International Demand Continues To Drive Future Industry Growth
Near-Term Economic Factors Temper Volume of New Jet Orders
10,000 New Business Jet Deliveries Worth $230 Billion Forecasted Through 2021
NBAA, Las Vegas, October 8, 2011 – Honeywell (NYSE: HON) issued the 20th edition of its annual Business Aviation Outlook today, forecasting sales and delivery of approximately $230 billion in new business jets from 2011 through 2021. This represents approximately a two percent increase in total expected industry sales value compared to the prior ten-year horizon Honeywell forecasted in 2010.
For 2011, Honeywell Aerospace estimates deliveries of 600-650 new business jets, down approximately 15 percent from 732 in 2010 due to continued slow global economic recovery. While 2012 deliveries are expected to be below 700 airframes, Honeywell anticipates higher delivery levels than in 2011. While five-year buyer interest remained steady versus 2010, based on the reduced economic growth outlook and this year’s survey responses, the industry appears to be positioned to begin another period of expansion in 2012, which is consistent with Honeywell’s current industry outlook.
Honeywell surveyed more than 1,500 flight departments around the world for its annual business aviation outlook.
Aggregating all regions, five-year purchase expectations remain at a 30 percent level. Purchase expectations trended up in Asia and the Middle East, but retreated in other regions, most noticeably in Europe and to a lesser extent Latin America. “The level of caution continues to be tied to concerns specific to each region,” said Rob Wilson, president of Honeywell’s Business and General Aviation business unit. “We noted over the last two years that the timing of planned purchases in the five-year window was heavily shifted in most regions to the post-2010 timeframe. That still remains the case, with roughly 80 percent of planned purchases timed for 2013 or after.”
One bright spot is the earlier demand timing coming from Brazil, Russia, India and China (BRIC) countries and the Middle East. Acting on these purchase plans in 2011 and 2012 is critical to providing the industry momentum as current backlogs will not sustain delivery levels indefinitely despite recent book to bill ratios exceeding one at some manufacturers.
“This year, operators outside North America displayed mixed attitudes about the strength and pace of this nascent recovery,” added Wilson. “They are still looking beyond the current economic climate and anticipating a return to improved business conditions, but some regions have tempered near term expectations and buying decisions as reflected in this year’s forecast.” Despite the tepid pace of global economic activity, North American operators responding to the Honeywell survey indicated their overall new jet purchase plans for the five-year horizon were largely unchanged for the second year in a row.”
The survey showed the more cautious European and Latin American purchase plans were offset by improved buying plans in Asia and the Middle East leading to an overall five-year demand for new jets resembling last year’s levels and similar to those seen in the 2007-2008 time frame. Despite the economic uncertainty, there have been relatively few program cancellations and delays.
“The pipeline of new high-value models supporting long-term growth remains strong,” said Carl Esposito, vice president for marketing, strategy and product management at Honeywell Aerospace. “This year’s survey continues to indicate that international demand will still remain significant and contribute to longer-term growth.”
“The survey shows a mixed environment for business aviation growth as reflected by the individual market challenges of a recovering global economy,” Esposito said. “The retail value of jet shipments has not declined to the same extent as unit deliveries due to the relative strength of large cabin aircraft offsetting losses in other sectors.”
Business Jet Global Purchase Expectations Steady in Latest Survey
North American purchase expectations remained largely unchanged for the second year running, rising by about 10 basis points over the prior year, but expectations in other world regions varied in response to global economic concerns.
International demand still accounts for more than 45 percent of the new aircraft purchase plans projected over the next five years. Based on this survey, Honeywell believes that new jet deliveries will continue to reflect a global shift in share of demand, which is well above the current international business jet fleet share.
Honeywell’s 2011 survey indicates a potential demand for more than 5,000 aircraft globally during the 2012-2016 period, excluding demand from fractional ownership or branded charter start-up businesses and piston aircraft owner trade-ups into jet aircraft. Honeywell reported last year that a sharp recovery in deliveries is unlikely, since this potential demand has to be translated to orders and in turn to increases in production, which will take some time to implement if purchase intentions remain near current levels.
The survey also reconfirmed the strength of large cabin models in overall buying plans. This result aligns with the relatively strong performance of large cabin aircraft throughout the current business cycle.
20 Years of Forecasts Reflected Major Changes in the Industry
During the last two decades, the Honeywell Business Aviation Outlook has provided numerous insights into the evolution of the industry. Some seminal changes first reflected in the outlook:
The advent of the light medium, ultra long range, super midsize and high speed ultra long range classes of business aircraft – new classes serving unique operator needs and offering cutting edge capabilities;
The sea change in composition of overall business jet demand from a U.S. centric to a global business;
The explosive growth of the fractional ownership model and its more recent contraction and nascent re-emergence;
The personal jet bubble and the air taxi business model’s lack of traction; and
The emergence of new full spectrum global business jet manufacturers.
Honeywell has played a part in many of these revolutionary changes, either by promoting the customer needs behind the emergence of new aircraft, developing and supplying systems to facilitate those aircraft, or avoiding overzealous participation in endeavors that proved unsustainable.
Esposito added: “The forecast allows us to invest in areas our customers say are important to them, including technologies like Primus Epic, the first certified fully integrated cockpit, synthetic vision, IntuVue weather radar, SmartRunway/SmartLanding safety products and the industry’s most successful engine in the seven thousand pound thrust class, the HTF7000, that gives operators more than 99 percent reliability. As the potential expands for a new class of aircraft, potentially the long range, mid-size cabin jet, we will be investing in the key technologies to make those aircraft as successful as the other classes are and have been.”
“Understanding and quickly meeting our customers’ needs set Honeywell apart in today’s business aviation market,” said Mike Rowley, vice president for global sales for the company’s Business and General Aviation markets. “Our comprehensive portfolio of avionics, propulsion engines, environmental control systems, auxiliary power units and cabin productivity products can be a one-stop-shopping experience for customers looking for a full suite of products for new or fielded aircraft.
North America Expectation
North American respondents say they expect to purchase aircraft equal to about 26 percent of their existing fleets for replacement or expansion during the next five years.
Overall buying plans in the region are steady, with replacement plans offsetting a small decline in fleet expansion plans.
Despite the slow pace of recent economic growth in the U.S. and the ongoing concerns over job growth, stock market volatility and deficits, the survey indicates that purchases over the next five-year period are planned at levels similar to those reported in our 2010 survey, reflecting the value and productivity these aircraft deliver.
Honeywell’s baseline forecast is based on one-to-two percent U.S. Gross Domestic Product growth in 2011, and positive growth on the order of just below two percent in 2012 and approximately two percent in 2013. Volatility of economic forecasts during the past few years remains a concern in the current environment and Honeywell continues to plan around a range of outcomes.
Global Regional Purchase Expectations
In other regions, five-year purchase expectations were mixed. In Europe, purchase expectations equaled 29 percent of the current fleet, down about four points from 2010 results. “Clearly the ongoing concerns over European debt and the future of the currency union are weighing on operators in the region.” Wilson said. “In the longer term, the weaker dollar is projected against the Euro and other major trading partner currencies for some time. The trend should result in potential tailwind for new jet demand driven by higher than average rates of growth and business expansion expected in Eastern Europe and Russia, the regional growth drivers.”
Overall, European operators reduced their desire to replace their existing fleets compared to 2010 survey findings, by a few points. European plans for fleet expansion also softened, but to a lesser extent.
Purchase plans are timed predominantly in the 2012-2015 period, demonstrating a more restrained posture than seen last year and falling into a profile similar to the North American responses, however with moderately stronger 2012 levels. Continued interest in moving into larger, longer-range and lower cost models was reported by European respondents. Large and mid-cabin models outpolled small cabin aircraft by a three-to-one margin in purchase plans, though small cabin models improved their share of purchase plans somewhat over 2010 levels.
Asia, Africa and Middle East Expectations
In this year’s survey, Asia, Africa, and Middle East regions ranked the highest in purchase expectations regardless of the economic environment. Asia, Africa and Middle East purchase plans have moved up from 2010 levels and once again exceed the overall world average. Purchase expectations of nearly 38 percent recorded in Africa and the Middle East were up almost nine points from 2010 levels. Asian purchase plan rates rose about five points over 2010 levels in the current survey, and at 45 percent, lead all world regions.
The revisions in purchase plans came from improvements in both replacement and fleet expansion rates. Even with the prospects of slower near term economic growth worldwide, operators in these regions expect to be active buyers. Operator purchase plans are still timed sooner in Africa and the Middle East than in Asia, but Asian operators reported strong buying intentions for 2013. Planned purchases, if realized, will result in more rapid regional growth in Asia and the Middle East and Africa, than is expected in North America, Europe or on a worldwide basis.
Clearly the relatively mild impact of the global recession on major Asian economies such as China and India is still helping support a more optimistic level of interest in business jets than in other regions. On the other hand, the slower recovery of major trading partner economies and ongoing concerns regarding export fueled growth and Chinese inflation control policies continues to hold regional results below prior peak levels.
Confidence in Asian and Middle Eastern economic growth in the intermediate and long-term remains high, boosting interest in longer-range, larger aircraft with better operating economics. Concerns over new duty time restrictions, tax and regulatory compliance issues were voiced again this year.
In Latin America, operators reported slightly lower levels of purchase expectations. Operators say they plan to purchase new aircraft equal to about 32 percent of current fleets for replacement or expansion over the next five years. Interest is still above the overall world average. That said, Latin American operators’ plans seem to be pragmatic about the outlook for economic growth in the region and remain cautious about the current environment, but relatively upbeat about long term prospects.
The survey showed Latin American operators are still looking at significant new aircraft purchases in the five-year period, but 93 percent are timed for 2012 or thereafter. Range and reduced operating and maintenance costs were leading reasons for replacing existing models.
Brazil, Russia, India and China (BRIC) Countries
This year Honeywell chose to survey the emerging economies as a subset of our traditional regional breakdown. Brazil, Russia, India and China or BRIC countries group of high growth emerging economic powerhouses is contributing significantly to overall business jet demand, and the survey indicates operators from this group of countries will continue to do so. Combined BRIC fleet replacement and expansion purchase plans came in at just over 49 percent for the next five year period.
Though current fleets are relatively small, the high purchase plan level will generate significant new aircraft demand if realized. More than 60 percent of the planned purchases are in the medium and large cabin class of business jets.
Fleet Replacement Drivers
Chief reasons to replace current aircraft remain relatively consistent with prior surveys with age, range improvement, cabin size all listed as important criteria in every region. In particular, range demands increased again in importance in this year’s survey and represent the top reason for replacement apart from age in every region in the survey. A desire to replace current models and gain the benefit of reduced operating and maintenance costs offered by a new aircraft also appeared prominently in every region.
Used Jets and Flight Operation Levels
The used-jet environment continues to show modest improvement, but remains challenging in the near-term. Over the last year, inventories of used jets for sale as a percent of the active fleet have declined by about four points off the peak levels seen in early 2009 and prices are still significantly lower than 2008 averages.
The 2011 survey recorded another modest improvement in worldwide planned used-jet purchases over the next five years, which may help maintain momentum in used inventory. Used-jet purchase plans rose in every region, with the most significant improvements recorded in Europe and Latin America.
The 2011 survey also recorded intentions regarding usage rates of business jets in the near future. Most regions posted a shift in intention toward increased usage rather than decreased utilization in the near-term. These results align with modest operational gains this year widely reported in the U.S. based on FAA jet cycle counts and in Europe using similar information provided by Eurocontrol. Survey results support projections of continued incremental recovery in operational levels for the balance of 2011.
“By selecting Honeywell’s retrofits, modules and upgrades, operators can dramatically extend the operational effectiveness and efficiency of fielded aircraft in the NextGen flight environment with upgraded avionics capabilities,” said Rowley. “As an example, by investing in Primus Elite cockpit upgrade, operators gain the benefit of the NextGen flight environment and when they choose to trade in their aircraft, their investment is not lost, but rather reflected in the increased value of the overall aircraft.”
Traffic recovery rates have settled into low to mid single digit rates for most jet classes in 2011 compared to higher rates of growth recorded in 2010. Very light and ultra long range classes continue to enjoy the strongest performance year to date due to relatively small and expanding fleets as well as improved utilization. International jet flights continue to recover more rapidly than domestic U.S. missions, but the gap is narrowing. International flight growth in Europe has fallen more or less into parity with domestic traffic.
The implications of these used aircraft and jet utilization trends are significant for service providers and dealers. Economic and operating cost concerns are clearly affecting the desire to own and operate older jets as extensively as in the past. The weakest recovery rates continue to be more prevalent in the small and mid-cabin classes or fleets with large numbers of mature model jets.
Global Economy and New Product Pipeline Favor Recovery and Long-Term Growth
Honeywell’s current 2011 statistical forecasting model predicts a business jet delivery decline of more than 33 percent from peak-to-trough measured in dollar terms (excluding fractional and start-up jet taxi demand) with the trough occurring in 2011. Last year a solid recovery in 2012 was anticipated, however disappointing rates of global economic recovery have added considerable uncertainty, despite relatively strong order performance in the first half of the year. As a result, the 2012 outlook has softened somewhat, but still shows modest recovery. The model is signaling weak but positive growth starting in 2012 with the next cyclic peak likely to be higher than in 2008, although fairly late in the forecast period.
Overall, Honeywell believes that the longer term outlook for business aviation is still positive. The company incorporates updated survey findings, statistical model analysis, manufacturer insights, backlog levels and new model introduction timing to produce its current outlook.
Owners of fleets serving fractional shareholders and jet card purchasers reduced demand sharply in the current recession. Fractional fleet operators still have reduced order backlog and continue to curtail current new aircraft additions in the face of ongoing net share sales erosion.
New jet deliveries to fractional fleet operators were off 44 percent in 2010 and another 20 percent through the first half of 2011, with only four new jets delivered to fractional operators. Net incremental sales of new ownership shares have deteriorated another 12 percent through the first half of 2011 after a 31 percent loss in 2010.
In results largely unchanged over the past two years, Honeywell is still projecting significantly lower deliveries to this segment for the next few years as excess capacity is worked off and shareholder levels are rebuilt. The good news is that fractional type operations are returning with significant new business booked in 2011 for several classes of aircraft. We expect more significant order announcements before the year is over as part of broad fleet renewal and operational efficiency improvement strategies.
Replacement demand for new aircraft contributes a significant share of new jet purchases in the fractional segment which supports some improvement in new jet deliveries to the sector by 2012. This segment’s higher utilization rates, and desire to maintain a consistent passenger experience with newer aircraft while maintaining low operating costs, leads to replacement at shorter intervals than is typical for traditional operator groups.
Demand for Larger Aircraft Classes and Geographic Sales Mix
The 2011 Business Aviation Outlook is heavily influenced by new jet models mentioned by survey respondents, and projects a continuation of the strong demand share for larger business jet classes over the next five years.
Medium-to-large aircraft combined account for around 35 percent of the projected demand through 2016, up slightly from a year ago. The next largest grouping is for long-range and ultra-long range aircraft at 25 percent, also up several points from 2010. Light and light-medium aircraft make up about 21 percent of projected five-year demand, unchanged from a year ago.
Sustained interest in the long and ultra-long-range segment has been present for several years and reflects increased need for aircraft capable of trans-Pacific flights, as well as the growth in demand in other regions requiring more long-range operations as trade and economic growth is still anticipated. These longer-range models contribute more than 50 percent of the dollar value of deliveries over the same period. The balance of demand is accounted for by very light aircraft which account for roughly a fifth of the unit deliveries, but fewer than four percent of the retail value of shipments.
North America is expected to account for about 55 percent of business jet deliveries over the next five years, moving back toward the 50 percent mark set in 2008 as purchase plans have improved in Asia, the Middle East and Africa as previously noted.
Honeywell has reported on the trend toward increasing international share of business jet demand for many years, and the survey is still tracking with observed shifts in orders and deliveries very closely. Asian demand through 2015 based on the survey improved to around nine percent of the total on improved purchase plans aimed at fleet expansion. European demand share remains near more traditional levels at 17 percent. Latin America’s share remained stable at 13 percent. The Middle East/Africa region also improved about one point, to just below six percent.
While these percentages shift somewhat each year, the overall demand pool remains fairly large so individual regions are still absorbing significant numbers of new aircraft into their fleets, even if percentage share slips a few points.
Demand Trends of Other Aircraft Segments
Personal Jets: The 2011 Business Aviation Outlook assessment of the emerging personal jet segment has strengthened modestly. This portion of industry demand has been centered on the emergence of very light aircraft priced below $2.5 million and not normally covered by the Business Aviation Outlook.
The current outlook continues to reflect low levels of near term deliveries for this class of jet and is heavily influenced by close monitoring of ongoing OEM developments. Current 10-year potential is somewhat improved due to the infusion of fresh capital into select projects and incremental progress made on ongoing development programs which improve the chances of several models entering service over the mid portion of the forecast period
With this in mind, deliveries over the next 10-year period are still likely be constrained to somewhere between 750 and 1,250 very-light personal jets. When combined with new-generation low-cost aircraft carried in the very-light segment of the Business Aviation Outlook, the total deliveries range from 2,200 to 2,700 aircraft from 2011 to 2021, well below the range predicted earlier by Honeywell survey research. While the prospects for a few new personal jet programs to enter service has improved, the near term soft demand for light class business jets weighs on the traditional very-light jet class resulting in a total forecast roughly in line with earlier projections.
Business Liners: The current Business Aviation Outlook does not explicitly include aircraft in the business liner class (typically well over 100,000 pounds takeoff weight and based on transport airframes). However, purchase expectations are recorded for these models in the survey. Forecast deliveries in this class will range around 220 to 240 aircraft through 2021 and should average roughly 20 aircraft per year in the forecast period. Aircraft represented in this segment include the Boeing BBJ series, the Airbus Elite A318 and Airbus Corporate Jetliner as well as the Lineage 1000 from Embraer, plus corporate versions of twin aisle aircraft and potential corporate versions of new regional jets. This segment comprises an additional $18 billion of business aircraft sales.
Honeywell predicts deliveries will continue to cycle down in 2011, but will post modest gains in 2012. The peak-to-trough decline expected to be in the range of 40 to 45 percent on a unit basis and about 33 percent on a value of aircraft delivered basis, reflecting the sales strength of large cabin models through the downturn (and corroborated by survey results in both 2010 and 2011). In 2012, a combination of deferred delivery orders already in hand for some new models entering service and somewhat improved rates of global economic growth will result in a modest improvement in demand for new jets. The pipeline of new high-value models in development also supports the long term growth scenario, as well as strength in international demand.
Honeywell Aerospace’s “Customer Benefit Index,” a key component of the long-range forecast, which tracks the perceived value offered by business jets to fleet owners and operators, also has a favorable long-term trend based on many newer production models and development programs in the pipeline.
Widely regarded for decades as the most reliable forecast for the business aviation market, the Honeywell Aerospace Business Aviation Outlook and the purchase expectations survey summarized each year are a snapshot of expected business aircraft sales at a point in time and reflect fleet operators’ views of current events, such as political and economic conditions, fuel costs and changes in regulations, taxes and user fees that would affect expected sales in the near term.
Honeywell Aerospace’s Business Aviation Outlook does not reflect the impact of unforeseen events such as a war, major economic shock, fuel crisis or new regulatory restrictions. The outlook is based in part on Global Insight’s baseline economic forecast assumptions that call for world economic growth at annual rates in the 3.1 to 3.5 percent range during 2011 and 2012, followed by sustained world growth rates averaging just-under 4 percent through 2021.
Honeywell International (www.honeywell.com) is a Fortune 100 diversified technology and manufacturing leader, serving customers worldwide with aerospace products and services; control technologies for buildings, homes and industry; automotive products; turbochargers; and specialty materials. Based in Morris Township, N.J., Honeywell’s shares are traded on the New York, London, and Chicago Stock Exchanges. For more news and information on Honeywell, please visit www.honeywellnow.com.
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