Honeywell and Other Analysts Posit
Gradual Market Upturn
Aviation Week & Space Technology
10/06/2003, page 36
Anthony L. Velocci, Jr.
New York
Deliveries and orders for new aircraft continue to decline, but
some analysts--and Honeywell's newest outlook--posit a gradual upturn
may be taking shape
Where Biz Aviation Is Going
Business jet manufacturers expect to deliver no more than 450-500
new aircraft in 2003 and 2004, a 26-33% drop from last year, with
only a small upturn in 2005, as orders struggle to recover from
the worst slump in a decade (see pp. 63-66).
But the long-term outlook for business aviation remains bright,
according to Honeywell Aerospace's 12th annual Global Business Aviation
Outlook.
Customers are apt to purchase more than 7,700 new turbofan-powered
aircraft (gross takeoff weight less than 100,000 lb.) worth more
than $115 billion in the next 10 years. To put that into perspective,
original equipment manufacturers (OEMs) sold $75.5 billion (in constant
dollars) worth of business aircraft from 1993 through the first
half of 2003. If Honeywell's forecast is correct, the $3.5 billion
in sales in the first six months of 2003 will swell to $7.1 billion
for the full year.
As for the near-term, Honeywell's outlook generally is in line
with industry analysts. For example, Byron Callan at Merrill Lynch
also expects deliveries to total 498, 484 and 520 aircraft in 2003,
2004 and 2005, respectively. In fact, he recently revised his estimates
upward from the second quarter of this year, based mainly on what
he thinks will be more deliveries by Cessna Aircraft than he expected
previously.
STILL, CALLAN REMAINS cautious. "The business jet market no
longer is deteriorating, but a robust recovery in demand may still
be quite a long way off." He added, "It is way too soon
to conclude another up-cycle has begun."
J.P. Morgan analyst Joseph B. Nadol, 3rd, is just as wary about
reading too much into the recent uptick in orders and buyer interest.
"Prices will continue to be under a lot of pressure,"
he noted. "Even if OEMs are able to step up production in the
next year or two, most of it won't be very profitable." He
considers business jet demand the least healthy of the overall aviation
industry--and thinks Honeywell's outlook may be overly optimistic.
Perhaps, but Honeywell's annual forecast historically has been
surprisingly accurate.
"Operators worldwide continue to tell us they recognize the
benefits of business aircraft and emphasize their strong interest
in new technology and new models" that offer improved value,
Honeywell Aerospace President and CEO Bob Johnson said. In fact,
prospective buyers expressed stronger interest in purchasing a new
business jet in the last three surveys (2001, 2002 and 2003) than
during any three-year period in the last decade, noted Charles Park,
director of market analysis for Honeywell Aerospace.
An exhaustive cross-check
of survey findings and subsequent analysis has enabled Honeywell
to achieve a high degree of accuracy in its business aircraft
outlook in the last nine years.
"There's a lot of of pent-up demand, although buyers participating
in the survey indicated a lot will depend on the broader economic
recovery," Park said. He believes the downward pressure on
orders and deliveries has stabilized and is likely to remain stable
through 2004, and a significant recovery will follow in 2005, barring
any shocks to the economy.
After a record peak in 2001, deliveries declined moderately in
2002 and then more sharply in 2003. Honeywell's survey data and
analysis, which is based on interviews with 1,000 corporate flight
departments and OEMs around the globe, point to a likely increase
in orders in 2004. "This suggests a year of rebuilding order
backlogs for some models, but it probably portends flat to only
slightly higher aircraft deliveries due to supply chain ramp-up
limitations," Johnson said.
Deliveries of turbofan aircraft in the first half of the year were
off 37.5%, at 223 versus the same six-month period in 2002. As of
late September, OEM backlogs stood at about 1,500 aircraft orders,
options and deposits, with about 40% tied to fractional ownership
programs. Nearly two-thirds of the total order backlog is for new
models--such as Raytheon Aircraft's Hawker Horizon, Gulfstream 150,
Cessna Aircraft's Citation Mustang and Dassault Aviation's Falcon
7X.
Honeywell is currently tracking more than 20 all-new or derivative
business jet programs in various stages of study or preliminary
design, many of which are expected to enter service during the next
10-15 years, he noted. This does not include the six or so "micro-jet"
programs publicly announced plus others under consideration.
THE COMBINATION OF FORECASTED sustained economic growth--some believe
a 4% expansion in real GDP in the second half of 2003 is entirely
achievable, as is 4% in 2004--and the introduction of new models
suggests 2005 will mark the beginning of the recovery, according
to Honeywell analysts. Further, they think the momentum could last
for several years, assuming there are no further shocks to the economy.
A major concern among analysts and other industry observers is
the sharp drop-off in the net growth of fractional ownership shares.
It has become a crucial component in the sale of new business aircraft.
But Honeywell Aerospace is upbeat about the future. The company
believes much of the potential fractional business market remains
undeveloped, and that continued growth is sustainable for years
to come. By 2012, Honeywell expects the fractional ownership fleet
to comprise 10% of the active business aircraft worldwide, up from
about 6% currently.
Market research by NetJets seems to support Honeywell's assessment.
"There's still a tremendous potential," Executive Vice
President Kevin Russell said. He told Aviation Week & Space
Technology that NetJets has identified more than 100,000 targets
for participation in fractional ownership, and three times that
many for participation in programs involving the one-time purchase
of block hours of flight time.
North America remains the largest business jet market, and operators
participating in the Honeywell survey indicated they expect to replace
or expand nearly 24% of their jet fleet with new aircraft during
the next five years. During this period, about 75% of all new aircraft
will be sold in North America, according to the survey, representing
a 4.3% increase compared to last year's survey.
Honeywell's survey suggests
that about 200 U.S. operators planning to purchase new business
jets in the next five years may accelerate their plans due to
bonus depreciation.
Survey findings further suggest:
Deliveries of long-range and ultralong-range aircraft are expected
to average around 100 per year for the period 2003-2013. For 2003
and 2004, however, the numbers will be significantly lower.
Deliveries of 770 aircraft in the "large" category
at rates averaging 70 per year, with fractional ownership programs
contributing significantly to market demand in this segment.
Steady growth for medium and medium-large aircraft, with deliveries
totaling 2,250 by 2013. These projections take into account the
introduction of several new models in the near-term, as well as
additional new models later in the forecast period.
Strong interest worldwide in light and light-medium aircraft.
Deliveries are expected to approach 2,100 jets by 2013. Deliveries
in the near-term will be in the range of about 130 per year.
Demand for very light aircraft is remaining solid, with deliveries
of around 80 jets per year projected for the next several years.
Delivery volume will start to ramp up in 2006, when the Cessna
Citation Mustang begins to enter service.
Emerging ultra-light aircraft--such as the Eclipse, Safire S-26,
DJet and others--are not included in Honeywell's business aviation
outlook.
