JP Morgan Business Jet Monthly: June 2013

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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.

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 says that used data shows incremental weakness. A single month does not make a trend, but May used market data, including a sequential increase in inventory (+40 bps) and decline in pricing (-3.6%) not seen since 1H09, suggest that business jet demand will remain weak.

On the plus side, the younger part of the used fleet is performing better, but overall the trends were not favorable. Inventory increased most for Light jets, consistent with ongoing weakness in this segment, and Heavy jets experienced steep price declines. Hawker platforms, which they still include in their analysis for now, contributed to rising inventories. Demand for the Citation Sovereign and XLS are key drivers for Cessna this year, and used market data for these models were mixed: Excel/XLS inventory spiked but Sovereign declined moderately. Meanwhile, inventory rose for Citation X in advance of the introduction of an upgraded model later this year.

On the pricing side, G5 and Challenger 600 experienced particularly steep declines.

The company says that low residual values are holding back a recovery, especially for smaller jets. While used inventory peaked in 1H09, used pricing has yet to bottom. The low values on trade-ins leave owners who want larger or newer aircraft with a wide gap to bridge. This dynamic is particularly important in the Light segment, where much of the existing installed base is in the US and independent business owners who are sensitive to macro and tax developments are key players. Firming prices are therefore an important ingredient for a recovery and this should take more time.

JP Morgan says  that used inventories increased 40 bps in May. Used inventory jumped to 10.3% of the installed base of in-production models. Inventory had looked set to break decisively below the ~10% level at which it had been hovering for over a year but bounced instead. (They revised 2012 and 2013 data this month to remove discontinued Cessna models.) Light jets were up 60 bps, followed by Medium jets at 30 bps, while Heavy jets rose 20 bps. In the toddler and pre-K fleet, (0-5 years old) estimated inventory declined to 7.4% in May after ranging between 7.5% and 7.9% the prior nine months.

The company says that average asking price decreased 3.6% m/m in May. Prices fell across jet classes with Heavy, Medium and Light jets down 4.8%, 1.7% and 0.6%, respectively. Prices were down 9% y/y and are now 40% below peak.

Finally, JP Margan says that flight ops increased modestly. The FAA reported that US flight ops grew 1.9% y/y in April. This was slightly better than the flattish numbers from the prior two months (adjusting Feb for the leap year) but it was still only 1.5% above April 2011 and still 16.2% below April 2007. In Europe, flight ops were down 0.3% in April y/y, the18th decline in 19 months, though the magnitude of the drop was small.

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