JP Morgan Business Jet Monthly: June 2012
JP Morgan reports that economic weakness would hamper the bizjet recovery. Last week, JP Morgan’s economists lowered their global GDP growth forecast for 2H12 to 2.1% from 2.6%. If it persists, the disappointing economic data should pressure new bizjet demand, further postponing a recovery in a market in which 2011 deliveries were still around 40% below the 2008 peak.
They say that data points could soften amid macro concerns, as they have during the past two summer slowdowns. In 2011, used inventories bottomed at 10.3% in July before rising 80 bps the next four months, while in 2010, inventories hit 11.4% in July before bouncing 50 bps the next three months. In addition, US flight ops growth stalled out in 2H11 and have yet to recover.
JP Morgan says that economic weakness should reinforce relative strength of large cabin jets. High net worth individuals in emerging markets have supported this segment and we believe a weaker economy affects these customers less than other buyers, such as public companies. For China in particular, low penetration should mean more pent up demand, even amid a slowdown. Finally, large bizjet buyers are less reliant on financing, which could become scarcer.
The company says that the NetJets order is a bright spot. NetJets ordered 100 Bombardier Challengers (plus 175 options) and 25 Cessna Latitudes (plus 125 options). The market often views fractional operators’ orders as less firm, but we still see this as a positive development, especially for Bombardier and Cessna.
JP Morgan says that GD, BBD/B well-positioned amid macro concerns. Gulfstream’s focus on large jets and the introduction of the G650 should enable it to hold up relatively well if slower growth reduces overall bizjet demand and GD’s US
defense exposure could be less of a liability in a falling market. Bombardier also has exposure to large jets (as well as small and medium) and the stock’s valuation should mitigate downside.
The company said that the used inventory declined 10 bps in May. Used inventory of in-production models is now 10.6%, down from 11.1% in Feb. Heavy and Light jet inventories declined 10 and 30 bps, respectively, while Medium jet inventories increased 20 bps.
JP Morgan reports that the avg asking price fell 0.9% sequentially in May. A bottom remains elusive for used bizjet pricing, with May representing a new low for the cycle. Prices for Heavy and Light jets were down 1.5% and 0.3%, respectively, while Medium jet prices were up 0.6%.