Walter Spracklin:
Welcome to the Industries In Motion Podcast from RBC Capital Markets, where we'll be exploring what's new and what's next in today's fast-moving markets and industries. My name is Walter Spracklin, Canadian Research Management and Co-Head of Global Industrials Research at RBC Capital Markets. Please listen to the end of this podcast for important disclaimers.
I'm pleased to be joined by Ken Herbert, RBC's US Aerospace and Defense Analyst, and James McGarragle, who covers Canadian Airlines and Aerospace and Diversified Industrials. Today, we'll discuss the outlook for the business jet industry. Ken and James recently published an in-depth industry primer including market analysis, which increases our conviction in the long-term demand trends and opportunities for leading manufacturers. James and Ken, let's kick it off with an introduction to the world of business aviation. Give us a lay of the land.
James McGarragle:
Yes. Thanks, Walter. For some background and to provide some context for our conversation today, the Global Business jet fleet stands at approximately 22,000 aircraft with the United States holding the majority of these jets, accounting for roughly two thirds of the total. The business industry is therefore largely concentrated in North America, which leads in deliveries at 64%, followed by Europe at 14%, and Asia Pacific at 11%.
Looking at deliveries, over the past three decades, the business jet industry has seen an average of approximately 720 aircraft deliveries each year. That marks a significant sustained demand for private aviation for high net worth individuals and corporations. Customers who purchase business jets typically have an average net worth of around $1.1 billion. And on average, the typical business buyer is a self-made entrepreneur in the financial sector with most of their assets in public and private investments, justifying the need for the flexibility and speed of business jets for their corporate activities. Business jets are generally classified into five categories, although for simplicity, they're frequently referred to in three groups: light, mid-size, and large.
Walter Spracklin:
Great. Ken, who are the key players?
Ken Herbert:
Thanks, Walter. The largest original equipment manufacturers, or OEMs, in the business jet market are: Bombardier, Textron Aviation, which includes the Cessna brand, Embraer, Dassault Aviation, known for the Falcon Jets, and Gulfstream Aerospace. These manufacturers account for the bulk of the industry deliveries. Among these, Gulfstream Aerospace, which is a subsidiary of General Dynamics, boasts the highest revenue and the largest order backlog with an emphasis on premium high-end market segments. Certain OEMs, such as Gulfstream, Bombardier, and Dassault command higher billings per unit with figures surpassing $45 million per jet with more of a focus on the midsize, large or long-range segments. Whereas Textron and Embraer, which concentrate more on the light jet market, have lower buildings per unit at approximately $22 million and $14 million respectively.
Walter Spracklin:
James, how has the demand for business jets changed in the wake of the COVID-19 pandemic?
James McGarragle:
Yeah, the pandemic had a major impact on the industry with private jets becoming much more popular. So before the pandemic, only about 10% of wealthy people used business jets regularly. But then with all the worries about COVID-19, and dealing with crowded airports, and also the lack of business and first-class capacity as planes were parked, people with the financial means who never thought about flying privately began to do so. Important to fly here though is that as business and first-class capacity has come back, business jet utilization has settled at an elevated level compared to pre-pandemic levels.
So let me put some numbers around this. During the pandemic, there was a 25% increase in the absolute number of billionaires, which meant even more wealthy individuals wanting to use business jets. Also, options like sharing a jet or buying a membership with a jet card became popular for those who couldn't afford to own a jet by themselves or didn't really need to fly as often to necessitate that type of purchase. This drove exceptional business jet demand in 2021 and 2022. Although, this spike in demand is starting to level off, it's still stronger than it was in the past, which we can tell from all the flight activity levels we track and the long list of pending orders for new jets. This large order backlog should help support pricing in the industry, especially given that the supply chain is currently impacting the number of jets that are being produced each year.
Walter Spracklin:
Ken, what are the current trends in business jet sales and ownership?
Ken Herbert:
So current market trends are showing a preference for large, long-range aircraft favored particularly by ultra-high net worth individuals, governments, and fleet operators as these buyer groups are typically less sensitive to public market volatility and therefore more likely to proceed with deliveries. Supporting this trend, Honeywell's projections indicate a robust inclination toward these types of aircraft estimating they will comprise 37% of total deliveries and contribute to 68% of the total value in the aircraft market over the coming decade.
James McGarragle:
And on the ownership side of things, fleet operators, which offer membership programs or fractional ownership, represent the fastest growing segment of customers. Jet utilization among operators has seen a notable increase with double-digit growth compared to 2019, despite some normalization in 2023 where we saw a slight decline in total hours flown at down 4%. However, this was still an 18% increase compared to 2019 figures.
Concurrently, the fractional ownership model witnessed substantial growth driven by companies moving away from private flight departments in favor of more versatile flying solutions. The top 30 fleet operators accounted for approximately 29% of all hours flown in 2023 with NetJets, Flexjet and Vista Global leading in terms of hours operated. Meanwhile, Wheels Up experienced some financial challenges stemming from aggressive expansion efforts leading to route reductions, whereas VistaJet adapted to changing demand by focusing on their super midsize and ultra long range jet offerings. The lighter jet segment, however, witnessed declines in branded charter operations attributed to an influx of new entry level clients.
Walter Spracklin:
Okay. Let's zero in on the key findings from this report that makes you positive on the sector going forward. Ken, let's start with you and then over to James.
Ken Herbert:
Sure. Our examination of supply and demand dynamics suggests that the industry is experiencing a relative shortfall in supply. We observed that between 2020 and 2023, the expansion of the business jet fleet failed to match the significant rise in the number of global billionaires and the growth of the global economy. Although, historically, total business jet deliveries have shown a slight positive relationship with these economic indicators, they have not aligned in recent times. We are of the opinion that forecasts for business jet deliveries up to 2026 are justifiable based on the need to compensate for the current supply deficiency and the cautious projections for the increase in the world's billionaires and the global economic output. James?
James McGarragle:
It's also important to note, the fleet of business jets is currently the most aged it has been in over 20 years underpinning the need for new jet acquisitions and the anticipated uptick in production rates. Used inventory levels are trending around 7% of total fleet, which is significantly below the typical range of 11% to 14% of fleet prior to the pandemic. We expect the market to experience strong, continued demand and price stability for business jets, particularly the larger models that are experiencing the most significant scarcity across the three primary jet categories.
Since 2020, the aviation industry has seen firm order backlogs double to $51 billion amid strong market demand and the recovery in delivery rates, despite challenges such as tight supply chain and limited labor availability. However, the pace at which these backlogs are growing slowed to 2% in 2023. With production efficiency on the rise, the rate of aircraft deliveries is now outstripping the rate of new orders, which is nudging book to bill ratios closer to one times, a sign of a stabilizing market.
Additionally, having backlogs that extend for 18 to 24 months offers manufacturers clear visibility into future revenue streams. The net positive of supply chain issues has been to keep the pace of production and delivery increases slower than the OEMs might otherwise like. This has helped with the improved perception of discipline by OEMs, which was lacking in prior cycles.
Walter Spracklin:
That's great. Ken, how do you see supply chain constraints impacting the industry going forward?
Ken Herbert:
Although the demand has begun to stabilize, thereby reducing some of the strains on the supply chain, the ongoing scarcity of technicians and components still constrains the pace of production. Shortages in engines, parts and avionics persist largely due to complications like the worldwide shortage of semiconductors, disruptions among suppliers and a surge in demand. Labor deficits remain a primary concern as the industry has seen the departure of skilled workers during the pandemic resulting in quality assurance problems at certain supplier sites.
Despite the supply chain presenting current challenges, we anticipate an improvement in these conditions by 2025. According to our recent Aerospace and Defense Supplier Survey, suppliers have indicated that they project business jet volumes to increase by only around 3.5% from the second to the third quarter of 2024, a figure that seems to be influenced by persistent supply chain bottlenecks as well as prior setbacks encountered during the certification of new aircraft. Additionally, while business jet OEMs display moderate confidence levels, some crucial tier one suppliers are positioned lower in supplier confidence rankings. Moreover, according to survey results, 65% of participants perceived that a US presidency under Donald Trump would be more advantageous for business jet demand.
Walter Spracklin:
Okay. What gets you guys most excited about the business jet industry right now?
Ken Herbert:
Services.
James McGarragle:
Services.
Ken Herbert:
Original equipment manufacturers, or OEMs, are expanding their internal service departments to capture a bigger piece of the maintenance, repair, and overhaul market for their aircraft. This strategy is driven by tougher and more expensive requirements for certification, which cause airplanes to stay in use longer, increasing the need for upkeep. We're seeing fewer planes being retired, which implies that they're flying for more years before being taken out of commission. The longer these aircraft are flown, the more maintenance and service they will need.
James McGarragle:
Key is that sales of replacement parts and aftermarket services are not just crucial for keeping older planes in good condition, they're also very profitable. This means it can significantly enhance the earnings of OEMs. Given that the average business jet is just above 18 years old, there's potential for more comprehensive maintenance work and the larger invoices that typically accompany the upkeep of these aging planes.
As we touched on earlier, there's been a notable increase in demand for large, long-range jets. These aircraft are making up a larger part of the fleet leading to an increase in the typical spend on upkeep because they have more intricate and significant maintenance needs. Also, both commercial fleet operators and defense clients are flying their aircrafts more often, which means they need to service and replace parts more regularly, which we'd see as a tailwind for OEMs. Just last week we saw General Dynamics and Bombardier report very strong services growth of high double digit year-over-year.
Walter Spracklin:
And now there are important ESG considerations to keep in mind regarding business jets. What are the primary concerns here?
James McGarragle:
Business jets contribute a mere 0.04% of global emissions. However, they do generate significantly higher emissions per passenger being five to 14 times greater in comparison to commercial aviation. Because of that, they have become focal points for environmental activism. Strides in sustainable aviation fuel, investment in carbon offset programs and innovation in cleaner technologies are being pursued to diminish the environmental impact of private air travel.
On the policy front, governments have begun to take action to curb business jet usage in favor of more sustainable transportation options. Notably, in May, 2023, France implemented a ban on short haul private flights if there's a train journey available that can cover the distance in under two and a half hours. Similarly, Spain is also considering a ban on short flights that can be substituted by a rail journey of less than two and a half hours further indicating a trend towards stricter regulations on private jet travel to reduce carbon emissions.
Walter Spracklin:
Okay. Wrapping it up, what impact do you see emerging technologies having on the design and operation of business jets to be more environmentally friendly? Ken?
Ken Herbert:
At the recent 2024 European Business Aviation Convention and Exhibition held in May, experts agreed that sustainable aviation fuel is essential to making flying more eco-friendly, and we're seeing better ways to make and use it. At the same time, the industry is working on greener engines, like hybrid electric, but there are still some technical challenges to solve before these can be become the industry standard. Aerospace manufacturers are urged to concentrate on the dual objectives of crafting more aerodynamically efficient aircraft and streamlining environmentally friendly manufacturing processes. In addition, government agencies are expected to craft and enact supportive regulations that support the aviation sector's shift towards sustainability. To really make progress, a lot of money needs to go into researching and creating new technology as this will lead to big steps forward in making the industry less harmful to the environment.
Walter Spracklin:
Well, Ken, James, thank you very much for your time. This has been a really informative discussion. And if you're wondering what else lies ahead in today's ever evolving markets and industries, we'll be keeping track right here on Industries in Motion. Thank you for joining us on this episode recorded on July 29th, 2024. Please make sure you subscribe to Industries in Motion wherever you listen to your podcasts. And if you'd like to continue the conversation, or if you're interested in more information, please contact your RBC representative directly or visit our website at www.rbccm.com. Thank you very much.
Speaker 4:
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