalizing on its still significant order-backlog, Dassault expects to deliver a record 85 or more aircraft by year-end, surpassing the previous record of 77 deliveries in 2009.

Another aircraft builder doing better in this downturn than most is Embraer, from Brazil. This year, Embraer significantly increased the deliveries of its smallest aircraft, the Phenom 100, a four-passenger personal jet selling for only $3.75 million a copy. The aircraft had been newly introduced in 2008, with only two delivered in the fourth quarter of that year. In all of 2009, Embraer delivered 97 of these aircraft. During the first nine months of 2010, 67 new Phenoms were delivered. As a result, Embraer actually reported an increase in the number of new aircraft delivered during the first nine months of this year versus the same periods in 2009 and 2008. Conversely, its much larger Legacy 600 aircraft, with room for 13 passengers and selling for $27 million a copy, experienced a significant drop in deliveries, during the first nine months, from 26 in 2008, to 12 last year, then down to only three during the first three quarters of 2010. The net result is that deliveries of new aircraft by Embraer, measured in dollars, has been rather flat over the last three years.

Gulfstream Aerospace
Based in Savannah, GA and owned by parent company General Dynamics, Gulfstream has long been considered the U.S. flagship builder of the ultra-long-range, ultra-expensive business jet. At the October 2010 NBAA Convention, the company unveiled a finished cabin version of its latest model, the G650, still undoing flight test and scheduled for first delivery in early 2012. The aircraft can carry eight passengers and a crew of four, on a trip of 7,000 nautical miles non-stop and has a list price of $64.5 million a copy.

Gulfstream’s overall order backlog has decreased by $1.5 billion, from $19.3 billion in early 2010 to $17.8 billion as of October 2010. This consisted of $12 billion for nearly 200 G650s ordered, with the remaining $6 billion for its aircraft currently in production, roughly two-thirds for other large-cabin, long-range models and the remaining $2 billion for its mid-size aircraft models. In 2009, Gulfstream reduced employment by 1,200 down to 10,600 while cutting travel and marketing expenses. It also reduced production rates due to market conditions, delivering 75 large-cabin and 19 mid-size jets, compared to 87 large-cabin and 69 mid-size aircraft in 2008. For this year, Gulfstream is staying about even with last year’s delivery rate.

Hawker Beechcraft Corp.
This company has fallen on difficult times. Over the years, it has gone through a number of corporate ownership changes, the most recent being the purchase of the company, by Onex and GS Capital Partners (i.e., Goldman Sachs) from Raytheon in 2007 at nearly the top of the market for $3 billion. It is going to take patience and deep pockets for the company to get through this difficult economy. Much like its cross-town rivals at Cessna and Learjet, this Wichita, KS-based firm has suffered extensive order cancellations and large payroll reductions.

The company struggled to certify the Hawker 4000, originally launched in 1996 as the Hawker Horizon. Its top-end model, this aircraft carries eight passengers and sells for almost $22 million a copy. It took until 2006 for this aircraft to receive provisional FAA certification and then another two years to earn full certification. In 2005, NetJets, the major fractional-ownership company, had ordered 50 of these aircraft. Then, late in 2009, with the economic downturn in full fury, this order was cancelled. Like other airplane builders, Hawker Beechcraft faced significant order deferrals and outright cancellations with even fewer new orders to replace them.

For the first nine months of 2008, this company delivered 104 new business jets. By the end of the third quarter of 2009, the figure had fallen to 64 and, by September 30 of this year, only 37 new jets built by Hawker Beechcraft were delivered. The production rate has been reduced to match the lower level of demand.

Industry Outlook — (When) Will Corporate Aviation Climb Back to a Higher Altitude?
Every fall, at the start of the annual NBAA Convention Exhibition, Honeywell Aerospace releases its well-regarded ten-year forecast for the business aviation industry. The Groundhog says there will be at least one more difficult year ahead. However, by 2012 the rebound will be upon us and then the outlook is bright indeed. Specifically, Honeywell expects to see only 675 to 700 new business jets delivered in 2010, the lowest since 2004, followed by another year of less than 700 deliveries in 2011. Over the next five years, from 2011 to 2015, Honeywell forecasts 5,000 new business jets, excluding deliveries to fractional programs and air charter companies. For the ten-year horizon out to 2020, Honeywell expects that there will be 11,000 new business jets worth $225 billion delivered worldwide.

Of course, all this is predicated on a strong recovery of the global economy. Of note is the significant rise in the U.S. stock market from its low point back in March 2009, and the substantial improvement, since then, in corporate balance sheets. Specifically, with respect to business aviation, consider the following signs of possible “green-shoots” that suggest things are slowly getting better:

  • Fractional programs are starting to order new aircraft again;
    • NetJets ordered 50 Embraer Phenom 300s with an option to buy 75 more
  • Aircraft manufacturers continue to make significant investments to develop new aircraft;
    • Bombardier announced that it will introduce two new ultra-long-range business jets to compete with the Gulfstream 650. The jets will be priced at about $65 million a copy (2010 dollars) and plan an entry-into-service date of 2016 and 2017, respectively.
  • Utilization of corporate aircraft is on the rise as evidenced by reports that owners are bringing their aircraft in for maintenance they had previously deferred due to the economic downturn.
  • President Obama and members of Congress have toned down their adverse rhetoric regarding corporate aircraft.

Gradually, as companies feel better about their future, senior management will find the need for additional business travel and will again see that there is no better way to get there than in your own private jet.

Don Gies, an industry consultant, has over 25 years of experience in the aviation finance and aircraft manufacturing industry. He served as group leader-Aircraft Finance for Daimler Chrysler Capital and then as vice president & group manager for Business Aviation Finance for Merrill Lynch Capital. Before that, he served as vice president/CFO for Dornier Aviation, the U.S. subsidiary of the German aircraft manufacturer. In addition, he has authored many articles for various industry publications. Gies holds a B.S. in Business Finance from the University of Maryland and a M.B.A. in Aviation Management from Embry-Riddle Aeronautical University.

Leave a comment

No tags available