Richard Aboulafia, Vice President, Analysis, for Teal Group, discusses how Business Aviation has performed during the first half of 2021, and where things might be headed. Among the topics covered during Richard’s second podcast of 2021:
Since 1988, Richard has tracked aircraft programs, markets, and companies as an analyst and consultant. He manages consulting projects in the commercial and military aviation field and analyzes broader defense and aerospace market and industry trends. He has advised numerous aerospace companies, including most prime and many second- and third-tier contractors in the US, Europe and Asia. He also advises numerous financial institutions on aerospace market conditions.
Richard is Vice President of Analysis at Teal Group. In addition to his consulting role, he writes and edits Teal Group’s World Military and Civil Aircraft Briefing, a forecasting and analysis tool covering over 135 aircraft programs and markets. He also writes publicly about aviation and defense, with regular columns in Aviation Week & Space Technology and at Forbes.com. His articles have also appeared in Foreign Policy, Royal Aeronautical Society’s Aerospace magazine, the Wall Street Journal, Slate, AIAA’s Aerospace America, the Financial Times, Professional Pilot, and other publications.
Frequently cited as an aviation industry authority by trade and news publications, Richard has appeared on numerous television news and radio programs including ABC, BBC, Bloomberg, Reuters, CBS, CNN, NBC, NPR and PBS. He has spoken at numerous conferences, including Speednews, ATRIF, NAFA, IADA, AeroMontreal, the Ontario Aerospace Council, and PNAA. He is a Fellow of the Royal Aeronautical Society. Since 2012 he has served on the National Aeronautic Association Collier Trophy Selection Committee. He presents a yearly lecture to the National Defense University/Industrial College of the Armed Forces and has served as an expert witness in aerospace markets.
Before he joined Teal Group in 1990, Richard analyzed the jet engine market at Jane’s Information Group, served as an aerospace industry consultant for an international trade advisory company and supported research projects at the Brookings Institution. He has a Masters degree in War Studies from King’s College, University of London and a Bachelors degree from George Washington University. He lives in Washington, DC.
Teal Group is the leading source of aerospace and defense market intelligence. Our team of experienced analysts covers a diverse range of markets, including aircraft, engines, military electronics, missiles and smart munitions, unmanned aerial vehicles, space systems and much more. Teal Group provides valuable insights and forecasts to aerospace industry executives, strategic planners, market researchers, government officials, and others who need to understand the developing trends and expectations.
Tony Kioussis (00:33):
Welcome to another Asset Insight Podcast, covering the aircraft ownership life cycle. I am Tony Kioussis, President of Asset Insight and your host. Those of you that have been following our podcasts will probably recall the episode we recorded back in January with Richard Aboulafia, Vice President of Analysis at Teal Group entitled, COVID-19 and the Business Aviation Market. To learn how business aviation has been performing during the first half of 2021 and where we might be headed, we asked Richard to join us once again, and he is graciously agreed to do so. Welcome, Richard, always a pleasure to discuss the market with you.
Richard Aboulafia (01:14):
It’s great to be back, Tony. Thanks for asking. One day we’ll be able to do this in person again, but until then it’s good to hear your voice over the ether.
Tony Kioussis (01:21):
I know you’ve been tracking the data for some time now. How do you think 2021 is shaping up from what you see in the first half?
Richard Aboulafia (01:31):
Pretty darn good. The overwhelming theme is, how sustainable are the really good numbers we’re seeing? But in terms of the numbers we’re seeing, they’re great. And especially the contrast from 12 months ago could not be more stark. The leading macro economic indicators a year ago were heart-attack awful. Today they’re really good. The micro indicators on the market’s behavior, they’ve gone from meh to hmm, very encouraging. We might be heading for the growth spurt that’s alluded us for over a decade now and keep looking for that next level, getting to that next level as an industry. Well, if these numbers are sustainable, we’re going to get there. It’s just that good.
Tony Kioussis (02:15):
I’ve heard you speak about the market bifurcation. Explain a little about that, what you’ve been seeing and what you anticipate happening as we come out of the pandemic.
Richard Aboulafia (02:26):
This big question, how sustainable are the industry’s currently very promising numbers? You really see it in the question of bifurcation. What happened about 13 years ago is, basically, the industry hived off into two segments. One is the upper segment, large-cabin jets and the other is small and medium cabin. They used to travel in tandem, be about the same size. Then starting in ’08, they ripped apart. In ’09, the large-cabin segment, the upper segment, basically, kept growing. And the bottom-cabin segment collapsed to the tune of about 65%, an unprecedented market catastrophe. There hasn’t been a whole lot of change to that bifurcation since. The small and medium cabin stuff just didn’t recover. Lost a decade. Whereas, the large-cabin stuff kept growing. Had a bit of weakness in 2015, but it is now roughly two-thirds of the industry, as opposed to the 50% it used to be.
Richard Aboulafia (03:21):
Now, what you’ve seen over the past year is a lot of activity in the small and medium segment. That’s perhaps expected, because people were looking for alternative modes of travel, given the pandemic and given concerns about hygiene and public places and whatever else. But if this is sustainable, you’re going to see the bottom segment outperforming the top segment. That bifurcation, that rift in the market, will be repaired. Here again, it’s a question about just how sustainable the trends in numbers we’re seeing are. And if so, it’ll be good to see a return to health for the bottom half of the market.
Tony Kioussis (03:56):
Let’s follow that a little bit further. What are some of the leading market indicators you’re watching? And are there any indicators that might be viewed as say, immediate market health guideposts?
Richard Aboulafia (04:09):
In terms of the macro indicators, you’ve got corporate profits that are really pretty good. You’ve got fuel prices, which primarily impact the top end and you want higher fuel prices strangely enough. Those are back into the low 70s, which is very good historically in terms of the correlation with big-cabin market health. That’s also very promising. Then of course, last and perhaps most, you’ve got equities markets, which are still in close to record turf, which is also very promising. Those are historically the three biggest predictors. They’re looking really good.
Richard Aboulafia (04:43):
Now, in terms of the actual market, direct market indicators, not macro, but micro industry indicators, most of them look really good, too. Availability is way, way, way down. Pricing still is a little soft, but it’s always soft. Perhaps that’s partly a function of an aging fleet. Perhaps it’s just the inevitable. No one ever seems to get pricing power back in this industry. I don’t know what it is. But it’s not bad either. Market and pricing hasn’t fallen precipitously. And if availability stays as tight as it is been well, then that indicates that eventually, just law of gravity or whatever, prices are going to have to go up. That’s what happens when supply gets and stay as tight.
Richard Aboulafia (05:26):
Then you’ve got utilization, which looks better and better, particularly for the 91k and 135 Charter and Fractional. Folks, that’s way above peak. That’s wonderful. Now, 91, that’s still down, but not catastrophically. Before we see a full recovery, we’re going to have to see borders open up again, because a lot of that is international. I guess you could say, of the main indicators, pretty much all of it, aside from activity of the traditional flight departments, that all looks really good.
Tony Kioussis (05:54):
How do you see consolidation or do you see any consolidation in the marketplace relative to the manufacturers?
Richard Aboulafia (06:02):
This industry, we’re rather different from all the other segments in the aerospace business that Teal Group covers in that we actually have had new market entrants, most notably HondaJet, but also Pilatus, joining the jet club with the PC-24. And of course, Cirrus making the big leap from pistons to turbines. So we’ve got new market entrants. We also have the highest profile casualty of the entire aviation business for the past couple of decades, which, of course, was Archer Beechcraft, I guess, about 10 or a dozen years ago. I guess I’d be foolish to bet against further change, because we seem to be more prone to change than any other segment of the business.
Richard Aboulafia (06:38):
Now, in terms of the big five, that’s an interesting one. When Embraer Air was going to sell its jetliner unit and there was a big question about what remained and whether that would be sold to somebody, the business jet unit, and anything could have happened there. Anything still might have it if, in the event, they decide to sell their jetliner unit. But we have no idea. It would fit very nicely with Gulfstream. That’s an intriguing one. Bombardier is the big question. Again, the world’s only pure-play, publicly-traded business jet prime, the people who own it, they might just decide to cash out at a certain point or there might be a crisis that forces their hand. They’d fit very nicely with other folks. Ironically, they fit in pretty well with their former arch enemy, Everett Air. But, I guess, that would be politically very difficult.
Richard Aboulafia (07:25):
Dassault was Dassault and will always be Dassault. Gulfstream is exactly fine with who and what they are. That leaves us with Textron. No reason to imagine a sale. On the other hand, it’s conceivable that they would fit pretty well with Bombardier and that would create the ultimate mega merger. I think there’s all sorts of possibilities. Again, given the track record, there’s every reason to believe that things could change.
Tony Kioussis (07:50):
I’ve often thought of what it would be like to have Cessna and Bombardier merge, just because of the sizing of the aircraft that Cessna has versus Bombardier would be the absolute reach from the smallest to the largest, right?
Richard Aboulafia (08:03):
It would be a very comprehensive product line. Obviously, Bombardier’s decision to kill off Learjet clears the way for that. I guess, the only thing you’d got is some friction around the Challenger 350 and the Longitude there, but maybe there’s room for both. But it would be a really intriguing creation.
Tony Kioussis (08:24):
I think it would be. How do you see new aircraft deliveries shaping up during 2021 and perhaps over the next few years? And which airframers do you feel are best positioned at the moment?
Richard Aboulafia (08:36):
You had a bad year, last year, predictably. Things down double digits. It’s hard to tell to what extent was that a market problem and to what extent was that a logistics associated with the pandemic problem. Factory closure. Shipment disruptions. People unable to travel to take delivery of their aircraft. A lot of it does look like it’s logistics. Numbers are coming back this year. We’re expecting to see a low double-digit increase. We’re expecting perhaps a similar low double-digit increase next year, too. We’re being conservative after that with relatively flat numbers. But if things really are sustainable, in terms of what we’re seeing in used aircraft availability, in terms of utilization, then you’re going to see continued upward pressure on production rates, which would be fantastic.
Richard Aboulafia (09:21):
In terms of the big players, boy, Gulfstream has become number one. I wouldn’t want to get in their way. However, in terms of faster growth rates, it could be that if the bottom half of the market continues to out perform the top half, you might see good numbers out of Textron and Embraer, absolutely. Dassault, not bad. They’re going to have to wait until the 10X arrives. That’s not for another few years. The 6X hasn’t arrived yet. They basically took a bit of a holiday in terms of new product development. They’ve been paying for that market share. They’ll be back. It’ll take a few years.
Richard Aboulafia (09:53):
And then you’ve got Bombardier, which is number two, but because they’ve now become the world’s only publicly-traded, pure-play business jet prime, there are big questions. They have a lot of debt. They’re completely dependent upon this market. They have a great product line, though. They are number two. It’s just a big question as to whether or not they stay independent and intact on their own.
Tony Kioussis (10:18):
Let’s talk about geographic diversification outside of North America. Where do you see that going?
Richard Aboulafia (10:24):
Well, it’s been 60% North America for a very long time. We saw tremendous progress sometime around six or seven years ago with China and a lot of the rest of Asia looking at China saying, “Hey, the more we can access in China, the more we like the idea of business jet operations.” Sometime in the mid 2010s, President Xi of China instituted all these changes and anti-corruption campaign, but he basically didn’t tell anybody what anti-corruption meant. All of a sudden people said, “Let’s be less wealthy, in appearance at least, and let’s get our Moa jackets out to the dry cleaner, because it might just be a prudent step.”
Richard Aboulafia (11:03):
Sure enough, so many aspects of Chinese civil society have changed over the past couple of years, if you look at the rather terrifying story of Jack Ma and Ant Group and everybody. Nothing to do with business aviation, but all of a sudden the culture of what had been a market economy, or something that was becoming a market economy, has been completely reversed. That has predictably had a devastating effect on business jet adaptation in China. I would love to see China return to the fold and have Asia go with it. But if it doesn’t, I’m afraid we’re stuck with pretty much what we’ve got. There’s been a little bit of incremental progress in Latin America and other parts of Asia and Africa. But for the most part, it looks like we’re still 60% North America with, of course, a very solid second market in Europe, that’s a bit more stable and not showing much signs of growth. But on the other hand, not doing badly either.
Tony Kioussis (11:51):
How do you see the electrification of aircraft or hybrid designs playing in the marketplace as we move forward into this decade?
Richard Aboulafia (12:01):
There’s a lot of interesting experimentation with hybrid and electric architectures. But the important thing to remember is, just that in terms of the energy density, there’s nothing like avgas. There’s just really nothing, jet fuel… Avgas, there’s just nothing like it. So what we have are new air vehicles that might be quite relevant for short ranges, but beyond that, you just got to change the laws of physics for that to make sense. The most promising, the most ambitious airframe, which was the 19-seater from Heart Aerospace that United has expressed interest in, they claim to be ordering some, it’s obviously a very soft order, but that is certainly the most ambitious concept. Even that is basically a 200 mile machine, 250 miles at most.
Richard Aboulafia (12:47):
Obviously, as you know, business aircraft are, well, they’re inter-city and typically, a thousand, two thousand, three thousand, eight thousand mile ranges. Nothing we’re talking about in the world of electric is more than a couple of hundred and that’s being extremely optimistic. Most of the air vehicles really are intracity, not inter-city. So fascinating experimentation, but a long time before it has any kind of impact on our market in business aviation. And perhaps never.
Tony Kioussis (13:16):
The way I look at it is, it’s an interesting experiment, but I really don’t see how it will affect the demand for the aircraft that we’re used to. I can see it for short hops, but I really can’t see it for anything along the lines of what business aviation does today.
Richard Aboulafia (13:34):
I completely agree with that.
Tony Kioussis (13:38):
With Aerion going away, I wonder what your thoughts are on the whole supersonic arena and the manufacturers, or purported manufacturers, that are still left in the game.
Richard Aboulafia (13:52):
It’s really interesting. I would have thought if anybody had a chance to bring a supersonic jet to market, it would have been Aerion. They had a pretty respectable engineering team. They’d been going at it for about 15 or 17 years. Of course, they, ostensibly at least, had some degree of backing from Boeing. But, boy, did that implode quickly. If they can’t do it, I’m not so sure who can. Obviously, if someone like Gulfstream or Dassault put their mind to it, they could. But so far, their emphasis has been on range and comfort, the traditional metrics, cabin and range, the traditional metrics of business aircraft appeal. If they are working on something supersonic, they certainly haven’t announced anything or even the slightest interest in it.
Richard Aboulafia (14:36):
Yet I still believe that there’s some part of the market that would be willing to trade cabin and range for speed. It’s a niche, but I think it would exist. It just doesn’t appear to be enough of a niche market to justify spending billions of dollars on a bespoke air vehicle.
Tony Kioussis (14:52):
Do you think it’s possible for an airliner to be developed before business aviation gets into it?
Richard Aboulafia (14:59):
I think airline economics for supersonic operations are even worse than BizAv. You’ve got this situation where you could probably put a supersonic transport into service overnight on a handful of routes. You just box up all the premium traffic in the front of an airliner and put them between New York and London, New York and Paris, maybe even Washington and Paris and you’d come up with demand for about the same number of Concordes as were built, 14. I don’t know how you find enough routes with enough premium traffic on it to justify that, especially since Asia is basically off limits. Business jets are another story, of course. There’s a lot more flexibility. The economics of finding those high rollers don’t matter, because most of the time it’s just going to be three, four people on the plane anyway. If that doesn’t work, I just can’t understand how commercial jetliner operations would work with supersonics.
Tony Kioussis (15:51):
Let’s talk a little bit about the changes that we’ve seen over the last year and that you’ve seen over the last year and where things might headed.
Richard Aboulafia (16:00):
I think the biggest changes have been at the high altitude metrics. If we’d had this conversation a year ago, equities markets, we were clearly heading for a collapse, not that a record Dow at 34,000 that we’re seeing today. But I think it was obvious to everyone that there’d be a terrifying recession. And there was, but things are great economics-wise. Ditto for corporate profits. They looked like they were doing a nosedive and now they’re back up at way beyond cruising altitude, just doing great. Those are two extremely important indicators.
Richard Aboulafia (16:29):
Then you look at the high-end segment and its relationship with oil prices. It’s a pretty close correlation there, because frankly, a lot of the customer base is domiciled. So you compare today’s fuel prices back in the ’70s for west Texas, with what we saw a year ago and I think, tactically, they’re paying you to take this stuff, this is a much better place to be for the market. All the macro indicators compared to when we last spoke, when we were still in the grips of the full force of the pandemic, they’re so much better now, night and day, in fact. Let’s just hope it’s sustainable.
Tony Kioussis (17:03):
Thanks for your input, Richard. I really appreciate it. Anything you want to share with respect to Teal Group for our listeners?
Richard Aboulafia (17:10):
Well, after following the industry for 30-something years, it’s funny, I guess, we’ve had the privilege of mapping the market and seeing two of the most amazing growth surges, 2003 to 2008 and 1996 to 2000. I’m pretty confident that one day soon we’re going to witness a third surge that’ll bring the market to a new level.
Tony Kioussis (17:34):
This has been another Asset Insight Podcast covering the aircraft ownership life cycle. Please visit our ever-growing podcast library at assetinsightpodcast.com and select from any number of topics discussed with business aviation industry experts. This is Tony Kioussis and as always, thank you for listening.
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