Features Operations
Manufacturer’s Roundtable

THERE APPEARS TO BE A CONSENSUS THAT RENEWED DEMAND FOR BUSINESS
AIRCRAFT WILL RETURN IN 2005. GIVEN THE NUMBER OF FALSE STARTS, WHAT
TRENDS DO YOU HAVE TO SEE THROUGHOUT 2004 TO INDICATE THESE FORECASTS
ARE ON TARGET?

CHRISTOPHE CHICANDARD, BOMBARDIER AEROSPACE:
There
are encouraging economic signs – the revised US GDP forecast for 2003
is 3.5%, and corporate profits in Q3 were up 11% on Q2. Most economic
forecasts envisage this trend to continue. This augers well for the
business jet market as these are key drivers behind demand.

The
impact of the used or pre-owned market is also important. While demand
for used aircraft has picked up in recent quarters – a good sign – the
degree of oversupply is such that inventory levels are still above the
historic level of 13%. We forecast a return to this level in 2005,
suggesting a gradual recovery in demand for new aircraft.

JACK J. PELTON, CESSNA AIRCRAFT:
Currently
we are experiencing a positive net order intake. We believe that we
will see increased growth in 2005, fuelled by a ramp-up in production
of the CJ3 and Sovereign.

JIM SCHUSTER, RAYTHEON:
If the
market is to recover in this time span, we’ll have to see: (1)
sustained growth in corporate earnings and general economic indicators;
and (2) continued reductions in used aircraft.

JOHN ROSANVALLON, DASSAULT FALCON JET CORP:
My
prognosis is fairly optimistic. On the orders level, we experienced a
substantial improvement in activity in the fourth quarter of 2003, and
I think is going to continue in 2004.

TOM APPLETON, PIAGGIO AMERICA:
The
business jet market typically lags any move in the US economy by about
one year. If the slow improvement in the economy continues through
2004, then 2005 should begin to see the recovery of a more robust
business aircraft market.

During 2004, Piaggio will continue to
increase the production rate to meet existing demand for new production
Avanti P.180 aircraft, and a strengthening market for P- 180 resales.

MIKE CONNELL, ECLIPSE AVIATION:
Some
of the things we are seeing to indicate the growth coming back is a
bottoming out on the used market. When this starts to occur and you
have some extraordinary items such as accelerated depreciation, you
also have the catalysts that allow for an upturn to comeback.

I
don’t like to call it recovery – I prefer to describe it as back to
normal growth. That is a very important label. Normal growth in
business aviation is anywhere from two to 10% a year.

ART MAURICE, COLUMBIA AIRCRAFT SALES:
There
are a few reasons why we predict that corporate demand for aircraft
will increase in 2005: (1) low interest rates along with banks that
want to lend money on aircraft; (2) good used inventory is drying up
because of rock bottom prices in the past; (3) huge tax incentives [in
the US] for new aircraft; and, (4) a very unscientific trend that shows
aircraft sales follow a rise and fall in the Dow Jones index.

WHAT
DISTINGUISHES THIS MARKET DOWNTURN FROM PREVIOUS ONES, AND DO YOU SEE
THE REVERSAL OF SUCH FACTORS STRONG ENOUGH TO RESULT IN PENT UP DEMAND
FOR NEW AND REPLACEMENT AIRCRAFT?

ROBERT BAUGNIET, GULFSTREAM AEROSPACE:
Since
9/11 it seems there has been an almost never-ending series of issues or
events that have impacted negatively on the market place, and on
investors’ confidence in the market. However, it does appear,
particularly in the last three to four months, as if the tide is
turning in the economy and investor confidence is being restored.

PELTON:
In
previous downturns, we’ve noticed that customers have stopped flying
their aircraft. This downturn is different because customers are
utilizing their aircraft more than before. This is a strong indicator
that there is still a great need for business jets and the flexibility
they provide.

SCHUSTER:
That is a very difficult
question to answer. There are a number of factors at work. On the one
hand, you have pent up demand, but on the other you have a larger
number of used aircraft on the market. It will be difficult to predict
the timing of any type of rebound.

CHICANDARD:
Today’s
installed base is circa double what it was in the early 1980s. This
growth is driving current and future demand as typically 70% of
industry deliveries are to replacement purchasers. Today’s financing
costs are less prohibitive given the low interest rates, even though
today’s residual values are also coming under pressure.

Today,
OEMs are continuing to introduce new products. In the early 1980s,
however, there was little product innovation. The current selection of
high-value products is extensive and will be a key driver of demand.

WHAT
IMPACT, IF ANY, WILL A CONTINUED SOFT MARKET HAVE ON PRICING, OR IS IT
MORE LIKELY THAT AS A MANUFACTURER YOU WILL RIDE OUT WHAT REAMINS OF
THE DOWNTURN?

CHICANDARD:
Pricing has come under
particular pressure as residual values weakened due to oversupply. As
the used market continues to strengthen during 2004, residual values
will continue to firm up which will benefit both the owners and
purchasers of new aircraft – as well as the OEMs.

BAUGNIET:
There
is no doubt that at the moment it is a buyer’s market. Price is
extremely competitive. However, as inventories of pre-owned aircraft
shrink – and we are seeing encouraging signs this is indeed happening –
it should lead to some firming up of pricing.

APPLETON:
The
downturn in the economy had little impact on Piaggio’s pricing as
demand remained strong. Happily, 2003 was a record sales year for
Piaggio. Unlike many OEM’s, we were fortunate enough to increase
backlog as demand has grown faster than production. In North America,
prices will continue to firm up in parallel with the US economy.

SCHUSTER:
We believe that pricing is stabilizing and that future price erosion is unlikely.

ROSANVALLON:
We
have been able to adjust our production and have been very good at
slowing down so we don’t accumulate an inventory of unsold airplanes.
Some of our competitors have ended up in a white tail situation. That
puts pricing pressure on all of us. PELTON:

We have maintained
a strong backlog throughout the market downturn. Our aircraft are
popular because of their performance capabilities and competitive
price-point. We do not foresee reduced pricing in 2004.

CONNELL:
The
valuation of the new aircraft has been affected disproportionately to
the number of used airplanes. The inventory of used aircraft rises, so
prices are going to drop. The benefits of buying used aircraft out
weigh even the benefits of accelerated depreciation – not always, of
course.

SIZE NOTWITHSTANDING, WHAT ARE THE FACTORS THAT WOULD DISTINGUISH THE CANADIAN MARKET FROM THAT OF THE US?

CHICANDARD:
Apart
from relative size, there is a minimal difference between the two
markets in terms of regulation, infrastructure and profile. Deliveries
reflect its relative size. Canada accounted for 2% of industry turbofan
deliveries in the past five years, versus the USA with a 66% delivery
share.

Canada is skewed slightly more toward narrow-body
aircraft – 75% – than the US. The Canadian market is split between
Bombardier and Cessna, with 40% and 44% share respectively. Not
surprisingly, the deliveries in the Canadian market are concentrated
around the major economic and business centres of Ontario, Alberta,
Quebec and more recently in Southern British Columbia.

PELTON:
It
is easy to be lulled into thinking there are no truly distinguishable
difference between the US and Canada. However, there are subtle
cultural difference between the two countries that affect ones approach
to conducting business – bilingualism, multi-culturalism, conservative
business attitudes, social attitudes, etc. Cessna’s product line fits
well into the Canadian niche because of their performance, reliability
and versatility.

Tax treatment is probably more similar than
dissimilar other than the fact that Canada does not offer accelerated
depreciation as is now available in the US. Aircraft sales in the US
have benefited from this accelerated depreciation.

APPLETON:
Corporate
and government customers for business aircraft in Canada are
particularly sensitive to the perception of aircraft as a business
tool, not another toy for the CEO. Canadian operators see the inherent
advantages of the propeller as a strongly positive factor in the
purchase decision. Perhaps Canadian operators are also more accepting
of an aircraft, which is different, as long as the difference produces
genuine advantages in performance, comfort and economics.

SCHUSTER:
The
US has put in place a very aggressive depreciation schedule that allows
a buyer up to 76% depreciation on the sale price after only 24 months
compared with 12.5% after the first year and 25% on the descending
annual balance in Canada. Aircraft sales in the US have unquestionably
benefited from bonus depreciation.

Also, the Canadian
operational environment is much different. It’s vast expanses and
extremely harsh climate in the northern area certainly are very
different from what is encountered in most of the continental US. This
bodes particularly well for our King Air line, with over 200 operating
across Canada today.

BAUGNIET:
Overall, Canada is a very
sophisticated business jet market with an excellent general aviation
infrastructure. Our situation at Gulfstream in the past has been that
most of our product offerings have been almost exclusively in the
large-cabin, long-range and ultra-long range categories. With our
acquisition of Galaxy Aerospace in 2001, and subsequent introduction of
new aircraft at various price and performance points, we now have eight
aircraft in our fleet to meet the varying needs of customers in Canada.

ROSANVALLON:
The
Canadian market is not all that small. We have seen some ‘pushers’ and
‘blockers’ in the market. On the blocking side, there are some cultural
issues similar to Europe. Canada is very conservative when it comes to
using a business aircraft. When you look at the overall economy and
size of Canada, you should have a bigger fleet of business jets.

There
are some shorter term issues which have helped the US market – tax
depreciation that is available in the US. This alone is not making the
market, but it is a good incentive for people, particularly at the end
of the year where they might make up their minds a little more quickly
than they would have done otherwise.

CONNELL:
Until you
get into the regulations and the fees and tax implications of operating
an aircraft in Canada, there is very little differentiation in what is
unique to Canada other than there is a tremendous mass of no airports
as you go west.