Summary
The business jet cycle has certainly hit rock bottom, but will not show clear signs of recovery for at least six months. This recovery will be unique, in that there is significantly more competition, in virtually all major business aviation segments. As a result, understanding who will recover more quickly, and more sustainably, will require much more detailed analysis than before.
Analysis
Used aircraft inventory and pricing data all point to us being at the bottom of the current business jet cycle. Deliveries of new aircraft will remain low for at least 9-12 months, with a much more dramatic delivery trough than we saw during the last downswing. The fractional providers remain mired in heavily negative share sales, but have refrained from dumping large quantities of used aircraft into an already-saturated whole aircraft market, for now. Recovery during the last upswing was led by security concerns in the US, together with generous tax depreciation benefits from the Bush administration. We also saw strong deliveries to the major fractional players, in spite of weak whole aircraft deliveries. This cycle has many new, and complex, characteristics: the US market was already stagnating, several years prior to the 2008 worldwide collapse in business jet demand. Fractional demand for new aircraft has also collapsed, and is unlikely to recover anytime soon, based upon our current analysis of used inventories among the six leading providers. Manufacturers will be forced to fight for business more than at any time in the past two decades. There are too many aircraft models fighting for reduced demand. In every key segment, we have derivative and clean-sheet aircraft programs that will shift demand away from traditional leaders. Going forward, much more detailed analysis will be required to assess the aircraft portfolios, and market share potential, offered by each manufacturer. New models, from Embraer, Gulfstream and Bombardier, will be game-changers in their respective segments. Demand will gravitate away from legacy manufacturers, as their older, weaker, aircraft models lose ground. Consumer feedback is already indicating a shift in demand towards aircraft types that have held their value better in the current downturn, or that offer a better package of speed, range, range at high speed, cabin and operating economics. Those OEMs that have failed to refresh their technologies during the last five years will see market share degrade. Cessna and Hawker Beechcraft are vulnerable in key segments, especially in the light, super-light and mid-size segments while other leading manufacturers will struggle to sustain volume for successful models (Bombardier Challenger 300, for example, which is already coming under pressure from the Hawker 4000 and Gulfstream 250). Some established players have margin to use as a competitive weapon. However, newer, more efficient designs will start to assert themselves. For investment professionals, the landscape is becoming far less straightforward to interpret than before. Many pundits are inaccurately interpreting used aircraft data, suggesting that a stable inventory of used aircraft is a good sign, in spite of clear evidence that hundreds of used aircraft have been withheld from sale, until values recover, and hundreds more are in the hands of the fractional industry and may well be released unless share and card sales stage a dramatic recovery. There are many complex differences between the present cycle and past cycles, rendering current demand and market share forecasts unreliable, at best.
