has authorized a record $35.8 billion in financing, a 9% increase over 2011’s first three quarters. Looking at year-end 2011 numbers, about 40% of this goes to aircraſt financing, mostly Boeing jetliners. Added to this is the global rise of government-owned banks and government-owned airlines. Altogether, the overwhelming bulk of jetliner transactions today involve one or more governments acting in a financial role (either as buyer or financier). Tis combination of easy third-party finance and govern-
ment money has created a recipe for market distortion. And of course the recent jetliner boom is out of line with passenger traffic. 2011 saw respectable growth rates, with revenue pas- senger kilometers (RPKs) increased 6.9% over 2010. But in the past few months, traffic growth has slowed to around 5%. As more cash is coming into the jetliner finance business,
and as industry capacity continues to increase at a considerably faster pace than airline traffic growth, returns on this cash are falling, even if they are still healthier than most other investment opportunities. Tis would explain the notable return of Japanese banks to the jetliner finance arena. Japanese banks have long been in the position of being cash-rich, yet with a very limited set of investment options that earn any kind of returns. Even with shrinking returns, jetliner finance is still more attractive to Japanese banks than most of their other available options.
financing terms. Te best way to prove this assertion is to look at the market as two completely different segments. Historically, the business jet market could be divided in half
by value. Te top half consists of jets costing $25 million and more (in today’s money). Te bottom half consists of jets costing less than $25 million. Also historically, these two halves usually rose and fell in tandem. In fact, in the 2003-2008 market boom bottom-half jets actually outperformed the market for top-half ones, with deliveries growing at a 20.2% CAGR (top-half jets grew by a 15.7% CAGR). Still, between the mid-1980s and 2008, in aggregate, both halves stayed roughly equal in size. Yet this market downturn has seen a serious split between
these two segments’ fortunes. Te bottom half fell by a record- breaking 56.4% by value in 2008-2011. Te top half of the market, by contrast, is holding up reasonably well, finishing the 2008-2011 period with virtually no change (0.3% growth by value). Corporate profits are historically the most important driver behind business jet demand. Tese fell in 2008-2009, but in 2010-2012 they have made a strong recovery. In fact, US corporate profits in the first half of 2012 set a record, reaching $2.1 trillion on an annualized basis. Tis has helped maintain top-half business jet deliveries at record levels. Yet bottom-half deliveries are still scraping the bottom of the market trough, with no sustainable deliveries increase in sight.
The new single-aisle generation is coming, with serious consequences for the current models.
Most financial company demand for jets over the past few
years has focused on just two single-aisle aircraſt families, Airbus’s A320 and Boeing’s 737. Tese two jets are consistently rated the two most appealing jets by investors. Production of them has reached record levels, both in absolute and relative terms, with their output equating to over 50% of all jetliner deliveries by value for the past five years. Te biggest challenge for the market, therefore, is that the
new single-aisle generation is coming, with serious conse- quences for the current models. Upfront pricing indicates that there will be little or no premium paid for A320Neos and 737MAXs. Tey will likely sell at the same price, implying a relatively fast and painful impact on current A320 and 737NG values. It’s difficult to imagine why customers would line up to take record numbers of the last copies produced of the older models, particularly if traffic growth stays anemic. In short, there’s likely to be a day of reckoning, with new
models and weak traffic forcing some kind of jetliner produc- tion-rate reduction in a few years.
Bottom-Half Business Jet Horrors While the story of the business jet market over the past four years reflects sluggish demand, it also reflects changed
Te most likely explanation for this persistent market
bifurcation revolves around differing finance requirements. Transactions for larger business jets are more likely to be self- financed, either from a large corporate balance sheet or from a very wealthy individual’s checking account. By contrast, the strong majority of small/mid-sized (bottom-half) business jet purchases are dependent on third-party finance. Tese bottom-half workhorse jets typically go to mid-sized
enterprises that continue to face difficulties getting credit at reasonable terms. But it isn’t just the nature of the customer that’s hobbling business jet finance. Tere’s also the jets themselves. Jetliners can be deployed around the globe to earn money in airline service. Business jets are a form of private transportation, and asset values oſten drop fast aſter the origi- nal customer sells them. Also, jetliner types are relatively homogeneous, with few
models and a manufacturer emphasis on commonality to enable easy remarketing. Business jets tend to have more op- tions, and they come in many more models. For comparison, the top two jetliners today—Airbus’s A320 series and Boeing’s 737 series—make up 54% of 2011 industry output by value. Te top five selling business jet series represent just 52% of industry output by value. ✈
Aerospace & Defense Manufacturing 2013 19
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