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B i z a V F u t u r e | Column

Too Soon To Tell?

Business Aviation’s Current State of Affairs By Morgan Gray

2009 was an extraordinary year for business aviation. Let me be quick to point out that it was probably not extraordinary in the sense that any would have hoped for. As an industry with a reputation of being innovative and resilient, business aviation found itself back on its heels in the first quarter of 2009. Companies around the United States divested from their airplanes and dismembered their flight departments at astonishing rates, manufacturers’ “bulletproof” order books evaporated, and used business jet inventories rose to their highest level on record. Most economists had agreed that any downturn would be cushioned by a strong international market and big backlogs, but the global financial crisis and scrutiny on the use of business aviation hit the industry hard. THE BUILD UP It is a widely held belief that corporate profits are the indicator with the closest correlation to business jet demand. At the beginning of the decade, deliveries peaked in 2001 after U.S. corporate profits reached a high in 1999. In this particular cycle, business jet deliveries bottomed out in 2003 as the economic slowdown and the aftershocks of September 11th were felt. The downturn lasted for two years before positive growth returned in 2004. The U.S. economy regained 106

its momentum and corporate profits peaked again in 2006. The demand for business jets rose along with these indicators and business jet deliveries hit an alltime high two years later in 2008, when more than 1,300 business jets were delivered to customers around the world. The international market also started to gain its greatest momentum during the last cycle and untapped markets in Europe, Russia and the Middle East started to generate substantial demand.

U.S. economy going to sputter? With more than half of business jets sales coming from customers outside the United States, many hoped that this geographic diversity would insulate the industry and protect the coveted backlogs. However, in the several months that followed, the U.S. financial crisis spilled quickly, broadly, and deeply into the real economy worldwide. Investors panicked and access to capital became severely impaired. The industry scrambled to right-size its businesses in an attempt to maximize stability for the next few years.

Flight activity was up 3.2% in November 2009 over October 2009 and when compared year-over-year, activity was up 22.7% over November 2008.

THE FALL Spurred by the subprime mortgage crisis and its effect on credit availability in early 2008, the U.S. was the first to experience trouble. Even though business jet shipments in the second and third quarters remained strong, the industry took notice of the drop in flight activity. As we entered the third quarter of the calendar year, the big question emerged. How much and how long was the

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To make matters even worse, as public anger over the deteriorating market environment and job losses intensified, business aviation and the “fat cats” that flew on these jets became collateral damage as policymakers worked to address public outcry. I think we are all familiar of the debacle during a Congressional hearing in which the CEO’s of Ford, GM, and Chrysler came under heavy criticism for flying their business jets to Washington. Not long after, Citigroup, one of the many beneficiaries of

bailout funds was pressured to cancel its impending delivery of a business jet. The media fiasco that followed these events and others had a brutal affect on the industry. The global financial crisis, a major credit crunch and business aviation’s damaged image, led to one of, if not the toughest year, the business aviation industry has ever experienced. Cancellations of new jets outpaced orders at an astounding level. Production cuts and massive layoffs ensued. The used market became saturated virtually overnight as flight departments were shuttered and the number of business jets on the market reached record levels. RECOVERY? History has shown that demand for new business jets lag economic growth and corporate profits. There is no clear consensus yet on when and how the global economy will return to growth and many expect that any recovery in the business aviation industry is going to take time. One likely indicator will be economic growth in key international markets and the expanding base of wealthy individuals in these regions. Merrill Lynch and Cap Gemini estimated in their 2009 World Wealth Report that the population of High Net Worth Individuals (HNWI) (i.e., people with financial assets of $1 million or more) will start growing again as the global economy recovers. By

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