Business aviation’s lost decade

In 2013 Citigroup issued a depressing piece of research suggesting that the business jet market faced a “lost decade” of flat deliveries. It argued that manufacturers had built too many aircraft during the 2000s boom – so the next 10 years were going to be tough for new sales.

More depressingly, Citi have now revisited this theory and believe that it is correct. And that deliveries will continue to be flat until 2020.

“The good news is that it probably does not get too much worse from here and that new products set up for a 2020s recovery,” write Jason Gursky and Jonathan Raviv in an excellent paper titled Making BizJets Great Again. “The bad news is that it is still a few years away.”

The pair have looked back at deliveries since 2013 and their theory has been shown most clearly in small and mid-size aircraft.

Now they feel that the small and mid-size aircraft markets have hit a floor. They estimate that this market was oversupplied by more than 2000 aircraft in this class during the 2000s – with half of these competing with new aircraft now. Their calculations suggest that there will be around 444 aircraft of this size delivered each year in 2017, 2018 and 2019. Manufacturers delivered 439 small and mid-size aircraft in 2016.

The large cabin market behaved differently. Even though Citi believes it was oversupplied – by 500 aircraft in the 2000s – large cabin aircraft held on better for a few years. This was mainly driven by buyers in international markets. With sanctions, the strong dollar and lower commodity prices they feel that large-cabin demand could fall more. They predict large cabin deliveries could fall from 219 in 2016, to 197 in 2017, and 177 in 2018. In 2019 just 159 large cabin aircraft may be delivered.

They say that things could be better if new products stimulate demand or large corporates start replacing existing aircraft. “Our lost decade analysis suggests new production is flattish through 2019 barring an unexpected economic development in one direction or the other,” say Gursky and Raviv. “For now we are mindful of how the recent excess supply of large-cabin contributes to a lost decade that lasts a bit longer for this segment.”

Textron’s first quarter 2017 results came out this week and support the “lost decade” theory.

First quarter revenues fell from $1.09 billion to $970 million in the same quarter of 2016. Profit was down from $73 million to $36 million. The company delivered 35 new Citation jets, up two from the same quarter in 2016. But it only delivered 12 King Air turboprops compared to 26.

The drop in King Air deliveries also demonstrates weak international demand. King Air deliveries have historically been split fairly equally between North America and the rest of the world (often with more going internationally.) In the first quarter of the year just three went to overseas customers.

Textron’s backlog stayed at $1 billion – the same as in 2016. It is astonishing to think that in 2008 it was $14.5 billion – without Beechcraft. But Textron does not see backlogs changing.

“I think that we are in a mode now where there is no reason for people to book aircraft very far in advance,” said Scott Donnelly, Textron Chairman and CEO during an analyst call. “So usually we are working with people who know when they want their delivery to be. They may have an aircraft that is coming off lease or want to re-market their existing aircraft. But there is no reason, given where the industry is today, to be looking at deals that are a year out or even six months out.”

Donnelly says that they are fighting hard to maintain pricing. “As we went through the quarter, we certainly had some customers that said: ‘look, give me a little better price, I’ll do it this quarter. I’ll go ahead and book it now.” And I said, ‘we can’t do that’. So we are working with them, and so then deals do start to book at that higher price, which is where we need to be.”

When asked about competitor pricing, Donnelly said: “I think we – collectively, the industry – has been a little unhealthy. That is certainly how we have seen it, and I suspect they see it the same way. But obviously, they have to make their own calls in terms of the pricing environment,” says Donnelly. “But I certainly would say that as we work with customers and explain what we are doing, and why we have to do it, they do realise these aircraft are still a heck of a price compared to historical prices. And that it is  a good deal. That is why we still see deals closing.”

If Citi are right, this could be the same for a few more years.

“The good news is that OEMs continue to suggest that the used market is moving, and that the percentage for sale is falling, albeit modestly,” says Citi (which published the research before the Textron call). “The bad news is that they have been sounding relatively positive on this metric for several years with little to show for it in terms of industry improvement.”

Optimists can be happy that we are already more than 70% of the way through the “lost decade.”

This originally appeared as the editorial in our Corporate Jet Investor One Minute Week newsletter. To find out more, and sign up for free, please click here.