May 10, 2004
Teal Group Offers Upbeat Bizjet Outlook - With Caveats

The Teal Group issued a generally optimistic forecast of business jet deliveries over the next decade, but cautioned that a drop in orders by fractional aircraft operators and a squeeze on profits could affect the outlook.

The Teal Group, a Fairfax, Va. consulting organization, said deliveries in 2004-2006 represent a low point in demand, but said it anticipates production of 6,413 business jets valued at $91.7 billion over the next 10 years (value is expressed in 2004 dollars). The forecasters said they believe "the fundamentals are in place for a long-term market growth. Despite the market's softness, utilization remains high," with the number of flight departments continuing to grow.

Retirements of existing business jets also are expected to help spur demand for new aircraft. Teal noted that the first business jets arrived in the early 1960s and most of the early models are still in service. "Assuming a 25-30-year life span for business aircraft, there could be some major increases in new, or at least newer, used business jet demand after 2005 to replace aircraft retiring from the market. At the very least, scrapping the older planes will contribute to a positive trend in number of planes available for sale."

As a result of those positive trends, Teal said "we believe the business jet market has arrived at a new level, and that we are now in the midst of the first down cycle of this transformed segment." The 6,413 aircraft/$91.7 billion in deliveries between 2004 and 2013 represents a 21 percent increase over the $75.9 billion in deliveries between 1994 and 2003, Teal Group said. "And the worst year in our forecast will be better than any year prior to 1998."

Business jet deliveries are expected to begin increasing slightly next year and continue to grow, peaking in 2009-2010 at nearly 900 new aircraft per year valued at more than $10 billion annually. Deliveries then are expected to fall off somewhat, although annual shipments will remain between 700 and 800, valued in excess of $8 billion per year.

Although the overall outlook for increased deliveries is favorable, forecasters cautioned that fractional aircraft providers account for 15 to 18 percent of new business jet deliveries currently. "Their orders, however, account for about 50 percent of the stated industry backlog (alarmingly, the rest of the backlog is completely opaque and non-verifiable)." Fractional aircraft account for about seven percent of the worldwide business jet fleet, Teal Group said, citing the annual Honeywell turbofan forecast that predicted this figure will rise to 15 to 17 percent by 2011. "Clearly, the future of the business jet industry is closely linked to the success or failure of fractional ownership," Teal Group forecasters said.

The Teal Group Business Jet Overview also warns that "the biggest potential transformation of the business jet market concerns profitability. The market no longer caters exclusively to an elite, price-insensitive clientele. Increasingly, it is offering a commodity, complete with price competition (at both the user and manufacturer level). Again, we expect margins to retreat from their fat and happy heyday. Raytheon Aircraft's mediocre results in 2001 have proven to be a harbinger of things to come, with 2002 seeing write-offs at Bombardier and General Dynamics. In fact, this industry could come to resemble the commercial jetliner industry - high volumes, lower margins and fewer players."