By Graham Warwick, William Garvey, Joseph C. Anselmo and Robert Wall
Mar 1, 2009
Three men who flew to Washington and one who took the train may have changed the face of business aviation. Together, they have fueled a negative public perception of business jets at a time when the industry faces its deepest recession.
The political fallout from the public flaying of the top three U.S. automakers’ CEOs for coming to the Capitol in corporate jets to seek a government bailout haunts business aviation as it struggles with an unprecedented downturn. And it keeps getting worse.
On Feb. 24, President Barack Obama, who arrived by Amtrak train for his January inauguration, took a rhetorical swipe at business aviation when he pledged tight restrictions on banks that receive federal bailout funds. “CEOs won’t be able to use taxpayer money to pad their paychecks or buy fancy drapes or disappear on private jets,” he told a joint session of Congress, drawing a standing ovation.
It was the second time in a month that the president criticized the use of corporate jets by institutions accepting taxpayer money. In late January, through his spokesman, Obama attacked Citigroup’s plans to buy a Dassault Falcon 7X. Congressional leaders weighed in on the “unconscionable” purchase, and the bank, which has received a $45 billion bailout and may need more, quickly canceled the order.
“We have an unprecedented situation where there is a stigma attached to flying a corporate jet,” says Credit Suisse aerospace analyst Robert Spingarn. “That didn’t exist in the last downturn. People are being much more careful about how they fly and how often.” Industry officials worry that the taint will hang over the sector for some time and, even when they recover, businesses will be afraid to reenter the corporate aircraft market.
Flight activity, an important indicator of the industry’s health, is “abysmal,” says Spingarn. His analysis of FAA data shows business aircraft flights were down 28.5% in January from a year earlier. Consultancy Aviation Research Group/U.S. says charter and fractional-ownership activity last month was down 22% from December and almost 50% from a year earlier.
Taking an optimistic view, fuel supplier Avfuel “is seeing 80% of flying is still happening,” says president and CEO Craig Sincock. But he adds, “Whether you are speaking to fuel suppliers, FBOs, maintenance providers or flight departments, it’s no secret that the aviation industry is off in the first few months of 2009 anywhere from the high teens to 20%. The big question is will it go off even further, and for how long.”
As recently as October, Honeywell’s annual forecast, a key barometer of the industry’s health, predicted deliveries would reach a record $25 billion in 2009 before heading into a mild downturn in 2010-11. What was not foreseen was the speed with which the U.S. economic downturn would spread round the globe. Honeywell is updating its forecast for release in the coming months.
While manufacturers are cutting production and payrolls as demand plummets, aviation service providers are struggling. Charter and aircraft management company Executive Fliteways was among the first hit when the banking crisis took grip in November. A major aircraft management client failed, forcing layoffs. As the downturn continued, there were more furloughs. Now, CEO John Grillo says, his business has “stabilized, bouncing along the bottom.”
Another indicator is the number of used business jets for sale. Those were up 69% in January from a year earlier, while asking prices for most models have fallen 20-25% from their recent highs, according to UBS Investment Research. Analyst David Strauss says 17% of the in-service fleet is now for sale, exceeding the previous peak, in late 2002.
The frozen credit markets are making it difficult for some customers to secure financing to buy an aircraft, particularly a used model. In response, the National Aircraft Resale Assn. (NARA) hosted “an unprecedented meeting” in Dallas last week, calling the challenges ahead for the industry, including market liquidity, “unparalleled in scope and depth, unlike previous recessions.” Attendees said brokers with aircraft inventories are in serious trouble, with buyers trying to get out of their contracts.
But there are signs some banks are lending and some sales are taking place. A third of respondents to a recent UBS survey cited “limited financing,” up from virtually none a few months. Banks at the NARA meeting said they are lending, but borrowers’ creditworthiness is being closely scrutinized and new customers must put in more money, up to 20% down.
Cessna, meanwhile, has taken a cue from the car companies and begun to guarantee the repurchase of used Citations from its inventory. Cessna’s “No Worries” program offers buyers an option of repurchase or a guaranteed trade-in price.
Still, the glut of used aircraft is adding to manufacturers’ woes. Cessna has cut Citation production to 375 in 2009, down from an originally planned 525 and a decrease of 20% from the record 467 deliveries in 2008. The company has announced 4,600 layoffs. Bombardier is reducing Learjet and Challenger production 10% and cutting 1,360 jobs. Hawker Beechcraft is laying off 2,300 employees, about 25% of its workforce.
Dassault has reversed plans to ramp up Falcon production to 12 a month and will limit monthly output to eight while looking to avoid layoffs. The changes will not have a material effect on deliveries until 2011, and Falcon shipments will still increase this year to more than 100 aircraft, up from 72 in 2008.
Gulfstream is also planning to increase large-cabin jet production, to 94 from 88 last year, but will cut mid-size deliveries by more than half, to just 30 aircraft. Israel Aerospace Industries, which builds the mid-size Gulfstreams, is cutting part-time workers and subcontractors but hoping to avoid layoffs by shifting employees to other projects.
The cuts are deep because manufacturers were in the process of ramping up production to work off record backlogs. Those backlogs are now thinning as customers defer or cancel orders because of financing and other factors, and manufacturers try to bring forward buyers to fill the near-term gaps.
“Folks that couldn’t get an aircraft for 21/2 years are being called and asked if they want to get it this year,” Amin Khoury, chairman and CEO of interiors supplier B/E Aerospace, told a Cowen and Co. conference in New York. He predicts delivery rates will be down 50% by the end of the year. Khoury says, “The business jet market is going to unravel in 2009, and then it’s going to have another steep decline.”
Against this background, the industry is trying to head off regulations that would only add to its hurt. This includes the Transportation Security Administration’s (TSA) Large Aircraft Security Plan, which would impose operational restrictions on all private aircraft weighing 12,500 lb. or more.
At least one business-jet operator plans to challenge the TSA’s legal authority to impose the rules. Bruce Rose, head of Connecticut-based Carrington Capital, argues Congress directed the TSA to conduct a security review of general aviation security, but did not authorize it to take any action against private operators. While trade groups endorse Rose’s goal, they are concerned a direct challenge might simply anger TSA officials and provoke a harsh reaction.
There is some glimmer of good news. Despite well-publicized criticism by many members, Congress has not passed legislation broadly aimed at business aviation. It did prohibit the automakers from using some business aircraft as a condition of accessing federal funds, but no such restriction was included in the larger stimulus bill. In fact, that law contains a provision for accelerated deprecation to spur the acquisition of business aircraft.
But the most troubling issue for business aviation is the damage to its image wrought by the automaker CEOs and Obama’s rhetoric.
ry’s response ranges from advocacy to outrage. James Coyne, the outspoken president of the National Air Transportation Assn., faults “politicians, populists and demagogues” for their continuing criticism of business aviation use by private industry. Says Coyne: “It’s almost like someone asserting we’re the worst type of people, like child molesters. It’s bizarre.”
Aircraft manufacturers and industry associations have launched advocacy efforts, including bringing back the “No Plane, No Gain” banner of an earlier campaign. But even as it strives to restore its image, there is no recovery in sight for the industry. “We’re in this quandary of where do we hit bottom,” says James Hagerty, a Gufstream specialist at brokerage Avpro. “It’s gone down so far, so fast.”