Aviation Week & Space Technology 01/17/2005,
Business Aviation Ready for Recovery
Weathering downturn, business aviation looks ahead with guarded optimism
Slow but steady recovery is the byword for the business jet manufacturing industry, with many executives declaring that the 2002-03 downturn is over.
And while those tough times may well be over, the current state of the business jet market is nevertheless best described as tenuous. The mood at many manufacturers seems to be one of cautious optimism, as seen at the National Business Aviation Assn. (NBAA) convention and exhibition last fall.
Due to the recent spate of well-publicized corporate scandals, business practices have come under greater scrutiny by both company shareholders and the media. This could result in a hesitation on the part of some companies to acquire aircraft for the first time, or to add to their fleets, through purchase or a fractional share, no matter how justifiable the purchase may be. Also, at a number of corporations, policies regarding use of the firm's business aircraft are receiving greater attention.
Other factors that can have a negative impact on the business jet market include environmental restrictions and limitations on airport access. Local noise regulations and airport capacity constraints weigh heavily on business jet operators.
Overall, though, the business jet industry seems to have survived the downturn in reasonably good shape. Order backlogs remain healthy, due partly to a buildup of orders for several models that are still in development or have recently entered service. In addition, a number of manufacturers have been reporting increased sales levels since late 2003. Barring a serious disruption, order intake should further accelerate in 2005.
The years 2002 and 2003 were difficult ones for business jet manufacturers, especially following a nine-year expansion. Production declined by double-digit percentages both years. Several customers chose to defer or cancel planned deliveries. And the results for 2003 were exacerbated by temporary production shutdowns at some key manufacturers.
The next few years will see initial deliveries of a number of new business jets and derivatives. These include the Bombardier Learjet 40 XR; Cessna Mustang, CJ1+ and CJ2+; Dassault Falcon 7X; Eclipse 500; and Gulfstream G150, G350 and G450. Deliveries recently began of several other new jets and new derivatives, such as the Bombardier Challenger 300, Cessna Citation Sovereign and Gulfstream G550.
Meanwhile, airliner manufacturers Airbus and Boeing have moved into the business jet arena by marketing corporate-configured versions of narrow-body transports. In a joint venture with General Electric, Boeing builds the 737-based Boeing Business Jet (BBJ). Airbus has developed the Airbus Corporate Jetliner (ACJ) version of its A319. Both directly compete with the Bombardier Global Express and Gulfstream G550.
One of the factors driving the business jet market is growing frustration with travel on commercial airlines. Polls and surveys, as well as considerable anecdotal evidence, indicate that many corporate executives resent time spent waiting for commercial flights at airports, seeing it as lost productivity.
The inconvenience and frequent delays of airline travel increasingly may cause companies to turn to business aircraft to help solve at least part of their air transportation needs. Many companies recognize that business aircraft are tools to enhance productivity. Through point-to-point, on-demand, private transportation, the use of business aircraft can result in considerable time savings. The need for connecting flights disappears, while the time spent at airports is minimized as companies can control their employees' travel schedules. Employees also can use travel time more effectively, as business jets provide quieter working environments than do commercial flights. Corporations also use business jets due to personnel safety concerns and to project themselves positively.
These companies could decide to own such aircraft outright, own them jointly with others through a fractional ownership program, turn to an air charter service or use a combination of these strategies. The number of customers for fractional programs may expand, as they may prove more attractive to first-time business aircraft users than outright purchases.
Fractional ownership is an important element in the business jet market; its growth during the second half of the 1990s helped drive a business jet market boom. Even during the recent downturn, the fractionals continued to grow, albeit at a slower rate.
Fractional programs account for 12-13% of annual business jet deliveries. This percentage can be expected to increase during the next several years.
Nevertheless, fractionals are not as wildly successful as some people think. Many programs are struggling to achieve profitability. Several are engaging in air charter work as a supplement. Growth in the total number of shareowners has slowed in the past couple of years.
Meanwhile, club card or jet card programs, which are variations of the fractional formula, are increasingly popular. In these programs, the card program operator buys shares from a fractional provider and then resells the time in smaller increments. In general, the card programs provide the benefits of fractional ownership, but without the need for capital investment in a full share. Essentially, the programs are simply a means to market block charters.
One of the more dynamic sectors in the business aircraft market of the future may be Very Light Jets (VLJs). They typically are small jets seating 2-6 people, including crew, with list prices ranging from less than $1 million up to roughly $3 million. They include such new models as the Adam A700, Cessna Mustang, Diamond Aircraft D-JET, Eclipse 500 and IAI/Avocet ProJet.
The past year or so has seen much enthusiasm, as well as considerable skepticism, about VLJs and their potential. VLJs could find favor with both corporate flight departments and individual owner/operators. Charter outfits and perhaps fractional programs might buy these aircraft in quantity.
In the longer term, VLJs could be used quite effectively by on-demand air taxi or limousine services. New taxi services could emerge using large numbers of these jets to fly between small airports, transporting passengers possibly at costs comparable to coach airline fares. If this concept becomes successful, it could pound an additional nail into the coffin of the hub-and-spoke systems of many major airlines.
The emergence of such air taxi services is probably necessary if VLJ production is to approach the rather optimistic projections of many manufacturers. Regulatory obstacles and airport access issues are among the problems that must be surmounted if the full potential of the business jet-based air taxi market is to be realized.
While the potential of VLJs is being explored, general aviation is undergoing significant development. One of the major recent success stories in this sector has been Duluth, Minn.-based Cirrus. In the past couple of years, piston output by Cirrus has been outpacing that of New Piper and Raytheon Aircraft. Cessna may soon be looking over its shoulder. Diamond Aircraft also has been having considerable success in the piston market. Besides its new A700 VLJ, Adam Aircraft has introduced a piston twin called the A500 that has significant market potential.
Single-engine turboprops may also be in demand increasingly. However, one factor that has significant bearing on the single-engine turboprop market is regulatory in nature. The European Joint Aviation Authorities (JAA) has been studying for the past eight years the issue of whether to permit commercial operations by single-engine aircraft in IFR conditions. A number of countries already allow such operations, including Australia, Canada and the U.S., so commercial carriers there can purchase and operate single-engine aircraft. As of the fall of 2004, the JAA was still a holdout.
JAA member Switzerland has adopted single-engine IFR (SEIFR) approval unilaterally. Several other JAA member nations allow cargo-only SEIFR operations.
Meanwhile, general aviation turboprops such as the Raytheon King Air--and general aviation pistons to some degree as well--could face increasing competition from the new VLJs.
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