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July 1, 2010

GENERAL AVIATION

Gradually Increasing Deliveries Will Offset Lower Use of Metals

Here’s a fact that’s surprising to the uninitiated: There are more general aviation business jets flying in the world (nearly 18,000) than there are commercial jet airliners (16,500). The peak year for the general aviation industry was 2008, when $24.8 billion of business jets, turboprops and propeller fixed-wing aircraft were delivered worldwide.

How quickly fortunes change. Facing both recession and an anti-business political climate in 2009, worldwide general aviation airplane deliveries plummeted 43% and values fell by 21%. We’ll see further deterioration in 2010, but it will be less severe than last year. Since deliveries often lag sales by 12 to 18 months, measurable growth really won’t materialize much before 2012 as sales slowly start to recover.

Corporate aircraft sales are closely tied to the economy. During the 2003-2008 period the industry enjoyed double-digit delivery growth each year due to growth in corporate profits, stock market values, GDP and personal portfolios. Since business jets are priced in U.S. dollars, the decreasing currency value helped to stimulate international sales by offering the equivalent of a 30% to 40% discount. Contributing to the sales frenzy was the deteriorating airline experience and security hassles. If folks could afford to fly privately, they’d find a way.

The five-year sales streak came to a screeching halt in late 2008 when every economic factor that drove the market made a 180-degree turn. This was compounded by media and politicians who portrayed the corporate jet as a symbol of excess, which caused companies to cancel orders and seek cover until the controversy passed.

Now the worst of the storm has passed. But it will still take years to recover toward 2008 delivery levels. Manufacturers must first wait for bloated pre-owned inventory to sell before customers come in numbers to buy new aircraft again. At one point during this recession, 18% of the world’s business jets were for sale, lowering prices by an average of 30% to 40%. That number has since decreased to around 15% but is still well above its historical level of around 12%.

Most of the value of general aviation deliveries are generated by business jets. With prices ranging from around $3 million for an entry-level jet to more than $50 million for some larger ones, it’s easy to see how they account for more delivery value than propeller aircraft, which typically cost “just” $250,000 or more. Put another way, one $50 million business jet has the same value as 200 little propeller airplanes. Piston aircraft aside, at the industry’s height in 2008 business jets accounted for 87% of the value when compared with turboprops and helicopters. As such, for the rest of this article we’ll focus on the business jet.

Metals Stake

The metals industry is likely watching the Boeing 787 development with intensity. The manufacturer took major technological and philosophical leaps (and risks) to move from a metal fuselage and wing to a composite design. According to Boeing, their newest aircraft will be 50% composites by weight with the balance going to aluminum (20%), titanium (15%), steel (10%) and “other” (5%). Clearly this trend has major ramifications for the metals industry moving forward.

Business jets differ from the airline segment both in the amount of metal needed for construction and the overall industry tolerance for risk. For starters, the weight of an empty Airbus A380, the airline industry’s largest model, is a plump 610,000 pounds. With only 20% of the A380 design being composite, that’s a lot of metal.

To compare, one of the largest business jets currently flying is the Gulfstream G650. Empty, it weighs in at around 54,000 pounds, just 9% that of the A380 airliner. The point here is that while the general aviation industry puts out a lot of valuable product each year, the weight in metal is far less than that of the airline industry.

That said, the move of business aviation toward composites is much more evolutionary than the airline manufacturers. It’s simply a more conservative industry, and in general, composites have only replaced metals in very limited areas, such as in aerodynamic fairings and flight control surfaces. Another factor is that large airliners, which use huge amounts of fuel and fly about 3,000 hours per year (or five times the utilization rate of business jets)—and are purchased in large fleets— can leverage vast economic gain from even small weight savings, whether this means composites or cutting back on in-flight magazines. Business jets can’t.

Some exceptions in history are notable. A couple of decades ago, Beechcraft’s futuristic Starship boasted an all-composite fuselage, two pusher turboprop engines, a main wing in back and a smaller “canard” wing up front. This was more technology than the market was ready for and was a complete marketing failure. It required the company to buy back all units they’d produced, as this cost less than supporting a fleet of just a few airplanes.

Today, the principal business jets in operation with significant composite content are the Hawker 4000 and Premier 1A—both of which have a composite fuselage. Other than those, the industry has been reluctant to leave well-understood metals behind. The end-users fret over the possibility of having to make field repairs to composite parts for which they have no working knowledge. Some buyers of the Premier 1A didn’t buy the airplane for any benefit from composites, but rather for bragging rights of having one of the few “plastic airplanes” out there. Business aviation is ego-driven, whereas the airline world is seat-cost driven.

Looking Ahead

Still, the industry has made at least one notable announcement away from metals, but not at the pace of the airline industry. Bombardier is busy developing its next jet, the Learjet 85, which is to have both a composite wing and fuselage. Other manufacturers will probably follow suit but in a very slow and measured manner. They’d prefer to see one of their competitors suffer on the learning curve first (i.e., the canceled Starship and the decade-late Hawker 4000) and must first be convinced that the switch away from metals truly affords production and operational cost savings.

Brian Foley Associates sees future business jet deliveries rising at a steady compound annual growth rate of 2.7% per year between now and 2019. In all, a respectable 8,900 business jets worth $170 billion will be delivered through the period. Interestingly, some 48% of these will go to non- North American markets, compared to a historical 30%—a major shift.

Our same numbers would yield a minus growth -2.6% if measured against 2008, but that’s not really useful information. We won’t see such high delivery rates again this decade because of tougher financing for aircraft purchase and especially the maturing fractional aircraft industry, which provides a replacement rather than a growth market.

Some other forecasters have offered rosier predictions that rise on the graph like hockey sticks, without a slowdown, but that tends to ignore the variable nature of this market, which historically has run in five- to six-year cycles.

The general aviation industry is not a bad little niche for metal providers to be involved in for at least the next 10 years. During this time, as manufactures replace legacy aircraft with clean-sheet designs, it’s likely that composites will be given much thought—but those aircraft will take years to develop, test, certify and deliver. Luckily, the industry isn’t migrating to composites nearly as fast as the airline manufacturers (yet) and will produce its mostly-metal models at a modest 2.7% annual growth rate. Metals will never entirely disappear from business aircraft, but it’s envisioned that clean-sheet designs will gradually incorporate more and more composites, over time.


Brian Foley is a recognized thought leader and management advisor to the general aviation industry. The primary practice areas of his Brian Foley Associates include industry analysis and forecasting, market research, strategic planning, new product evaluation and transaction support. Foley was, for more than 20 years, an executive at a major business jet manufacturer. For more information visit www.BRiFO.com or follow @BrianFoleyAssoc on Twitter.