In a 2012 report, the National Business Aviation Association said general aviation, which includes business aviation, contributes more than $150 billion to the annual U.S. economic output. However, from 2008 through mid-2010, flight activity in the business aviation sector dropped by as much as 35% to 40% in some areas. The report also noted that during the same timeframe, new aircraft sales also fell.

Now, in the midst of a slow but steady economic recovery, a recent GAMA report showed a business jet shipments increase of 12.4% in H1/14 compared to the same period in 2013. GAMA President and CEO Pete Bunce expressed encouragement in the association’s news release, but cautioned that, “There is still a great deal of work that remains to make this recovery sustainable over the long term.”

Richard Aboulafia, vice president of Analysis at Teal Group, discusses feeling encouraged due to recent business jet growth. He notes that while the industry has been “burned before,” the current conditions call for a stronger level of cautious optimism.

Monitor: The latest report from GAMA on business jet shipments for H1/14 showed a Y/Y increase of 12.4%. Do you see this trend continuing? What is your forecast for 2015?

RA: The fundamentals look good, but we’ve had a number of false starts. The fundamentals have looked good for some time — corporate profits, a nice reduction in the number of used jets available for sale, and solid economics, which can determine demand. Right now all you can do is say, “Yes, the conditions look safe for this positive trend to continue,” but we’ve been burned by false starts before.

Assuming the background numbers continue to book right through it in terms of corporate profit and equity sponsors, and that the number of used aircraft continues to make strong progress, it looks like we’re going to have another double-digit year. The conditions are set for at least this year, next year and beyond for double-digit growth. The way this market always works, you hit bottom and you have a four- or five-year rebound of double-digit growth. I think we’re starting to have that.

The last time this happened was 2003 when we saw subsequent five-year growth at 17% per year; but, from the 2003 perspective, all was lost. Everyone said, “Oh, this is awful,” that we were clobbered, but we had the best growth market in the history of the industry.

Monitor: In a May 2014 article, you wrote about the bifurcation of the business aircraft segment. Can you please comment on the separation, as well as how this split has benefited and/or detracted from business aviation growth? Why has the market’s bottom half struggled, while the top half flourishes?

RA: It just shows that the bottom half of the market was much less able to buy the jets and much less willing to buy with cash. When we talk about an increase in GAMA numbers, that is automatically a comment on the comeback of the bottom half of the market. In other words, it is proof that the bifurcation is starting to heal a little bit. Frankly, the growth we’ve seen in the top half over the past five years, doesn’t show up in units, it shows up purely in value. You add a few dozen Wellspring 650s into the mix, and everything looks good. But it doesn’t affect unit base recovery, which is driven by numbers of units rather than dollar value. Anytime you see a recovery in units, you know you’re seeing help for the bottom half of the market.

It really comes down to availability of credit at reasonable terms, coupled with willingness to pay in cash. Beyond that, a lot of it stems from the emerging markets — the Middle East, Asia, Russia — which are going after the big jets and leaving out the mid-sized cabin planes which, are largely North American.

Monitor: Aviation consultant Brian Foley said that smaller jets saw a 20% increase in H1/14 sales. What does this indicate for the business jet segment, as well as the overall business aviation recovery?

RA: It indicates very positive momentum. Whenever you’ve got deliveries that are going at 12% and bookings well ahead of that, it implies a really good book-to-bill ratio. And you want that, it shows positive momentum going forward. However, it’s just a couple data points. It’s encouraging, but we’ve been burned before.

Monitor: Can you please comment on the equipment finance and leasing industry’s impact on business aviation sector growth?

RA: A lot of it came down to exactly that. We went from 90% loans to 60% loans. It’s not exact, but we are seeing signs of a drop-off in credit for riskier assets, which was a primary driver in the bottom-half-of-the-market crash. We’re starting to see progress being made. One of the things that encouraged that tremendous expansion of the business in 2003 through 2008 was the impact of easy credit. We’ll see how close we get back to that level of easy credit. But obviously we’re seeing some progress.

Then again, I’d rather have a five-year expansion at 12% per year with slightly more rigorous credit terms than I would a five-year expansion at 17% with a risk of overbuilding due to easy credit. I understand the caution. It’s just a question about how cautious we stay.

Monitor: Can you please comment on Textron’s Beechcraft acquisition? What does it mean for Textron/Cessna? Can the brands be revived?

RA: It gives Textron greater critical mass and allows them to leverage their product for sales, marketing and finance offerings.

The acquisition certainly did wonders for Beechcraft. The turboprop side of the business definitely needed stabilization, and Textron provides that. But, they have made it very clear that Hawker is dead. That’s just the end of that. It was the biggest casualty in the downturn.

Monitor: Can you please comment on the residual value characteristics of a corporate jet?

RA: Residual values basically refer to the values that exist for the aircraft [and what goes into] keeping them up.
The market was really clobbered by the downturn — they are still clobbered. They are easily the worst indicator now. Everything is up except for them. The only thing that is encouraging is that historically, values are a lagging indicator, not a leading indicator. In other words, you could be six months into a fantastic recovery but still see values slumping.

Monitor: Is there anything you would like to add?

RA: Right now it’s time for cautious optimism, but a stronger level of cautious optimism than we’ve seen in five years.

Megen Donovan is an associate editor of Monitor.