Professional Pilot, October 2018

64 68 66 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 Macro indicators Excellent Broader economic conditions are now as good as they get for business aviation market health And nobody can complain that President Trump doesnt set a positive political tone for business aviation usage Yet something seems to have gone wrong at least for the past few years Business jet market booms and busts are closely associated with corporate profits As these profits vastly increased in 2 discrete cycles in the mid 1990s and mid 2000s business jet sales vastly increased in 2 discrete cycles too Then when profits declined a business jet bust cycle followed usually within 2 years This narrative has worked very well until the past four years The jet markets upturn purely in value not units delivered in 2013 2014 was quite anemic compared with the strong increase in corporate profits seen in 2010 2014 And the relatively modest hiatus in corporate profits growth seen in 2015 2016 wouldnt account for the business jet markets decline in 2016 Worst of all as clearly indicated by our corporate profits chart last year and this one have seen a complete disconnect between the market and profits We are now in exceptionally healthy macro territory Thanks to the Trump administrations tax cuts taxes paid by US companies fell 33 year over year in the 2nd quarter They saved over 100 billion at an annual rate Partly as a result total US after tax profits rose 161 year overyear Unlike recent growth spurts that were propelled by a handful of technology or financial firms this profits rally is quite broad and accompanied by generally optimistic comments from executives in a wide array of sectors This business profits strength has been accompanied by similar performance in equities markets and the broader economy The US economy grew at a 42 annual rate in the 2nd quarter above expectations of 41 and is on course for full year growth of 3 the 2nd quarter was boosted by international orders for US goods before tariffs kick in This is the economys best performance in 4 years 10 PROFESSIONAL PILOT October 2018 Plenty of money but not for bizav US GDP growth in the 2nd quarter was particularly strong in the business investment segment which includes investment in new business aircraft According to the Federal Reserve Bank of St Louis investment spending as a share of total US GDP rose from a low of 95 in July 2009 to a post recession high of 141 in January 2015 and now stands at a very respectable 133 as of April the latest number as of this writing US private nonresidential investment in the second quarter of 2017 hit a new record of 243 trillion But for some reason so far relatively little of this money is being spent on business aircraft Oil prices are relatively high again too which matters due to the close correlation between large cabin business jets and fuel prices Oil rich economies such as most Arab Gulf countries and Russia are key markets for business jets as are oil and gas exploration extraction companies In fact energy company profits this quarter showed the strongest year over year growth for any US corporate segment Unfortunately these excellent macroeconomic conditions may have an expiration date There is an emerging consensus among economists that dark clouds are looming on the horizon There are concerns about tariffs and trade barriers global debt load problems and emerging market financial conditions particularly in Turkey Most of all there is general agreement that interest rates are headed higher too which would make capital equipment finance more expensive and exacerbate that growing world debt problem too Worsening political instability due to ongoing Trump administration dysfunctions and a possible Democratic party House victory in the mid terms in November wont help either In other words if the current great conditions dont start translating into stronger business jet demand now the situation next year might be conducive to continued demand flatness or perhaps even a modest market dip 2500 2000 1500 1000 500 0 Corporate profits in Billions Deliveries in 2018 Billions Business aircraft deliveries and corporate profits Value of deliveries Corporate profits 30 25 20 15 10 5 0