AIN Staff

Last fall the Business Cycle Dating Committee of the National Bureau of Economic Research declared that the recession officially ended in June 2009, at the same time defining a recession as the period until the economy reaches its low point. From the perspective of the business aviation industry in the subsequent 19 months, that low point hasn’t moved much. The U.S. unemployment rate fell to 9.4 percent in December, which was welcome news. But two weeks later, on January 14, the Bureau of Labor Statistics reported a 0.5-percent increase in consumer prices and a drop in real average hourly earnings of 0.4 percent for the month of December. And even as Goldman Sachs was forecasting “substantial acceleration in real GDP growth over the next two years to a four-percent pace by early/mid-2012,” the news came that in 2010, for the first time in a single year, banks had seized more than a million homes.
The recession might be officially over, but there’s plenty of depression to go around in the business aviation industry.
In mid-January, JPMorgan North American Equity Research analyst Joseph Nadol III asked whether the excess used jet inventory would finally ease enough in 2011 to drive new-jet orders. In JPMorgan’s monthly business jet report in January, the answer cited a “significant overhang” of pre-owned jets available at “attractive prices” and noted that business jet demand remains “anemic” even as new aircraft backlogs continue to decline.
The report noted that used inventories remain at a level identical to the 2001 peak, even after a 0.4-percent drop in December. And it added, “If orders do not start coming in, the recovery will get pushed out.”
While the report took note that inventories of the active fleet of in-production models for sale decreased 40 basis points in December, that represents a reduction of less than half of 1 percent.
Aviation consultants and analysts such as Rolland Vincent Associates of Plano are reporting a slow increase in flying hours. But even as they do so, the specter of crude oil at $100 a barrel does not bode well for the business aviation industry. David Wyndham of Conklin &amp; de Decker in his picks for 2011 wrote, “This will have negative effects on business aviation as I doubt budgets are increased for many operators.”
While he forecast a better year for business aviation in the U.S., he added, “I suspect companies will be cautious and slow to rehire. ‘Do more with less’ is the mantra for aviation managers [again] this year.”
An Increase in Flight Activity
Vincent was among the analysts forecasting a better year in 2011. “It has been and continues to be a challenging time for many, but the darkest days of this current downturn seem to be in the past,” he said, pointing to increasing corporate profits, rising flight activity, and aircraft delivery billings in the first three quarters of 2010 as the fourth highest on record.
Avinode Business Intelligence took note of the slow flight activity typical of the holiday season, but also pointed out that demand traditionally picks up again in late January and early February.
“This year is already off to a good start,” said the Swedish worldwide charter consolidator, “with the post-holiday drop beginning to taper off almost 25 points above last year.
“While the early-January dramatic decline in demand may seem to be quite negative when viewed in direct comparison with the enormous peaks of late December holiday travel, it would be better to compare January demand with that of previous years to get a better sense of what might be in store for charter in 2011,” the company continued.
According to TraqPak data released in mid-January by aviation services company Argus, overall year-over-year business flight activity climbed 4.4 percent in December, with a boost by double-digit percent resurgence in Part 91 corporate operations. Part 91 activity was up 10 percent compared with the same month in 2009. The rise in activity in fractional flying, however, was a more modest 2.6 percent, and Part 135 charter experienced a 2.4-percent rise in activity.
While the number of used-aircraft transactions (medium- and large-cabin) was up an average of 30 percent in 2010 over 2008, AircraftPost.com reported that selling prices dropped an average of 56 percent. “One reason for the increase in transactions could be the result of prices going from ridiculously high levels to a level that makes sense again.
“Market values are down an average of 24 percent from 2008, resulting in greater value for the dollar,” said AircraftPost.com, “resulting in greater value for the dollar, which in turn creates a value proposition with some aircraft that’s very attractive.” However, as prices have eroded, aircraft have spent more time�not less�on the market, with the average number of days increasing from 139 in 2008 to 248 in 2009 to approximately 344 days last year.
‘Stagnant Recovery’ Continues
“The business jet market is in a slow-moving recovery, with selling prices hovering at the low end,” according to the report, which concluded that “being at the low end of pricing can be viewed as a sign of recovery.”
David Wyndham at Conklin &amp; de Decker labeled 2010 a year of “stagnant recovery.” He predicted that in 2011:�
Ÿ Business aviation activity will continue to show steady, but slow, growth. Aircraft sales will slowly increase in the U.S., be flat in most of Europe, and show some strong growth in the Middle East and Asia. More than half of new aircraft sales will be outside the U.S.
Ÿ Used aircraft values will stabilize overall, but variations will exist.
Ÿ It is still a good time to buy, and a less painful time to sell.
Ÿ With crude oil inching toward $100 per barrel, increasing fuel prices will have negative effects on business aviation if operators’ budgets are not also slated to increase.
Ÿ OEMs are still hurting and will be cautious in rehiring employees until they start seeing solid order books.
Ÿ MROs should see a good year as operators that have put off maintenance and refurbishments begin to return.
Ÿ As flight hours pick up, that should mean more jobs in the cockpit.
In an interview with AIN, Brian Foley of Sparta, N.J.-based Brian Foley Associates said it is his firm’s perspective that “mid-2011 will be the first time since 2007 that all segments of the general aviation industry will be simultaneously improving.” While the first half of the year would see further consolidation, restructuring and ownership changes, he added that 2010 is likely to be the delivery trough for jets and turboprops.
But he tempered his optimism, cautioning that while business conditions will improve throughout the year, this recovery won’t manifest itself as increased deliveries until later this year or early next year, since deliveries lag sales by about 12 months.
John Bingham, president and CEO of Piaggio America and a veteran of the automotive industry, had an interesting perspective. He noted that a business aviation recovery has typically followed an automotive industry recovery by about nine to 12 months. Foreign and domestic luxury auto manufacturers recorded double-digit sales increases in 2010 and are looking to better days in 2011.

�

Economy shows small signs of recovery as recession continues

Last fall the Business Cycle Dating Committee of the National Bureau of Economic Research declared that the recession officially ended in June 2009, at the

2024 Corporate Aviation Leadership Summit

AIN Products

SUBSCRIPTIONS

RESOURCES

ABOUT AIN