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Published: May 17, 2010
For years, the business jet sector was one
of the hottest growth areas in aviation. What a difference a
global economic meltdown makes.
Business jets, sometimes called private jets - or "bizjets" in
industry jargon - is the term used for jet aircraft of smaller
size that are used to transport business people or wealthy
individuals. These aircraft typically are luxuriously appointed
and designed to move passengers in high style.
In 2009, the business jet market got clobbered, with sales of
aircraft declining -20% from 2008. It didn’t help matters when,
during the auto industry bailout hearings on Capitol Hill last
year, CEOs who traveled to Washington, DC to ask for money made
the trips in private corporate jets. Lawmakers generated cheap
political theater of that fact, prompting many top executives to
jettison their planes, or avoid buying them altogether, to avoid
a populist backlash.
But that was then; this is now. Political memories are short and
the economy is improving - and the business jet market is set to
come roaring back. Great money making opportunities in the
business jet sector still abound, for those who know how to spot
and exploit them.
The best investment play: Bombardier Inc. (Toronto: BBD-B.TO).
This Canadian-based plane maker recently unveiled its C-Series
business jet, a family of narrow body, twin-engine, medium-range
jet airliners. Models are the 110-seat CS100 and the 130-seat
CS300.
The elegantly designed, futuristically engineered C-Series
boasts a fuel-efficient engine that’s not only environmentally
friendly, but a big lure for cost-conscious operators in a world
of volatile fuel prices. Advanced composite materials account
for nearly 50% of the C-Series aircraft, conveying a 15% lower
seat-mile cost and a dramatic reduction in maintenance costs.
The price of business-class jets varies depending on their size.
They can run anywhere from $1 million to more than $50 million
each. The price of a Bombardier C-Series business jet is $46.7
million.
Between 2004 and 2009, the business jet market was a bloated
bubble waiting for a sharp pin. It experienced a torrid growth
rate year after year of +15 to +25%, fueled by loose financing.
Wealthy individuals and extravagantly paid CEOs rampantly bought
private jets, often with borrowed money. Then, the global
economy fell off a cliff, taking the business jet market with
it.
Now, the stage is set for a dramatic rebound. Brian Foley
Associates, an aviation consulting firm in Sparta, N.J.,
predicts sanguine news for worldwide business jet deliveries
during the next 10 years. It sees deliveries rising at a steady
+2.7% per year (compound annual growth rate) between now and
2019, with 8,900 business jets worth $170 billion delivered
through the period.
These are conservative estimates -- future growth could be even
higher. Regardless, this time around, the boom stands less
chance of going bust, because the players have learned their
lessons from the previous wild party. Prospective buyers are
subjected to stricter financial qualification; top executives
are keenly aware of the need to first make a business case to
employees and stockholders for any private jet purchase. Also,
aircraft makers are tailoring their production capacity to
moderate - i.e., realistic - demand expectations.
The result: this sector is unappreciated by
investors right now but, ironically, it faces its best prospects
in years for sustainable, long-term growth.
According to another consultancy, Gulfstream International
Group (AMEX: GIA) and Bombardier are the business jet
manufacturing market leaders (28% and 26.3%, respectively, by
value of deliveries), followed by privately held Dassault
Aviation (15.9%), Textron's (NYSE: TXT) Cessna unit
(12.7%) and Kansas-based Hawker Beechcraft (8.1%).
Brazil's Embraer (NYSE: ERJ) will have 8.2%, which is up
from almost nothing in the last ten years.
Although it’s still too soon to announce a verdict, Bombardier’s
new C-Series already is garnering major customers as well as
favorable buzz; this family of aircraft could catapult the
company to the number one spot.
Before the worldwide economic recession and credit crunch,
analysts were projecting outsized growth in bizjet deliveries
through the remainder of the decade, with the emerging markets
of China, India and Russia as the hottest regions for the
industry. Favorable factors included the business community's
growing embrace of business jets as a
productivity tool. What’s more, increasingly popular
fractional programs -- wherein multiple owners share the
purchase and
overhead -- were lowering the cost of entry and ownership.
These inherently strong qualities still apply to bizjets. These
days, however, growth expectations for the market are more
rational.
For the fiscal year ended January 31, 2010, Bombardier's
revenues decreased -2% to $19.37 billion, but that was largely
due to the historically severe slump in aviation, which
experienced its worst decline since the Great Depression. With a
price-to-earnings ratio (P/E) of 13.8, the stock is now a
bargain, considering its long-term prospects.
-- John Persinos
Contributor
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