JP Morgan Business Jet Monthly dated July 2013

This report contains JP Morgan’s industry delivery projections plus data on market share and the used market. The industry is an important driver for many stocks they cover, including BBD/B, TXT, GD, ERJ, and COL.

JP Morgan say that Q2 earnings should bring few signs of recovery, though investor expectations are in check. Cessna should be in the spotlight following the disappointing Q1. Demand for smaller Citations remains depressed, and we will look for more colour on the Sovereign and XLS, key midsize offerings for which there are still open slots this year.

Gulfstream has expressed satisfaction with the near-term outlook for the 450 and 550 recently, though China has accounted for 20-25% of deliveries in each of the past two years and a slowing business jet market there is a source of risk. Gulfstream’s China deliveries appear to be running low at six YTD, according to JetNet, vs ~20 for the full year in each of 2011 and 2012, though this could be a function of timing.

Bombardier should once again stand out from a book/bill standpoint thanks to the 20 Challenger 350s that Vistajet ordered at the Paris Air Show. However, they still see a hole to fill for Challenger deliveries this year, and the 2013 bizjet delivery target for Bombardier overall depends on a large number of Lear 70/75s in Q4 when the aircraft is slated to enter service.

Used inventories declined 10 bps in June. Inventories declined to 10.2% following a spike the prior month and they have remained in the 10.0-10.6% range for most of the time since the start of 2012. Within size categories, Medium jets fell 40 bps to 11.2% while Heavy and Light jets each remained flat at 10.3% and 9.4%, respectively. In the toddler and pre-K fleet, (0-5 years old) estimated inventory remained flat at 7.4% in June.

Average asking price declined 3.2% m/m in June. Used pricing has taken a turn for the worse recently, with June showing the second consecutive m/m decline in excess of 3%. Prices have yet to bottom since the downturn began in 2008 and are now down 12% y/y and 41% from the Nov-08 peak. Pricing was weakest for Heavy jets, which fell 4.5%. Hawker 4000 played a disproportionate role but pricing was weak for most other models too. Light jet average asking prices fell 1.4% and Medium jet prices were flat. We view low used pricing as a key overhang for new jet demand.

Flight ops increasing modestly. The FAA reported that US flight ops grew 1.4% y/y in May. This was slightly lower than the 2.1% increase in April, but viewed against the weakness of the past two years, two consecutive months of growth could be an early indicator of improvement. Still, operations were only 1.7% above May 2011 and still 17.5% below May 2007. In Europe, flight ops were down 2.7% y/y in May, the 19th decline in 20 months.