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Business Jets: The alternative aviation universe December 2013 Download PDF

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There is an alternative to the middle seat on a crammed flight, to the frustrating queues in teaming airports. It is the private or business jet, a sector which, in terms of aircraft numbers, is almost as large as the commercial jet fleet.

Remarkably the world fleet of private and business jets totals 18,000, ranging from Very Light Jets to converted 747s. For comparison the commercial jet fleet is around 21,000 units.

To enter this parallel aviation universe it helps to be seriously rich. There are now about 1,400 dollar billionaires worldwide, with most of the new billionaires coming from the BRIC countries or Asia, where business jets are particularly prized. Underneath the ultra-rich are tiers of high net worth individuals (HNWIs) many of whom have particular requirements for private air travel. For example, London has seen an influx of HNWIs in recent years, which has resulted in soaring house prices in salubrious areas and, despite or perhaps because of the complex of commercial air services from the capital, a surge in demand for private jets.

The private jet experience is now also just about possible for the quite well-off. For instance, Flexjet has introduced a “Passport to the World” tour: for a total of $1.5 million a party of eight will be flown in a Challenger 605 around the world in 14 days, stopping at some very nice hotels.

Whereas HNWI usage of private jets represents the glamorous end of the market, the core business jet market is in the corporate and government sectors. Governments from those in impoverished African nations to the most developed nations like to have their own private jets. For corporations, business jets can be most cost-effective of transporting executives (and indeed other employees) between geographically diverse locations.

This is particularly the case in the US which accounts for about 60% of global demand for business jets. It is interesting that one of the largest fleets of business jets in the US belongs to Wall-Mart, the huge cut-price retailer. Corporations in the energy, agribusiness, automotive and finance sectors are also major users of business jets.

It was those two later sectors which threatened to give business jets a bad name in recent years. It did not go down well with US politicians when the CEOs of Chrysler, Ford and General Motors flew into Washington in their private jets to plead for government aid. Citicorp, having received $20bn of bail-out funds, was firmly told to cancel its private jet flying.

The crisis precipitated by Lehmans in 2008 bankruptcy hit the business jet sector hard. After record growth (in value of deliveries) during 2003-2008, the market fell by 29% between 2008 and 2012, according to the Teal Group. However, the top half of the market, larger jets with values typically of $25million plus, actually grew marginally during the recession while the bottom half slumped by 56%. One of the reasons for this is that smaller jet users tend to be concentrated in North America while in the more dynamic economies, notably BRIC economies, customers have a preference for higher-end products. And, even at the low point of the 2010-12 recession, the business jet industry was twice as large as 15 years ago.

For a while it looked as if the recession might claim at least one of the major private jet operators (see box for brief profiles). In particular, Warren Buffett must have wondered if his purchase of NetJets was going to be as painful as his ill-fated investment in USAir back in the 80s. With a heavy exposure to American bankers and fund managers, NetJets experienced a 77% collapse in aircarft seat sales post-Lehmans, and in 2009 posted a $711m loss (including heavy asset write-downs).

However, NetJets has proved to be a resilient business, returning to profit throughout 2010-12 (about $650m in total). Bookings are still below the 2007 peak but the fleet has been reduced by 20%, with focus on two standardised types — the Global Express 6000 (13 passengers) and the Phenom (7 passengers) — and 40% of sales are now outside the US. Buffett now sees his private jet business as very well positioned to benefit from the upturn in developed economies, the emergence of new markets and a recovery in business confidence. He also notes that barriers to entry are much higher in the business jet sector than in commercial jet sector.

In general, confidence in business jet prospects is growing. According to both the Teal Group and Honeywell, the market has bottomed out, used jet availability has fallen and economic indicators are promising. The correlation between the IMF’s outlook for global GDP and prospective demand for Business Jets, extracted from the latest Teal forecast, is shown on page 15.

In more detail, Teal is predicting:

  • Forecast production of 13,377 jets worth $320bn over next ten years
  • Of these 66% will be high-end models (50% pre-2009)
  • Bombardier and Gulfstream to be market leaders, followed by Dassault and Cessna, with Embraer as the fast growing new entrant
  • The anti-business jet cultural environment in the US is rapidly disappearing

Honeywell, in its Global Business Aviation Forecast (October 2013): notes the following:

  • Up to 9,250 deliveries of new business jets valued at over $250 billion expected through 2023
  • Operators plan to replace 28% of their fleets with new jets in the next five years
  • BRIC country purchase plans are increasingly important
  • Large cabin jets account for more than 55% of new purchase plans and more than 80% of all expenditure on new business jets

Over 2,000 business jets are currently on firm order, compared to a commercial jet total backlog of about 9,000. In-demand types include: Bombardier’s Global Express 5000/6000 and Challenger 605, Gulfstream’s G550/650, Dassault’s Falcon 7X, Embraer’s Legacy and Phenom, Airbus’ ACJ and Boeing’ BBJ. Unlike in the commercial sector, significant discounts are generally not offered; so, for example, a Global Express 6000 (carrying 13 passengers) will retail at around $60m, compared to, say, $45m for a 150-seat A320 NEO.

Normally, business jets have to be purchased using cash or finance lease products; less than 1% of transactions are on operating lease structures, compared to 40% in the commercial jet sector — possibly a major business opportunity.

Business Jet Delivery Cycle vs Economic Cycle
Business Jet Delivery Cycle vs Economic Cycle Produced by GNUPLOT 4.6 patchlevel 1 100 105 110 115 120 125 130 135 2003 2005 2007 2009 2011 2013F 2015F 2017F 10 15 20 25 30 35 40 Index 2003=100 US$bn gnuplot_plot_1 gnuplot_plot_2 Advanced Economies GDP Annual Delivery Value
Business Jet Manufacturer Market Share
by deliveries value
Business Jet Manufacturer Market Share
by deliveries value
Produced by GNUPLOT 4.6 patchlevel 1 0 5 10 15 20 25 30 35 Bombardier Hawker Dassault Cessna Gulfstream Embraer Other gnuplot_plot_1 gnuplot_plot_2 2003 - 12 2013 - 22F

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