Is the Sky Falling?
Aviation is cyclical by nature. It has seen some pretty wild fluctuations over the years. The good times are great! Things are busy, everyone is in a great mood and there are jobs for those wanting to work.
February 4, 2009 By Rob Seaman
Looking for the silver lining
Aviation is cyclical by nature. It has seen some pretty wild fluctuations over the years. The good times are great! Things are busy, everyone is in a great mood and there are jobs for those wanting to work. That has been the case over the last few years. So all was nice in our world until fuel prices started to creep up. That got
|We won’t know the full extent of the order fallout for another year
folks flying a little less. In fact, by midsummer most FBOs were reporting jet fuel sales down an average of 30 per cent year over year. There was also talk about things starting to slow a bit, the rationale being that after all, we had been going hard and fast for so long that something was going to give – if only a little. Many offered that we had perhaps hit what was more than likely to be the norm and that things had reached a plateau for now.
Then the fall hit and things became even worse – despite the drop in fuel prices. At the NBAA the message was clearly business as usual, but the facts unfolding were running counter to that theme. As the bank bailouts became more public, the questions started about aircraft and business financing. The word at the time was that money was still available, however, unlike a few months back when lenders were competing at rates in the mid single digits, the prevailing word of the day by early November was expect to borrow at 15-17 per cent – if they want your business at all.
At the same time as money started to tighten, the inventory of aircraft for sale was really starting to grow. Added to that, prices started to decline for certain types – mostly the midcabin or smaller and older aircraft. It has not been uncommon of late to find prices on aircraft like Cessna Excels, for example, dropping by $1 million over the ask over a few months. In another case, one seller of a Global 5000 was quoted to be asking for any offer and was willing to look at those below $40 million – well below the $50-55 million similar units have been asking. The market has the inventory, and for those with the cash, the choices are plentiful.
On a brighter note, there is still some good news out there. One case in point, while the global economy is in credit crisis mode, the Middle East seems to be insulated from these problems. With an estimated value of over $1 billion in aviation sales, this bodes well for the OEMs and resellers looking to sell business jets in the region. The Middle East Business Aviation 2008 show held in Dubai in November gave substance to this belief. As the three-day event wrapped up, there were reports of close to $1.5 billion in new aircraft orders for exhibitors. Among them was a $90-million order for new and used Cessna aircraft that reportedly included three of the firm’s new Citation Columbus large-cabin jets. You can even still find the odd OEM or broker sales rep who feels things are slow, but OK for now. So there is some optimism.
The crystal ball gazers are not so happy, though. They have been issuing their various predictions about the health of corporate aviation. Brian Foley Associates, a New Jersey-based group, issued a release in which Foley noted the peak for corporate aviation likely occurred in the third quarter of 2008 and has now begun to contract. He observes that “the industry’s backlog levels were recently at historic highs, but there are now factors that will keep it from growing and will actually cause it to contract.” In Foley’s view, the worldwide economic crisis, declining company profits, tight credit, strengthening dollar and the plethora of available used aircraft will all combine to keep new sales at a trickle. This lack of sales activity will keep the backlog from being refreshed. Simultaneously, shrinkage of the existing backlog has begun in two ways. First, manufacturers are delivering aircraft at unprecedented rates to the tune of over 1,000 aircraft per year. This will work to deplete the backlog at a meaningful clip. The second factor will be order cancellations and deferrals.
“The OEMs were sincere when they said that there wasn’t a spike in order cancellations immediately following the worldwide financial market collapse, and that’s not surprising,” explains Foley. “When a business jet is sold, there’s perhaps a modest five per cent due at contract signing and then a series of progress payments made every six or 12 months. The OEMs won’t see the order cancellations until these payments come due and a customer is unable to pay. As a result, cancellations don’t come all at once but rather over time as progress payments come due. We won’t know the full extent of the order fallout for another year.”
Other firms like UBS Investment Research seem to agree with Foley. In one of its fall reports, it notes a decrease of as much as nine per cent in the last year in business jet activity. The data also shows a decline of as much as 12 per cent in the light jet category alone – which makes sense given those are the aircraft that usually wind up being used by mid- and smaller-sized firms, the types of business that have been fastest and hardest hit by the economic turmoil. The UBS report shows that long range aircraft are only down six per cent in comparison and mid-sized jets by five per cent. Again, this report points to the growing inventories of resale aircraft as a factor to significantly slowing new OEM orders in the coming months.
For its part, Honeywell feels that orders will be slowing in 2009, leading to a decline in deliveries in 2010-11. But even that said, Honeywell still boldly projects that deliveries will exceed 2008’s record level of nearly 1,200 aircraft. Forecast International expects annual business jet production to exceed 1,600 units in 2009. The company projects that annual production will then suffer a three-year decline, dropping to a level of 1,515 units by 2012 before beginning an upturn. To put this into focus, though, you might want to consider the fact that the corporate aviation industry never delivered more than 1,000 jets in a year before 2007 and barely managed 500 in 2003. So how bad is this downturn going to be? Only time will tell.
As for the smaller personal aircraft market and VLJs – the stress is starting to show for some. Probably the biggest – and not all that unexpected– news late in 2008 was that Eclipse filed for Chapter 11, right on the heels of obtaining European certification for its aircraft. At the same time, Cirrus furloughed its production workers until January 2009, while Mooney temporarily halted production as well – laying off 229 of its existing 320 employees, virtually all of them on the production floor. Also AAI Acquisitions Inc., the company that bought the assets of bankrupt Adam Aircraft, plans to drastically cut operations, suspend airplane certification efforts and stop its previously announced hiring program. This could, some feel, spell the final end to the Adam 700 VLJ. Again, only time will tell how these firms recover or move on. This is just the news we have heard thus far. There is surely more to come.
So welcome to the tough times. From here on we will see what separates the truly devoted and deserving in this industry, from the fringe crowd who joined just for the party. Like everything in the aviation world, tomorrow will bring more news and change.