Business jet sales take off again in better climate

Financial Times 
By Michael Stothard in Paris
August 13, 2014


When the chief executives of Ford, Chrysler and General Motors flew to Washington, cap in hand, during the 2008 financial crisis to ask for a government bailout, they did so in three separate private jets.

Following the subsequent torrent of criticism, GM terminated the leases on seven Gulfstream jets. Citigroup, which received billions from the government, cancelled a Dassault Falcon 7X and put on the market two older Falcon 2000EXs.

This episode, combined with a rapid fall in corporate profits, business confidence and deal-making, helped bring about an unprecedented 30 percent fall in the private jet market by delivery value between 2008 and 2013.

But this year the global market is showing signs of a comeback, pointing to the creeping improvement in global business confidence and the impact of the ever-growing number of the ultra-rich on the luxury goods sector.

“We are now seeing a decent recovery for the market as a whole,” says Captain Stephen Taylor, head of Boeing’s business jet unit, which along with rival Airbus makes some of the biggest and most expensive jets in the world.

The market for deliveries, which has a year or two delay from when orders are placed, is expected to rise 3 percent this year to $23bn, and then 10 percent the following year, according to Teal Group, the US aerospace consultancy.

This bodes well for the main business jet groups, which include Gulfstream, Bombardier, Dassault Aviation, Cessna and Embraer. Hawker Beechcraft, which went bankrupt in 2012, last year left Chapter 11 protection.

The structure of the market has changed significantly, however. The smaller end of the market, where jets cost between $4m and $26m, saw a whopping 56 per cent drop in deliver values from 2008 to 2012, and still shows few signs of recovery.

It is the bigger jets, costing from $26m to $400m, that are leading the post-crisis revival, tapping into greater demand for long haul travel, but also the rapid return to profitability of the world’s largest corporates, particularly in the US.

“The large-cabin long-range aircraft has recovered much more quickly than the midsized or the light-jet market,” says Scott Neal, who runs sales and marketing globally for Gulfstream, the jet-maker owned by General Dynamics.

Demand for larger jets, while improving everywhere, was coming “especially from the larger corporations in the US, the Fortune 500-type companies,” he added.

Margins at S&P 500 companies are hovering near all-time highs of 9.8 percent. The cash of the largest companies’ balance sheets is also near a record at $1.233tn, according to S&P Dow Jones Indices.

The rapid rise in large jet sales also taps into the growing number of the global super rich. The number of billionaires increases nearly ever year, growing from 935 in 2003 to 1,682 in 2013, according to Knight Frank’s annual Wealth Report.

“Countries with a new class of rich people, for example in Russia, want the biggest, fastest, strongest planes,” says Fabio Gamba, head of the European Business Aviation Association. “A decade ago this market did not exist in the same way.”

Long term, there is hope Asia will drive growth. “In the last few years, we have seen Asia-Pacific, and in particular China, become a very strong and fast growing market for corporate jets,” says David Velupillai, the director of marketing for Airbus.

Some of the ultra-rich have even gone so far as to buy private jets from Airbus and Boeing, which are essentially large commercial jet lines made private, and are more typically used by governments.

Prince Alwaleed bin Talal, the Saudi billionaire investor, for example bought one of the largest passenger jets in the world, the superjumbo A380, which seats about 550 people, according to Airbus. An A380 costs $400m at list price.

He ended up selling it to another undisclosed buyer, according to the company. Mr bin Talal already has a Boeing 747.

Captain Taylor says that for the private 747s, the interior can often cost as much as the $300m plane itself, once you factor in missile protection, for example, and the sometimes eccentric customer demands.

“Some of the things that really impressed me were a full restaurant-sized pizza oven, for a gentleman who just had to have fresh pizza, and we have seen putting greens [as well]. You name it and it has been in our planes,” he says.

Source:  http://www.ft.com