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GAMA 2Q 2011 SHIPMENT ANALYSIS

September 2011

Category: Aircraft for Sale Reports

Author: Mike Potts

GAMA Second Quarter 2011 Shipment Analysis
Disappointment at results, but what’s indicated?

It shouldn’t be happening like this. Despite all kinds of signs that the economy is picking up, we continue to see disappointing results in new aircraft deliveries. The latest report by the General Aviation Manufacturers Association (GAMA) is out and the message regarding recovery is clear: It’s just not happening. GAMA released the report for the second quarter of 2011 in August, and to be completely candid, the results were abysmal.

Total airplane shipments were down 15.5 percent, from 936 last year to 791 for the first six months of this year. Billings totaled $7.3 billion (down 22.3 percent), indicating spreading weakness in the jet market. Jet deliveries were the hardest hit by far, dropping 26.5 percent. In raw numbers that translated to 261 deliveries (down from 355 in 2010). Suddenly it’s beginning to look like Honeywell’s prediction that the jet market would sag below 700 units a year just might come true. The positive note is that Honeywell has always said the sub-700 total would represent the bottom of the market.

In the other segments, turboprops and pistons fared better than the jets, but both were still down with turboprop deliveries off 8.9 percent and pistons losing 8.7 percent. The little up-tick in piston sales we saw last quarter was apparently an aberration and not the prelude to a pending recovery. In its news release accompanying this quarter’s shipment numbers, GAMA didn’t discuss the economic issues facing the market as it sometimes does. Instead, it fired back a volley at U.S. President Barack Obama, who seems to have singled-out our industry for special treatment in his version of the war on excess spending and government waste.

What Obama did was call for a change in the depreciation rules for business jets, from five years (as it is today) to seven years. What’s ironic is that it was only about a year-and-a-half ago that Obama supported the five-year accelerated depreciation program as a job stimulus [which most of us in the aircraft industry would agree that it is] prompting jet operators to trade their used aircraft for new ones a couple of years earlier than they otherwise might.

But the whole issue of how to finance the US government has become very contentious in recent months and the already volatile situation is supercharged by the Presidential election pending in the US next year. As a result, some decisions (and this one is an excellent example) lose their grounding in reality and instead become a platform to play to the emotions of one party or the other’s political base.

In this case it’s Obama playing to the portion of his constituency that sees business jets as a symbol of corporate greed and excess. Six times during the June news conference when Obama announced this proposal he specifically cited corporate jets – in spite of the fact that the change in the depreciation allowance for business aircraft accounted for less than five percent of the tax changes he was advocating - or an estimated total of only about $3 billion over the next 10 years.

The other changes he was advocating, incidentally, amounted to about $44 billion (over 10 years) in oil and gas tax preferences and $15 billion (over 10 years) in changes related to how income from hedge funds is taxed. Nevertheless, in spite of being a minor player, corporate jets got top billing as the ‘bad guy’.

What I think is really happening here is that the Business Aviation industry is being set up to be the poster-child for a campaign against “tax breaks for millionaires and billionaires.” I expect it’s a theme that will be repeated through much of the coming election cycle in the US – not because we are guilty, but because we are an easy target. It looks to me like a burden we are just going to have to learn to bear for a while. Which is not good news as our industry continues to struggle.

THE JET MARKET
The current GAMA numbers show that weakness is appearing in segments of the jet market where it had not existed quite so obviously before. Compared with last year, seven of the eight companies reporting to GAMA are down for the second quarter and all eight are down from their delivery totals for the year to date.

In raw numbers, the 133 business jet deliveries reported is the lowest second quarter total since 2004 (when the number was 124). That’s quite a come-down from just two quarters ago, when we had the best quarter for jet sales since the fourth quarter of 2008. It’s possible we are still paying the cost of a very strong jet sales surge in last year’s fourth quarter, but I suspect the answer probably isn’t that simple. There is clearly some shifting in where the weakness is occurring compared with how the market performed over much of last year.

Generally, in 2010 the light- to medium-portions of the market were experiencing the softest sales, while the upper-end held up better. Now there seems to be some improvement in the light-to-medium segment, while the bigger and more expensive jets are not selling as well as they did a year ago.

The result of this shift is that Bombardier and Cessna finished the first half of 2011 in a tie for “best-selling business jet maker” – each reporting 69 deliveries. Cessna had a better second quarter with 38 units delivered (compared to 27 for Bombardier). Cessna even had a few models that sold better in 2011 than they did a year ago.

The Cessna XLS+ and the Sovereign showed improved results for the quarter and for the six month period, with the XLS+ recording 11 units year-to-date (compared with seven last year) and the Sovereign at six units (up from four). Both were up one unit for the quarter, from three to four for the Sovereign, and six to seven for the XLS+.

The CJ4 was wildly ahead of last year’s total at 16 units compared with three a year ago - but that was primarily because it didn’t enter the market until the second quarter of 2010. Conversely, none of Bombardier’s products have experienced improved deliveries so far this year.

Gulfstream took third place for jet deliveries with 47 units - including 23 in the second quarter - followed by Embraer which delivered 31 units for the six-month period. Interestingly, both Gulfstream and Embraer recorded equal totals for the second quarter (23 units).

Dassault took fifth place in deliveries with 19 units, down sharply from 45 deliveries made in the first half of 2010. Dassault and Embraer (60 deliveries by this time last year, compared with 31 now) have both been particularly hard hit. By comparison, other companies, while off, did not suffer such a large percentage drop.

Gulfstream was down from 56 last year to 47; Hawker Beechcraft from 27 to 21 and Bombardier from 82 to 69. Cessna had the smallest percentage of reduction, from 74 units to 69, or a drop of less than five percent.

Like Cessna, Hawker Beechcraft has some models that are selling better this year. The Premier IA totaled five deliveries, up from three last year, while the Hawker 750 recorded four deliveries, up from just one last year. All of Hawker Beechcraft’s higher-end models were down, however.

The airliner-based business jets, which up to this year had been pretty much immune from the recession, were down sharply for the first six months of 2011. Airbus had four deliveries for the first two quarters, down from eight a year ago. For the second quarter it reported one, down from three. Boeing has made just one delivery all year, which came in the second quarter. Last year Boeing made three, including one in the second quarter of 2010.

Bombardier narrowly led business jet billings, with $2.156 billion, edging out Gulfstream ($2.096 billion). Dassault was a distant third at $846.5 million. A year ago these three companies collectively recorded billings of nearly $6.7 billion. This year the top three totaled just under $5.1 billion. That’s a drop of more than $1.5 billion – a staggering number that accounts for more than 70 percent of GAMA’s total reduction in billings from this year to last.

THE TURBOPROP MARKET
In the turboprop market the results are quite a bit more positive than for the jets. Five of the eight turboprop manufactures actually enjoyed better sales results than at this point last year, including Hawker Beechcraft, Pilatus, Piper, Pacific Aerospace and Piaggio.

Hawker Beechcraft narrowly leads Cessna by 40 units to 38 in sales for the first six months. The two companies matched each other in deliveries for the second quarter at 24 units, but Cessna’s sales are well off the 56 units it made during the first six months last year, and its quarterly results are down from 37 units a year ago too. By contrast, Hawker Beechcraft’s sales were more than 17 percent ahead of last year, and its second quarter total was up by 14 percent (24 unit compared with 21).

Pilatus takes third place in turboprop deliveries with 25 for the six months, which matched its 2010 performance. The company enjoyed 17 deliveries for the second quarter - a 30 percent gain over the 13 it made during the second quarter of 2010.

Piper was next with 14 turboprop deliveries for the six-month period (up from eight units over the same timeframe last year, and an increase of 75 percent). During the second quarter, Piper turboprop deliveries were up over 2010 by one unit from six to seven. Socata recorded 12 deliveries for the first six months, down from 18 last year; Pacific Aerospace with six, was up one for the year-to-date, while Quest had five deliveries, down from nine last year, and Piaggio with three was up from two in 2010. For just the second quarter, Piaggio was up from one to two over its 2010 results; Socata was down from 11 to seven; Quest was down from five to three; and Pacific Aerospace broke-even with three units.

On balance, if it hadn’t been for the 32 percent reduction in Cessna’s results for the first six months, the turboprop market would have been in positive territory. By discounting Cessna’s results, the other manufacturers collectively delivered 105 units compared with 101 in 2010.

THE PISTON MARKET
Turning to the piston market it’s difficult not to be disappointed by the failure of the positive upturn we saw in the first quarter to sustain itself in the second quarter. Instead of the gains I hoped to see, piston sales dropped from 424 units a year ago to 387 for the first half of 2011.

Key elements in the single engine segment (the heart of the piston market) saw 164 units delivered in the second quarter. That was down more than 31 percent from the 239 deliveries recorded during the second three months of 2010.

This was offset somewhat by a significant gain in the piston twin market, which was actually up 75 percent in the second quarter from last year, with 35 units compared to 20. In some respects, the piston twin segment is helping to mask just how weak the overall piston market really is right now. Among the 10 piston single manufacturers reporting to GAMA, seven endured poorer results than last year in single-engine sales, two were up, and one (Liberty) didn’t report for the second quarter.

Cirrus, which emerged last year as the new king of piston aircraft sales, is making a strong move to be the single-engine champion in 2011 too. At mid-year Cirrus had reported 118 deliveries. That was down from the 127 it had last year, but by a smaller margin than number two Cessna was off its own 2010 pace.

Cessna made 91 deliveries, down from 110 last year, putting Cirrus in the lead by 27 units midway through 2011- a bigger margin than it enjoyed over Cessna at this time last year. This is strictly a two-company race, with nobody else very close.

Diamond Aircraft takes third place, and is one of the two companies with positive results compared to last year. Diamond made 45 deliveries, up one from the 44 it recorded by this time in 2010. Piper, with 32 for the year and 17 for the quarter delivered about half of what it did last year, when Piper’s numbers were 59 for the half and 34 for the second quarter.

The second piston maker with positive results was American Champion, which recorded 19 deliveries for the first six months of the year, compared with 18 a year ago. Even so, the company’s second quarter numbers were off (6 units compared with 10 in 2010).

Also reporting piston deliveries were Hawker Beechcraft (nine for the half and four for the quarter, down from 10 and nine respectively); Gippsland (six and four, down from eight and five), and Maule, with one for the half and none during the last quarter, down from two and zero last year.

Among the piston twins, Diamond leads the charge with 40 deliveries for the year to date and 21 in the recent quarter. That’s up 133 percent over the 18 it delivered in the first half of 2010 and up 200 percent over the seven delivered in the second quarter last year. There’s clearly no recession in the Diamond twin-market, which is thriving.

The other piston twin OEMs are having a less spectacular year, but still doing okay. Piper is comfortably ahead of last year’s results at 13 aircraft for the half and nine for the quarter, compared with eight and five respectively last year. Hawker Beechcraft is a little behind, with 10 for the half and five for the quarter, down from 12 and eight.

Total piston twin deliveries stand at 63 units for the first half of 2011. Based on the probability for improving demand for Diamond’s twin and a general solidity with the other piston twin products, I’m thinking the piston twin market could rise to as many as 150-160 units this year. That would help to bolster the overall piston market, which is looking anemic right now.

MARKET SUMMARY
In spite of where we find ourselves at this time, I think piston numbers will improve somewhat in the second half. Last year we finished the year with piston sales at 889 units. I think we’ll come very close to matching that number again this year, perhaps even breaking the 900-unit mark. Anything beyond 950 would have to be labeled a significant turn-around.

It’s easier to be a little more optimistic about turboprops, with most of the manufacturers actually doing better than at this time last year. If sales continue at the current level, turboprops would finish in the 285 to 290 unit range. I think we’ll do better than that, and am forecasting turboprop deliveries to finish around 340-350 deliveries.

It’s harder to be optimistic about the jet market right now, particularly with all the economic turmoil involving governments and spending issues. In spite of all that, I just find the fundamentals in the economy to be too strong right now to believe that things won’t pick up as the year goes along.

Even so, we’re in a fairly deep hole, and I’m afraid that Honeywell’s 700-unit forecast is starting to look like the place we’ll end up. But at some point this thing just has to start turning around…

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