Sudden dive shows signs of flattening

Listen to this article

00:00
00:00

As the financial crisis stabilises and hopes of economic recovery grow around the world, there are signs that the slump in the business aviation industry may be finally easing.

The leading indicators that the battered sector has been monitoring anxiously over the past year have begun to look more hopeful – or not so dire.

No longer does every month bring evidence of yet another increase in the burgeoning number of used business jets for sale. That in turn means plummeting aircraft prices are showing signs of stabilising. The monthly falls in flight activity have slowed in some markets.

A number of manufacturers say they are starting to see purchase inquiries again.

In addition, the intense political backlash against the use of corporate jets has abated, following intense public relations efforts in Washington by the industry.

After one of the most painful periods in the industry’s history, however, none of this translates into a return to normality.

As Richard Aboulafia, vice-president for analysis at the Teal Group aerospace consultancy in Virginia, puts it: “We’re not falling. That’s not the same as recovery.”

Indeed, many leading industry figures remain unsure that the industry has finally bottomed out.

“We’re hoping we’ve found the bottom but you never know,” says Pete Bunce, president and chief executive of the General Aviation Manufacturers Association (Gama).

“We think we have from the indicators, but there’s always a danger the economy could stagnate or some other secondary crisis could come up.”

At the National Business Aviation Association in Washington, Ed Bolen, president and chief executive, is also cautious. “Maybe over the last two to three months, there has been an emerging consensus that things have stopped getting worse,” he says.

The gloom is understandable. The shock within the industry has been profound as it swerved from a
record boom to one of the worst crises in its history.

Business jet deliveries surged to more than 1,000 in a single year for the first time in 2007 and rose again in 2008 on the back of record backlogs built up by swelling orders. In 2009, however, deliveries will fall to between 750 and 800, according to the authoritative annual Honeywell Aerospace Business Aviation Outlook, published on Sunday. Next year it is expected to drop below 700.

Only last year, Honeywell forecast that 17,000 new business jets worth $300bn would be delivered between 2008 and 2018. It downgrades the forecast sharply in its latest outlook to 11,000 new jets worth $200bn between 2009 and 2019.

The turning point came in September last year when the collapse of Lehman Brothers, the US investment bank, prompted shockwaves that hit the sector from one side of the world to the other, along with the global financial community whose trajectory it tracks so closely.

“That’s when it all kind of stopped,” says Stephen Grimes, chief executive of Ocean Sky group, a UK private jet company offering charter, brokerage and aircraft management services. “That is when the bad times really set in.”

In Wichita, Kansas, home of Cessna, the company that boasts it has sold more aircraft than any other, the impact was also striking. “We ended up in a free fall,” says Jack Pelton, chief executive.

Cessna has cut almost half its workforce of nearly 16,000 over the last year, as it struggled to throttle back on a booming production programme, contributing heavily to the more than 19,000 jobs that Gama’s Mr Bunce says have now been lost within the industry.

“I think the most gut-wrenching thing for our members is lay-offs and furloughs,” said Mr Bunce. “This is our family – people who have worked hard to build these great machines.”

Mr Pelton has asked himself whether Cessna could have done anything differently, given the abrupt severity of the slump.

“We were sitting in September 2008 taking in new orders at a record pace,” he says, “better than any year we have ever had.” Customers faced four-year waits for some aircraft. Analysts kept pressing the company to build more aircraft faster to deal with growing backlogs. And then “this thing just turned around and crashed. I don’t know what else we would have done.”

Mr Pelton thinks the crisis has probably reached the bottom.

At Canada’s Bombardier, however, Bob Horner, senior vice-president, sales, for business aircraft, is yet to be convinced. “It’s perhaps too early to say we have bottomed out,” he says. “We are seeing encouraging signs. We look at the key indicators and those indicators – such as the pre-owned market, the number of inquiries, the charter market – are all looking positive.”

Bombardier has been forced to make job cuts, announcing nearly 4,400 this year, of which 3,210 had been completed last month.

Job losses were still being announced at Dassault Falcon’s business jet completion centre in Little Rock, Arkansas, last month and at Hawker Beechcraft the month before.

Some companies have not survived the crisis.

In the London offices of Allen & Overy, the international law firm, lawyers say there continues to be an increase in aircraft repossessions in both the corporate aviation and mass passenger sectors. Litigation partner Peter Watson, a 20-year veteran of aircraft repossession work, says that in the current economic climate he expects conditions to worsen as winter approaches and summer traffic falls away.

This fragility is underlined by the latest Business Jet Update from UBS, issued on October 2.

It shows an estimated 2,932 business jets for sale at the end of September – a figure broadly in keeping with other estimates. This is almost 3 per cent lower than the previous month, but UBS says inventories are still 26 per cent higher than last year.

Swollen inventories have meant falling prices. Average asking prices for Bombardier’s long-range Global Express BD-700 fell from $48.5m in September 2008 to $29.2m this September, says UBS. The super-large Gulfstream V/G500 went from $42m to $25.4m over the same period.

“Overall, we still think the business jet market is characterised by significant oversupply, weak pricing and tight financing,” the report says. “While our key indicators indicate the market is stablising at lower levels, we still see risk of an extended downturn.”

So when can the industry expect to see firm improvement? A consenus is emerging that it will be 2011 at the earliest.

Teal Group’s Mr Aboulafia forecasts another three bleak years, in which corporate profits and economic growth do not rebound until late 2010; inventories take time to shrink and deliveries of new aircraft only start to grow in 2012.

For signs of hope, it is best to look outside North America. Honeywell’s Business Aviation Outlook reports that global purchase plans actually improved over 2008 levels despite the economic turbulence of the last year, as the slump in North America was countered by an unexpected boost in purchase expectations elsewhere, especially Asia and Europe.

“There’s definitely a piece of optimism there,” says Rob Wilson, president of business and general aviation at Honeywell Aerospace.

“The improvement in overall purchase expectations is remarkable and indicative of the increasingly global nature of the industry and of improved outlooks for economic recovery in a number of regions outside North America.”

International demand now accounts for more than 50 per cent of new aircraft purchase plans over the next five years, a trend Honeywell predicts will continue.

For the many thousands still employed in the corporate aviation industry, that is a small but significant comfort in what seems likely to be another difficult year ahead.

Copyright The Financial Times Limited 2017. All rights reserved. You may share using our article tools. Please don't copy articles from FT.com and redistribute by email or post to the web.