JP Morgan Business Jet Monthly Report dated August 2013

In its August 2013 Business Jet Monthly Report JP Morgan says caution remains appropriate on new demand.

Most commentary this earnings season was consistent with recent characterisations of small jet demand as weak with larger jets holding up better though not quite healthy. Embraer was an outlier, as management reported incremental softness at the high end. We attribute some of this to the specific positioning of Embraer’s key large platform, the Legacy 650, though the company cited overall EM market weakness and this clearly bears watching in light of slowing GDP growth. Bombardier remained most bullish among OEMs, and targets for 2013 cash flow and 2014 margins depend on at least a moderate recovery. A US pickup would more than offset an EM slowdown for the market overall, but it is not clear that sentiment among US buyers is improving, and while US flight ops have picked up a bit they are still only barely growing.

The company says that there are mixed used market signals in July. Overall used inventory changed little, but inventory of the toddler and pre-K fleet (0-5 year-old aircraft), which competes more directly with new aircraft, declined an estimated 60 bps to 6.8% with broad strength. Toddler/pre-K inventory is now around the average level of the past 8 years. On the other hand, pricing remains strikingly weak. The avg asking price for all in-production models (not only toddler/pre-K) was down 2.1% sequentially in July, following ~3% declines the prior two months. We do not get prices for all aircraft for sale and outliers can affect the data, but the softening is notable, as used pricing has fallen steadily since 2008 and shows no sign of bottoming. We also note that while inventory for some key large platforms has moderated (G550, Global, and especially Challenger 600) asking prices for these platforms have fallen recently.

JP Morgan says that used inventories decreased by 10 bps in July. Inventories fell to 10.1%, the lower end of the 10.0-10.6% range it has been in since early 2012. Heavy jets fell 50 bps, partially offset by Medium (+20 bps) and Light (+10 bps). As noted above, inventories for the toddler/pre-K fleet fell 60 bps. Falcon 7X contributed most, though Challenger, Citation, Phenom 100, and G550/G650 all had fewer young aircraft for sale.

The company says that the average asking price declined 2.1% m/m in July. Pricing fell for the third consecutive month and was down 13% y/y. Pricing was weakest for Medium jets, which fell 3.4%, primarily driven by Lear 55/60, which is likely ending production, and Citation X, which is set for an upgrade. Heavy jets were weak too with a 2.1% sequential decline. Light jet prices were flat.

JP Morgan says that US flight ops are increasing modestly. The FAA reported that US flight ops grew 1.8% y/y in June. June flight ops are only 1.2% above.