JP Morgan Business Jet Monthly: May 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 we cover, including BBD/B, TXT, GD, ERJ, and COL.
JP Morgan Q1 reports affirm weak light jet demand. Results and colour from Q1 earnings reports support the view that demand for new business jets remains weak and is unlikely to pick up near term. Demand for the lightest aircraft remains weakest, and we saw this most prominently in a lower 2013 delivery forecast for Cessna. They believe the income tax hike at the start of the year was a material driver of the fresh weakness, and we view this as another leg down in the cycle rather than a sign that the market is somehow impaired.
The company saus that the larger jets faring better. We would not characterize demand for larger jets as robust, but it does continue to hold up better than demand for smaller jets, and at the margin our concerns about some key large platforms abated somewhat following Q1. For example, the book-to-bill for the Gulfstream G450 and G550 was ~1.0x, and pricing appears to be relatively stable, though backlog for these models remains below management’s target of 18-24 months. Bombardier plans to report Q1 on May 9, and we expect book-to-bill to come in light. They see bridging the Challenger backlog gap until NetJets deliveries begin next year as a key task for Bombardier this year.
JP Morgan says that the used inventories fell 10 bps in April. At 10.1% of the installed base of in-production models, used inventory reached the lowest level since Sept 2008. This was a small decline, and new demand tends to lag used inventory trends, but inventories are tacking in the right direction again and continued progress could shore up confidence in an eventual recovery. Heavy jets drove the overall decline, with the proportion of aircraft for sale falling 60 bps to 10.1% of the fleet. Medium jets increased 20 bps to 11.1%, while Light jet inventory remained flattish at 9.5%. Data from the toddler and pre-K fleet (0-5 years old) is less encouraging, as inventory remained ~7.7% in March (the data lags by a month) within the 7.5-7.9% range of the past eight months.
The company says that the average asking price increased 0.2% m/m in April. There was a slight sequential increase overall, though pricing trends were mixed by model type, with Heavy jet pricing up 1.2%, mostly offset by a 2.9% decline for Medium jets and flattish pricing for Light jets. On balance, pricing has remained weak through most of the downturn. The average price of $9.9 mn for April was down 7% y/y and ~40% from the 2008 peak.
Finally, JP Morgan says that flight ops still not growing. The FAA reported that US flight ops fell 0.6% y/y in March, as activity remained weak. We had observed signs of a potential pickup in 2H12, but this momentum has stalled in recent months with flight ops growth coming within one point of zero in three of the past four months, after adjusting February for the leap year. March 2013 flight ops were 3% below March 2011 and 18% below March 2007. In Europe, flight ops were down 3.4% in March and have declined in 17 of the past 18 months.