JP Morgan Business Jet Monthly: February 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 they cover, including BBD/B, TXT, GD, ERJ, and COL.

JP Morgan reports mixed datapoints so far from Q4 earnings. Demand remains depressed, but there have been a few bright spots in Q4 results and 2013 guidance. For example, ERJ guided to 25-30 large aircraft deliveries this year, representing solid improvement off a slightly better than expected end to 2012. Bombardier’s Q4 book-to-bill of 1.13x (ex VistaJet) was another positive sign, and we expect more colour with Q4 earnings on February 21. However, not all Q4 news has been positive. Gulfstream’s backlog declined, and Cessna results were largely in line, while a pickup in Cessna’s deliveries this year is dependent upon the pace of orders, especially in 2H. Used market developments were mixed, flight ops growth remains anemic, and we would characterize overall commentary as cautious. We still see potential for a pickup in orders this year, which combined with deliveries of new aircraft types could make 2014 the first year of material delivery growth since 2008.

Used inventories fell 20 bps in January 2013. Used inventory of in-production models was 10.3%, showing some improvement but remaining within the 10.2-10.8% range exhibited throughout 2012. An administrative note: we have modified the jets in our in-production fleet to start the year to better reflect true competition against new aircraft; the result is a slightly lower (~20 bps last year) used inventory curve, but the shape is unchanged, including a flattish 2012, and the current level is still down 370-380 bps from the 2009 peak.

Heavy jet inventories fell 30 bps, a welcome development after the sharp upward trend exhibited in 2H12. Bombardier Challenger 600s may be starting to look better, while inventories of Globals remain near their highs. Medium jets rose 30 bps and Light jets fell 40 bps. “Toddler and pre-K” fleet inventories (aircraft 0-5 years old) fell 20 bps to an estimated 7.7% in Dec. This is high but also the first decline since April 2012.

Avervage asking price declined 2.7% in January 2013. After signs of stabilization in 2012, used prices continue to trend down, dropping below $10 mn on avg, a new low this cycle, after remaining in the mid $10 mn range for much of last year. Y/Y avg asking price fell 9%. Heavy jet prices fell 4.2% sequentially and Light jet prices fell 0.5%, while Medium jet prices held up, with a 0.6% gain.

US flight ops flattish in December 2012. Flight ops had shown signs of modest improvement in October and November, rising by low single digits after months of being flat to down, but December was another flat month and did not shore up the trend. For all of 2012, US flight ops grew less than 1%, and while some companies have reported pockets of improved US demand, sustained improvement should require a more definitive pickup in activity.

European flight ops remain under pressure, starting off the year with a 2.6% y/y decline in January 2013 following a 3.4% decline for all of 2012. European flight ops have declined for 10 consecutive months.