Bizjets Search for Optimism

After two years of depression in the business jet market, it's natural to begin scanning the horizon for change. Unfortunately, there are few signs of a return to prosperity for what had been the best aviation growth sector in decades.

The worst news concerns used aircraft availability and pricing. Reports show just over 2,000 turbine-powered business aircraft are on the market, out of a total fleet of about 13,300. Pricing also remains soft, with many airplanes selling at an average 20% less than their 2000 peaks.

While there was a temporary drop in aircraft availability in mid-2003, it may have been due only to last spring's "bonus depreciation rule," part of the tax bill that increased the deduction of a business jet to 50% of the purchase price in the first year. Like easy finance terms and price reductions, favorable tax-rule changes provide a one-time market boost. Worse, they also effectively steal demand from the future, convincing customers to make planned future purchases more immediately.

These negative economic indicators raise doubts about hopes of a manufacturing recovery in 2004, which have been based on surveys of customer intentions. These surveys may have a good track record, but they are far from scientific. The real problem--that most of the available market has been satisfied--is not going to be addressed until economic growth resumes at a healthy pace.

Yet there is some very good news in this otherwise unimpressive market environment: The worst fears have subsided over what might go wrong. The market may be quiet, but the shrinking has clearly stopped. In fact, the portion of the fleet available for sale--about 14%--has not changed much since the downturn began in late 2001.

There might have been some overbuilding in the boom years of 1996-2001, but most of these new airplanes are doing productive work. Aside from aircraft on the market, most business jets aren't just sitting in the desert, acting as visible reminders of a market bubble that popped.

Also, while the fractional ownership industry may face some painful restructuring ahead, fractional utilization remains strong. In fact, the clear leader, NetJets, says its North American operations are profitable.

Overall, this forecast assumes that the bizjet arena is effectively going through the first down cycle of a transformed market. While this scenario is far better than that of a "burst bubble," it does imply a 40% peak-to-trough ratio typical of the civil aviation industry. This translates to a trough year worth about $6-7 billion in new deliveries, and it seems 2004 will be the trough year, with no meaningful recovery occurring until 2006. Yet it's important to remember that the business jet industry is in uncharted waters. Even this difficult year will be better than any in the market's history before 1997. The problem with looking at a transformed market is the lack of historical perspective.

THE TROUBLE WITH BEING NEW