Why the business jet market did not recover in 2013

Cessna Zurich service center

Cessna's Citation service centre in Zurich, Switzerland.

The business jet market did not recover in 2013 because of an uneven US economy, lack of confidence and too many pre-owned aircraft.
Cessna Zurich service center

Cessna’s Citation service centre in Zurich, Switzerland.

The final data is not in yet but 2013 looks set to be the fifth year in a row in which the number of new aircraft deliveries has fallen. We have seen 40 per cent less new aircraft delivered than in 2008 (roughly the same number of aircraft were delivered in 2004). While large aircraft have not been hit as much as smaller jets, the inflation adjusted value of all jets is still going to be 25 per cent down from the peak (and the industry billings tend to inflate actual prices).

This has become by far the longest recovery from a US recession. In the past, business jet deliveries have always risen within one year of the end of a recession. Deliveries have kept falling since the US recovery started in 2009.

Here are three reasons why we are still in a business jet downturn:

An uneven US economic recovery

While large corporates (corporate profits and share performance) and ultra-high net worth individuals have had a pretty quick recovery (Wealth-X and Forbes say the world has never had so many billionaires), this has not been felt in business jet deliveries.

Source: Corporate Jet Investor, GAMA and US Department of Commerce

Source: Corporate Jet Investor, GAMA and US Department of Commerce

This is a big change. For the last 20 years there has been a strong link between corporate profits and business jet deliveries. The same has been true for the S&P 500 share index.

One reason that this link may have been broken is that so far the US economic recovery has favoured large companies. The same is not true for smaller businesses.

In July, Bill Dunkelberg, chief economist for the US National Federation of Independent Businesses (NFIB) said: “The economy remains bifurcated, with the big firms producing most of the GDP growth with little help from small business.”

This economic bifurcation has been felt in the small and medium jet market as small and medium enterprises have not replaced their existing aircraft. You can see this clearly by looking at Cessna’s backlog.

Cessna's aircraft backlog

Source: Textron

Lack of confidence

Business jets are expensive and a long term commitment. People only buy them when they are confident of their personal wealth or future.

Although some key economies are improving this has not yet been felt in smaller companies (for the reasons outlined above).

The NFIB Research Foundation has collected Small Business Economic Trends data with quarterly surveys since 1974 and monthly surveys since 1986. Although it is volatile, significant drops in small business’ confidence are a good marker that business jet deliveries will fall in the next few years.

The bad news is that confidence does not seem to be returning quickly. The year is not ending on a high note in the small-business sector of the economy. The ‘bifurcation’ continues with the stock market hitting record high levels, but the small-business sector is showing little growth beyond that driven by population growth,” said Dunkelberg in December.

Source: Corporate Jet Investor, GAMA and NSIB

Too many pre-owned aircraft

The availability of pre-owned aircraft also hits new aircraft sales. This is partly because pre-owned aircraft are an alternative option to buying a business jet but, more importantly, as many potential buyers need to sell their existing aircraft to help finance their next purchase. Falling prices and delays in selling are not helping here. Bombardier estimates that 70 per cent of all business jets are bought by past owners.

According to JETNET, in 2008 the number of business jets for sale went from 1,635 in 2007 to 2,608. That meant that 16 per cent of the total fleet was for sale. JETNET now says that 13.3 per cent of the fleet is for sale (which is getting close to the historical average) but that still means 2,572 pre-owned aircraft are for sale – down by 36 jets from the 2008 peak.

On average it now takes 405 days to sell an aircraft according to JETNET. However, this figure is affected by the age of the aircraft for sale.

However, some 60 per cent of aircraft for sale are more than 15-years-old so may never trade.

When will the recovery start?

Markets change suddenly and the speed of both downturns and upturns tend to surprise people.Whilst the number of aircraft being delivered in 2014 is almost certain to rise, it is hard to see a sudden business jet market recovery occurring in early 2013.

For that to happen, we really need a stronger and more balanced US economic recovery. This would, in turn, raise confidence, and hopefully encourage people to buy pre-owned jets. Since 2009 there have been several fake recoveries but there is a chance that this could be the start of a real economic recovery. If that happens the business jet market – which tends to lag – should also see an upturn.