JP Morgan Business Jet monthly dated January 2012
This report contains JP Morgan industry delivery projections plus data on market share and the used market. The industry is an important driver for many companies they cover, including Bombardier, Embraer, General Dynamics, Honeywell, Rockwell Collins, Spirit AeroSystems and Textron.
JP Morgan believes that deliveries should turn up in 2012, but recovery still looks uneven. They estimate that bizjet deliveries were flat in 2011 (ex VLJs), marking the bottom of a 45% down cycle. Morgan expect an uptick in 2012, but our forecast for 9% growth has declined in recent months. Demand remains far stronger for heavier jets, driven by international customers, than for lighter jets, which depend more on relatively sluggish developed markets. This dynamic should continue. The good news is that a weak recovery should leave little room to fall if there is another macro shock, at least at the low end, though a China hard landing looks like a risk for large jets. In addition, we believe expectations are low, so upside surprises-particularly for smaller jets, where demand turns quickly-could yieldbig rewards. BBD/B, COL, ERJ, and TXT have the most small jet exposure.
They believe with Q4 earnings approaching. GD should offer a 2012 Gulfstream delivery forecast, an update on G650, which likely registered its initial green deliveries in Q4, and insight into G650 profitability on 25 January 2012. TXT will report the same day, and with Cessna demand somewhat macro dependent, the outlook should be fairly muted. Meanwhile, ERJ will offer 2012 guidance on Feb 9-10, and the Legacy 650 is one of the most important swing factors for the company’s overall earnings this year. Among suppliers, COL and HON both expect a nice 2012, though weak flight ops could affect aftermarket sales.
Morgan indicates that the used inventory of in-production models dropped to 10.8% sequentially, reversing course after four consecutive increases. Inventory declined only 50 bps in 2011 vs 120 bps in 2010 and remains only slightly below the prior cycle’s ~11% peak. Still, the natural level of inventory may be higher this cycle, and though there are bound to be hiccups, the 350-bp decline
from the 2009 peak signals progress. Heavy, Medium, and Light jet inventories fell by 20, 10 and 50 bps, respectively, in Dec. Cessna, Dassault, HB, and Gulfstream each saw inventory fall 30-40 bps. Bombardier was flat and ERJ rose 30-40 bps.
Morgan reports that average asking price rose 0.8% sequentially. Average price firmed a bit in December, reaching $12.5m for the largest sequential increase since February 2011. All three jet categories saw price increases, including Heavy (+0.3%), Medium (+1.9%), and Light (+1.5%). Overall, Light jets saw nice declines in inventory and increases in pricing, though it still seems early to read much into this with regard to new jet demand.
They report that US flight ops growth remained sluggish in November at only 0.5% year on year. Growth has been anemic in 2H, leading to an increase of only 3.4% Year To Date. This performance likely reflects heightened US fears about the economy and the
global financial system.