JP Morgan Business Jet Monthly for September 2011

JP Morgan reports on the month
of September

JP
Morgan sees an approaching crunch time for 2012 delivery outlook. We see the next few months’ activity
going a long way toward determining next year’s build rates. The company see
deliveries ex VLJs coming in flattish this year at 549, 47% below the 2008
peak. We are forecasting a 20% increase off the bottom in 2012, but this
will require a pickup in demand that has been slow in coming and confined to
the larger segment of the market. Order activity for the remainder of the year,
particularly Q4, will therefore be critical for determining whether next year’s
deliveries will meet our estimates. In terms of data points that will help us
gauge demand, they see little in the very near term, though October/early
November will bring the NBAA annual meeting and Q3 earnings from General Dynamics,
Textron and Embraer. Meanwhile, the challenging US macro outlook could put off a
recovery for small and mid-size jets. International customers, including those
from China,
have been the main drivers of relatively robust demand for larger jets, so good
relative performance in emerging market economies could therefore support
continued strength in this market segment.

The company sees that used market trends flipped in August. Last month saw higher prices and higher
inventories, the opposite of what we’ve observed for most of the year. The
main potentially positive takeaway is the increase in Light and Medium jet
prices, since we are looking to used pricing as an indicator of a potential
inflection point for new demand. However, we’ve seen prices tick up briefly
in the past, so another couple of months will be necessary to determine whether
this is sustainable. The lack of a price increase for Heavy jets is not a major
concern, as this segment is already recovering. The bump up of used inventories
may be a reflection of the impact of broader economic weakness, but again one
data point is not enough to determine that the trend is changing.

JP
Morgan sees the used inventory increased by 20 bps. Used inventory of in-production models
reached 10.5% in August. All three categories-Heavy (+0.3%), Medium (+0.1%),
and Light (+0.2%)-were up from July and 15 out of 24 models we track had higher
inventories. Inventories increased for Embraer (+2.0%), Hawker Beechcraft
(+0.5%), Gulfstream (+0.5%), and Dassault (+0.1%), while inventories for Cessna
(-0.1%) declined and for Bombardier remained flat.

The average asking price increased 0.2%. Average price increased to $10.64 million
in August, and is down 6.4% year on year. Heavy jet prices decreased 0.3%,
while Medium and Light jet prices increased 1.1% and 1.6%, respectively. Prices
for 12 of the 24 models we track increased, 9 saw decreases, and 3 remained
flat.

JP
Morgan sees that flight ops up ~1.2% year on year in July and up ~5.4% year on
year Year To Date.
Seasonally adjusted flight ops are now up ~19% from the 2009 low but remain
~22% below the 2007 peak. On a TTM basis, flights ops were up 7.8% in July.