JP Morgan Business Jet Monthly: August 2012

According to JP Morgan recent data points are a downer. Q2 earnings offered no sign of recovering bizjet demand, consistent with sluggish global growth and falling corporate profit expectations. Backlog declined at Gulfstream, Cessna, Embraer (we estimate), and Dassault (for 1H), and we view backlog growth as a prerequisite for rising production rates on legacy platforms. Other data points are little better: used inventories have trended down this year but remain
fairly high, pricing has yet to bottom, and flight ops are flat to down in the US and Europe. Even demand for large cabin aircraft is now showing some signs of weakness, particularly internationally. We see the cycle turning up eventually, and we have built 18% unit growth into our delivery forecast for 2013 since it could happen fast, but a recovery does not appear imminent.

JP Morgan says that Bombardier reports in August. June’s NetJets deal for 100 Challengers (with 175 options) could make for a high order number, though it is unclear whether the backlog will include these orders. Global 5000/6000 demand has held up, but Gulfstream has seen large cabin demand tick down, mainly in Asia, and this could affect Globals too. Lear should remain weak, as BBD/B plans to halt Lear 60 production this fall and adopt the 70/75 to replace the 40/45. Ex NetJets, a bizjet book-to-bill of 1.0x or greater seems unlikely.

The company says that the used inventory was flat in July after improving 40 bps in 1H. Declines in Light (-30 bps) and Medium (-10 bps) jet inventories were offset by an increase for Heavy jets (+40 bps) last month. The “toddler and pre-K” fleet (aircraft 0-5 years old) has not fared particularly well recently, with estimated inventory remaining 7.1% for June, or 20 bps above year-end.

JP Morgan says that the average asking price fell 0.5% in July. YTD, prices are down 6.3% and are making a new bottom for this cycle after being flat or down sequentially for ten of the past thirteen months. By category, Light, Medium, and Heavy jet prices were down 2.7%, 0.3%, and 0.2%, respectively.

The company says that flight ops remain weak. US bizjet flight ops were down 0.8% y/y in June, according to the FAA, and we estimate they were flat for 1H after adjusting for the leap year. In Europe, takeoffs and landings are declining more decisively, with a 4% y/y drop in 1H, including 2.6% for June.

JP Morgan ask, what’s next for Hawker? The 45 days a bankruptcy court gave Hawker and Superior for negotiations in mid July should conclude soon, at which point we will see whether the deal will face regulatory scrutiny. Hawker’s unions oppose it and we could see a Chinese takeover of a US aerospace company becoming a political lightening rod. A sale to Superior offers by far the highest likelihood that production of Hawker bizjets will continue and we therefore would see it as a negative outcome for the other OEMs.