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 Date:6/22/2010

 

World News
General Aviation: Ready for Recovery
The general aviation industry had shown steady progress toward recovery but fell into what appeared to be another stagnant period. Aviation market advisor Brian Foley sees no cause for alarm. The industry hit a speed bump but will continue on the road to recovery.

The general aviation industry (defined by privately owned aircraft including business jets, helicopters and piston airplanes) experienced a much steeper nosedive compared to the rest of the economy.

Its 2008 banner year was followed by a bad year (2009) that witnessed a worldwide delivery plunge of business jets, (34 percent), turboprops (18 percent) and pistons (55 percent). Combined delivery values dived 21 percent: from $24.8 to $19.5 billion. The fall proved catastrophic for some manufacturers: In only a few months, payrolls shrank a full 50 percent.

Current Situation: Promising
Fast-forward to today: The situation remains critical, but we see measurable gains. For instance, the market’s number of used business jets fell from about 18 percent of the active fleet down to around 15.5 percent. Used aircraft can compete directly with new sales, so getting the number of used planes down to the historical 10- to 12-percent of the fleet would be welcomed. We also see utilization of business jets coming off of their lows, which means that more people are flying and potentially need more services and equipment.

So far the recovery has been biased towards those that make the largest of business jets. This has been through a combination of supply and demand (there have been fewer big cabin jets produced) and the fact that entities who buy $40 million and up jets have more financial wherewithal to survive and move on from a downturn. The small and mid-size cabin producers have seen some sporadic activity, but are still recovering from an oversupply of product on the used market and tight credit markets for their customers – the majority of whom rely on financing in this segment.

While the recovery has been moving in the right direction, a couple of factors have surfaced which has, in our estimation, caused the industry to take a brief breather - namely, the strengthening dollar and the European financial crisis.

General aviation aircraft are typically priced in U.S. dollars, and with the index up 20 percent in just the last six months, the industry will slowly see a shift from predominately non-North American buyers to a more even mix.

This year the non-North American sales component helped arrest a further slide and has been the starting fluid for the downtrodden general aviation industry. Those economies and stock markets revved up long before the beleaguered United States, and with the dollar remaining weak, effectively rewarded buyers with double-digit discounts when purchasing with their strong, local currencies.

These trends have been confirmed: Some manufacturers report that well over half their sales now come from non-North American customers, who once represented a traditional 30 percent of all aircraft sales.

Causal Dynamics
What factors underlie this shift? Our hypothesis is that offshore buyers have been quietly helping to reduce the bloated inventory of pre-owned aircraft, particularly late models that compete directly with new sales from manufacturers. As the North American economy continues to improve and the dollar value rebounds from its lows, there’ll slowly be a shift from predominately international sales to roughly an equal mix. The U.S. market will eventually help lead the new aircraft sales revival since the most desirable used aircraft will have already been picked over from overseas. They’ll have no place to go but the new aircraft showroom.

Our recent 10-year forecast by model calls for North America to account for an average of 52 percent of all future deliveries. This is a fairly significant shift from two aspects: first, that this is a permanent departure from the pre-2000 average of around 70 percent; and second, that it will rebound from the most current estimate of just 40 percent. Going forward, manufacturers will have to balance their presence and resources more wisely throughout a widening world.

One Step Back, Two Steps Forward
We were recently asked about what seems to be another stagnant period for the general-aviation industry, which had shown signs of steady progress toward recovery. Is this just a little speed bump, or does it put the anticipated recovery into question?

Frankly I see no cause for panic or even pessimism, certainly not at this point. Most recoveries aren’t linear and the occasional pullback can be expected. A year ago we postulated this recovery might have a W-shape, and that appears to be what’s happening. The industry takes one step back before taking two more forward.

European troubles may explain the current situation. Europe is the world’s second largest business-aviation market. Financially, it’s been in disarray. Worldwide stock markets have responded with double-digit percentage drops. So how can any industry go unaffected, at least temporarily? Yet I don’t believe the long-term outlook really suffers. Europe and the markets will adjust themselves (they always do), at which point the recovery can resume in synch.

We think this slowdown will be shorter lasting and less pronounced than the big recessionary downturn of 2008-2009. But its timing is almost ironic. Many of the companies affected were just beginning to show improvement after an extended period of austerity. Now their sales have lagged again (though not all of them will admit it), and we may find evidence of this in things like reduced plant activity and possibly even furloughs this summer. But then the recovery should resume on a steadier, upward trend.

Brian Foley is founder of Brian Foley Associates, recognized thought leaders and management advisors to the general aviation industry. A former executive with a major business jet manufacturer, Foley is also a licensed securities representative who, through an affiliated company, helps find buyers and growth capital for general aviation companies. For more information, visit www.BRiFO.com.