JP Morgan Business Jet Monthly: March 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 stocks they cover, including Bombardier, Embraer, General Dynamics, Honeywell, Rockwell Collins, Spirit AeroSystems, and Textron.

JP Morgan says that evidence of a recovery is on the low end and is still not compelling. Select management comments, anecdotal evidence, and an improving US macro outlook are fueling expectations for the bizjet recovery to finally make
its way into the lower end of the market, but we do not see this clearly in the data. TXT and COL in particular have expressed optimism on this front, but we see little change in tone from other players.

They say that flight ops growth stalled. The most important indicator that the market is not recovering in our view, is US flight ops, which have barely grown since mid 2011 and posted Jan 2012 growth of only 1.3% y/y. Rising international demand makes US data less important than it once was, but as it contains ~60% of the installed base, the US should be a key component of a broader recovery, and it is hard to see demand improving much if operators are not flying more.

JP Morgan say that older used jets are still plentiful, while younger jets are gradually selling. The implications of used market trends on new demand are less clear cut, but among the 25 models we track, jets for sale rose 30 bps to 11.1% of the fleet in Feb and are now flat y/y after falling ~300 bps from the 2009 peak to early 2011. When we narrow our sample to jets five years old and younger to eliminate older aircraft that may be hard to sell, the data looks better, as we estimate that declines continued through 2H11 and into 2012. We estimate that the proportion of the “toddler and pre-K fleet” available for sale is 6.7%, 370 bps below the early 2009 peak and 20 bps above the 2006-2012 average. Overall, used inventories, which have fallen from the peak and continue to improve in some portions of the market, are still not at particularly low levels.

They say that used pricing continues to fall. Used prices declined another 2% in Feb and are down 32% from the peak. We only have prices for a fraction of jets for sale; however, we do view the broad-based nature of the declines-20 of 25 models showed declines in Feb, for example-as suggesting that the data is meaningful. Low used prices mean less for the more robust top end of the market, but we see more price sensitivity at the lower end, where it is hard to envision a new jet pickup with so many low-priced used jets still available.

And finally the big question on most people’s mind. Whether Hawker Beechcraft’s precarious financial situation and the recent appointment of turnaround specialist Steve Miller as CEO have raised questions about a Chapter 11 filing or sale. The bonds trade at deeply distressed levels, as many investors have decided to “Take the Money and Run.” We believe that the company has some attractive assets, including the King Air line as well as the customer franchise that needs to be serviced and could represent future customers for a potential acquirer. Miller could receive 6% of the sponsors’ equity, creating a strong incentive to avoid bankruptcy, but the balance sheet appears to us to be too much of a burden.