Optimism: Why we are still in a business jet downturn
There has been a lot of talk lately about how the business jet market has split or bifurcated.
You may have heard some analysts talk about a permanent shift in the business jet market with demand for light jets perhaps never recovering. There have been various theories proposed, including overproduction of light jets and a shift in buyer’s needs. With respect, they are wrong.
The reason the business jet market has split is because the US economy has bifurcated.
Apart from a few high-profile exceptions, large companies are doing well. US corporate profits rebounded quickly in 2009 and the Fortune 500 are growing. You can see this confidence reflected in the share indices. This is why large companies are back buying aircraft.
Historically, business jet demand appeared to track US corporate jet profits, but since 2008 this link has been broken. This is because the US is undergoing an unusual economic recovery. Although smaller and mid-size companies are crucial for growth (and have often led the country out of recession in the past) the rise in US GDP is coming from large companies.
Large companies do buy small aircraft, but it is small and mid-size companies that drive the light jet market (a 2009 Harris Research report for the NBAA said that some 69 per cent of companies with business aircraft have fewer than 500 employees). The problem is that these companies are not confident enough to buy aircraft at the moment.
The US National Federation of Independent Businesses (NFIB) confidence index shows that owners are still concerned about their businesses and holding back on new investments. In the past, there has been a pretty strong correlation between the NFIB confidence index and demand for business jets. Although it is pretty volatile, when the index stays above 100 for a year there is a normally a significant rise in orders.
There are some signs that the small business confidence is improving. The July 2013 NFIB optimism index was 93.5 per cent, marking the fourth highest reading since December 2007 (which was when the economy slipped into official recession) and up 12 points from the lowest point in the recession. But it is down seven points from the pre-2008 average (and 14 points below the peak in 2006).
Other small business confidence surveys are more encouraging. The Wall Street Journal/Vistage Small Business CEO Survey’s confidence index reached a high of 104.2 in August, up from 93.7 in August 2012. The Wells Fargo/Gallup quarterly small-business optimism index just reached its highest level since the third quarter of 2008.
When confidence returns small businesses will start buying light jets again. It is far too early to write-off the light jet market.
This is a frustrating situation for certain manufacturers and owners of light jets that are looking to sell them. The only thing we can all do it support small businesses (although you would expect me to say that).
Members of Corporate Jet Investor can view our Confidence Research Report here.