Riding the (Peloton) Cycle

opinion

by Alasdair Whyte

February 14, 2022

The next time someone says: “People have discovered business aviation and will never return to airlines,” think of home bike company Peloton.

Its share price fittingly resembles a ride over a mountain peak. Peloton floated in 2019 at $29, peaked at $163 in December 2020 – when much of the world was in lockdown, and fell to $24.6 last week before rising on takeover rumours.

In the summer of 2020, when Peloton sales were booming, a trading platform published a survey showing that 59% of Americans would not renew their gym memberships. Respondents said that the pandemic had taught them that they preferred exercising at home. This has not happened. About one in five Americans still have a gym membership.

Business aviation in the US is booming and this is fantastic. Many of the new travellers will try to keep flying privately, but the poor performance of airlines has helped. Not only have they cancelled thousands of flights, but the numbers of unruly passengers are at record levels. “How can any businessperson rely on an airline when there is a good chance that your flight will be late,” says one broker.

Aircraft manufacturers are not looking to repeat past mistakes. There is a chance that business aviation has fundamentally changed – but the recent demand could also drop if catch-up travel ends and when airlines raise their game.

“As prudence is serving us well, we are applying the same mindset to the production rate. We will continue to consider three factors: backlog, pricing and supply chain and won’t pressure one in favour of another,” said Eric Martel, Bombardier CEO and president, last week. Bombardier delivered 120 jets in 2021 and could deliver as many as 144 this year. It sold 1.5 aircraft for every one it delivered, ending the year with a backlog up $1.5bn to $12.2bn.

Gulfstream delivered 119 aircraft in 2021. It is expecting to deliver 123 in 2022 – this may seem like a small rise, but the company will not be delivering G550s in 2022 – so it works out at a 15% increase in G650, G600, G500 and G280 deliveries. It will also be building some G700 and G800 test aircraft. In 2023 it plans to deliver 148 aircraft and 170 in 2024.

“None of this is supported by heroic assumptions about continuing demand,” said Phebe Novakovic, chair and CEO of Gulfstream parent General Dynamics, in an investor call. She says the planned increase in production is based on a book-to-bill of around 1-to-1. In 2021 it had a book-to-build of 1.6-to-1 for the year (and 1.7 to 1 for the last quarter). Gulfstream’s backlog rose 40% in 2021 to $16.3bn.

Textron Aviation ended the year with a $4.1bn backlog – it added $2.5bn in 2021. This works out at about 12 months waiting for customers. “It gives you much better visibility. It allows customers the opportunity to go sell their used aircraft for many of whom are upgrading an aircraft,” said Scott Donnelly, Textron CEO and chair. “It gives them a lot more time to specify options, interiors, and paints, and all the things involved in that process. And it allows us to cut all those things into the production line in a very efficient way, rather than having a bunch of rework and changes towards the end to accommodate a customer need.”

Donnelly says they will keep reviewing production. “Our salespeople are out there selling hard every day. If we get the visibility where we can look out even further into the future, then we’ll look at continuing to increase production rates. But I don’t think we want to do something stupid and try to go radically accelerate production rates and then burn down backlog. I don’t think it’s healthy for the industry, to customers, or our companies.”

A graph Peloton’s share performance looks a lot like business jet deliveries from 2004-2012. When OEMs ramped up production only to be hit in 2008. This time, manufacturers are planning to not climb as fast or high. But still enjoy the ride.

The Gulfstream is this year planning a 15% increase in deliveries for the G650 (pictured), G600, G500 and G280.