JP Morgan Business Jet Monthly dated September 2012
According to JP Morgan deliveries are flattening, but the recovery is not yet imminent. Bizjet deliveries rose 11% y/y in 1H (ex Boeing and Airbus), prompting some commentary that a recovery is underway, but we view this conclusion as premature.
Tougher 2H comps and fewer Hawker deliveries post-bankruptcy should result in a 2H decline that holds deliveries flattish for the year. This would be an improvement relative to the declines of the prior three years, but it still leaves deliveries around 40% below the 2008 peak. Ultimately, we do expect bizjet demand to recover, and we forecast 13% delivery growth next year; however, the indicators we would most like to see improving are not yet there. Specifically, OEM backlogs are not growing and utilization is flat in the US and down in Europe. And while corporate profit growth since the recession may have generated some pent-up demand, the outlook for slowing profit growth does not bode well.
The company says that the used inventory ticked up in August but remains in the mid 10% range. Used inventory of in-production models rose 20 bps to 10.6%, in line with the average of the prior four months. Inventories were little changed across categories, with Heavy jets up 30 bps to 10.2%, Medium jets up 10 bps to 10.5%, and Light jets up 10 bps to 10.9%. We estimate that inventory was flat at 7.1% in July for the “toddler and pre-K” fleet (aircraft 0-5 years old). There has been little sustained improvement here, with estimated inventory remaining around 7% (+/- 30 bps) the past 14 months.
JP Morgan says average asking price increased 0.2% in August. This was the first sequential increase since April and the second this year, so used pricing remains close to the bottom for this cycle. Heavy jets drove the overall increase with a 1.3% advance, while prices declined for Medium (-2.8%) and Light (-1.1%) jets.
The company says that flight ops remain weak. US bizjet flight ops increased 0.7% y/y in July and are about flat YTD. In Europe, takeoffs and landings declined 2.7% and are down 3% YTD. US comps will get easier and we do not want to be overly dismissive of anecdotal evidence of renewed interest among customers, but it is hard to see demand recovering without increased utilization. Perhaps replacement will play a larger role in the absence of growth, but this remains far from clear.
Finally, Jp Morgan says that 2013 looks challenging for Challenger. NetJets’ order for 100 Challengers supports the long-term outlook for this platform, but deliveries do not begin until 2014 and we see a dip in the meantime. We estimate the Challenger backlog is 60 aircraft ex NetJets. We expect 93 deliveries in 2012, and orders have been running only 10-15/quarter, making a decline next year likely, in our view. In addition, used inventory for the Challenger 600 family has spiked, with the number of 0-15 year-old aircraft for sale up nearly 50% in 1H to 66, or 13.3% of the fleet.