Bulls and Bears
NOTE: The below originally appeared as the editorial in our January 22 One Minute Week newsletter. To find out more, and sign up for free, please click here.
Since the credit crunch, it has become a tradition for people in business aviation to be optimistic at the start of the year. And then for that optimism to quietly evaporate as the year goes on.
At the start of 2016, there are few bulls around. The first few weeks have seen volatile stock markets, political stand-offs and terrorism. The last year also turned out to be extremely tough year for many.
There is a lot of pressure on the US to carry the rest of the business jet market. This is not realistic.
Many smaller business jets are bought by small and medium sized US companies and used as genuine business tools. But US small business confidence – which we think is a good guide to the strength of demand for smaller aircraft – has still not returned. The NFIB optimism index has still not returned to its 42-year average of 98.
This (and the rise of large jet buyers outside the US) is one reason the market bifurcated.
Many small US companies stopped buying jets because they were worried. Some that were more confident could not get credit. Worryingly, finance for this group could get harder as Basel III banking regulations penalise banks for lending to weaker credits. (Honda’s ability to offer aircraft finance could turn out to be a big advantage).
Things are not looking great for larger US corporates either.
US corporates have had record earnings since 2009 but much of this has come from cost cutting. Earning margins for the S&P 500X (which excludes oil companies) margins are at 30 year highs.
Even more worrying, revenue growth has fallen sharply. A significant fall in revenue growth usually signals a recession.
If you want cheering up, there are some reasons to be more optimistic in the long term.
Committed users of jets will want replacements, new models can stimulate demand and – most excitedly – there are many companies looking to change the market through new membership models (Wheels Up), new online platforms aiming to get people flying (JetSmarter, PrivateFly, StrataJet, Stellar, Victor et al) and in other ways (this is a big focus of our London conference in two weeks time). The more people that try business aviation the better for the industry.
I am bearish about the next 12 months but bullish about the long term future of business aviation.