Professional Pilot, October 2017

for more hard times or at least a disappointing level of very slow growth Of all of the top half market drivers oil prices are overwhelmingly important This is because the price of oil stuck at 45 to 50 per barrel as of this writing is closely linked to high end market demand Sales of large cabin aircraft are heavily reliant on the economic health of oil rich countries Russia Saudi Arabia United Arab Emirates Qatar Kuwait etc and on the corporate prosperity of resource extraction companies particularly in the oil and gas industry Thus as Chart 3 indicates there is a clear connection at least between 2003 and today between oil prices and top half jet demand Oil prices started falling in 2012 and 2013 but thanks to the usual delay between orders and deliveries and normal backlog considerations large cabin jet deliveries kept going Relative to their peak oil prices have fallen by over 50 Top half jet deliveries by contrast have fallen by 35 This oil price trend implies that the top end market has few hopes of making a sustainable recovery in the next few years barring a massive uptick in demand from China or the US 2 countries where business jet demand is relatively but not completely unlinked to oil wealth This does not mean that the top half is overdue for further pain The link between large jet demand and oil prices is far from precise and output at the 3 big large cabin OEMs seems to be stabilizing for now at least What is more concerning is that oil prices appear to be stuck at around their current level Very few forecasts call for them to go much higher than 60 per barrel over the next few years and more than a few forecasts call for further market softness some even to the 30 to 35 per barrel range A bifurcated market These 3 drivers are impacting a market where the high end is now effectively the core of the business jet industry in terms of value After the start of the Great Recession in 2007 2008 the bottom half of the business jet market jets priced at 3 to 25 million fell by 57 while the top half jets priced at 26 million and above just kept growing This top half grew through 2014 a remarkable 11 year run In fact this top half actually managed a 6 compound annual growth rate between 16 PROFESSIONAL PILOT October 2017 2010 2014 while deliveries of bottom half jets fell by a devastating 57 Historically top half market demand had been about 50 of industry output by value hence the use of the terms top half and bottom half even though thats no longer the case In fact the top half represented exactly 50 of deliveries in both 2006 and 2007 The markets profound bifurcation after 2008 changed all that By 2013 the top half was a remarkable 77 of industry output Large jets built by just 3 players Bombardier Dassault and Gulfstream effectively drove almost all of the business jet industry Looking further we see that Cessna Embraer Bombardiers Learjet unit and Gulfstreams G150 and G280 represented a mere 23 of output But over the past 2 years soft emerging markets low commodity prices and Chinas anti corruption campaign have all pressured the high end market downward 120 80 with deliveries falling 27 by value between 2014 and 2016 Predictably record high end business jet output rates were sustained well after demand was showing clear signs of softening This guaranteed a steeper drop and a worse market oversupply situation New and used large cabin jet prices suffered in tandem helping to pressure down prices of aircraft in all lower price segments Slumping deliveries remain probable The supply side of the top half jet market is equally problematic Next year Bombardier will start delivering large numbers of its Global 7000 a belated and even more expensive nearly 80 million response to Gulfstreams ultra high end G650ER Since Gulfstream shows no signs of backing away from its 45 per year G650 production rate the ultra high end segment will grow as at least 30 to 40 Global 7000s are delivered annually If the top half market top line doesnt grow and the market sees this surge in ultra high end deliveries the net result will inevitably be more pain for all the other aircraft manufacturers This will show up in the form of slumping deliveries for new aircraft and in continued declines in pricing for both new and used aircraft Gulfstreams G450 has already been a casualty of this trend Its easy to see the G550 following it particularly as the all new G500 600 aircraft come on line Bombardiers Global 5000 6000 could face heavy pressure too along with Dassaults Falcon 7X and 8X trijets Clearly the business jet industry faces considerable uncertainty in the next few years The broader markets fortunes should be lifted by relatively positive macroeconomic trends But so much of this industrys fortunes are clearly connected with oil prices And there the news is unlikely to be positive for some time Richard Aboulafi a is VP Analysis at Teal Group Corp an aviation and defense market intelligence and consulting company He has tracked the business aircraft market for over 25 years Chart 3 Oil prices and top half jet deliveries 1989 2007 2014 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2003 2004 2005 2006 2009 1990 1991 2008 2016 2015 2002 2012 2010 2011 2013 100 60 40 20 0 Deliveries in 2017 billions Oil price in 2016 barrel Top half deliveries Oil prices 18 16 14 12 10 8 6 4 2 0