Members of the 1 percent may be getting used to flying commercial. The business jet industry is in the midst of a “lost decade” that began with the 2008 financial crisis and shows no imminent signs of meaningful recovery, according to a report today from analysts at Citigroup (C).
As industry leaders prepare to gather next week in Las Vegas for the annual National Business Aviation Association convention, they face dour predictions of a fourth-consecutive year with a disappointing outlook “as the broad-based recovery pushes out yet another year,” wrote Jason Gursky and Stephen Trent. Business jets are nursing “a wicked hangover” from the boom in orders and deliveries that occurred from 2000 to 2008, when demand for small- and medium-sized planes grew 109 percent, compared to the 1990s. The market also took a strong hit from Occupy Wall Street and the widespread backlash to oversized bonuses received by finance and corporate executives.
The deepest problem stems from too many planes: “Our analysis suggests that unit demand appears flattish through 2019 based on over-deliveries in the 2000s,” wrote Gursky and Trent.
The glut of used jets is slowly beginning to resolve, and companies shocked into penury by the recession have begun to ease back into the market, says NBAA President Ed Bolen. “An excess of capacity has led to reduced prices and a need for time to help with the absorption of that inventory,” he says. “We’re beginning to see the size of the inventory decreasing and prices begin to stabilize.”
The brightest part of the market is in large, ultra-long-haul jets such as Gulfstream’s G650, which can fly eight people 7,000 nautical miles (that’s nonstop from New York to Dubai), and Bombardier’s (BBD/B:CN)Challenger 850. (Big spenders, forget about a new G650 for now—it’s sold out until 2017.) The typical buyer for such bling-ish aircraft is your average Fortune 500 behemoth or entertainment mogul—Jay Z reportedly got a Challenger last year for Father’s Day from his wife.
“While these types of buyers have certainly been hurt by the economic downturn and its aftermath, their wealth and position mean that they are insulated from general economic and financial conditions to a much greater degree than are the types of customers that typically buy light and medium business jets,” market research firm Forecast International wrote in a December 2010 report on the industry, which it described as “a tale of two markets” (PDF). “Buyers of smaller jets tend to be less wealthy individuals, small or mid-size companies, and fleet operators such as fractional providers, air taxi services, and charter outfits.”
That’s the main reason Citigroup and others have been more bullish on stocks of the larger jet makers such as Gulfstream parent General Dynamics (GD) and Bombardier, which builds the Challenger and Learjet models. “I don’t think it’s been a lost decade; it’s been challenging,” Bolen says. “But sometimes pressure can create great things.”