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:: May 2017 Letter ::

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Dear Fellow Private Aviation Aspirants,

One Quixotic artifact of the A380 era is an Airbus-run website, www.iflya380.com, that allows passengers to select flights featuring that plane. I donít know if anyone has actually used this tool to plan travel, but if the site has inspired anyone, they can now go the next step, and buy their own A380. Iím just back from EBACE in Geneva, where we heard talk of four used Singapore A380s about to be retired and made available for VVIP conversion.

Airbus hasnít sold any VVIP A380s, but you canít rule this idea out. Thereís no evidence that a secondary commercial market exists at all, so Singapore (and other carriers) may have no choice if they want to dispose of their A380s. Soon, any potentate could buy a ten-year old A380 for less than $100 million, according to Aircraft Value News. But that represents everything thatís wrong with the business jet market today. Thereís too much cheap heavy metal having a knock-on effect against all the stuff beneath.

A brief recent history of the high end: After the 2008 economic debacle, the bottom half of the business jet market ($3-$25 million prices) fell by 57%, while the top half ($26+ million) just kept growing. It grew through 2014, a remarkable 11-year run. But over the past two years soft emerging markets, low commodity prices, and Chinaís anti-corruption campaign have all pressured the high end market downward, with deliveries falling 27% by value between 2014 and 2016. As is standard OEM practice, record output rates were sustained well after market alarms were clanging, thereby guaranteeing a steeper drop and a worse oversupply situation.

While the bad times were catching up with the high end, another headwind kicked in. In 2011 Gulfstream started delivering its G650, the first of a completely new class of ultra-lux-o-barge business jets, with a price tag $15 million higher than any previous traditional business jet model (about $74 million today). Over 230 have since been delivered.

Some people just want the biggest, and thatís great. But consider: with the G650, in six years the market saw $18 billion in additional deliveries at the high end. By comparison, last year saw just $20.5 billion in new business aircraft deliveries, from props to G650s, with the entire top half worth $12.5 billion. That sudden input distorted the marketís topline. In fact, without those G650s, the market would not have seen any kind of top line recovery at all from the 2009-2010 downturn.

Inevitably, as the rest of the market stayed flat and G650 output continued at a four-per-month rate, the previous high-end jets were displaced. New and used G550s, Global 6000s, and Falcon 7Xs got cheaper, particularly when they were traded in for new G650s. They, in turn, displaced G450s, Global 5000s, and whatever else. Those got cheaper too. The pain kept cascading down, until G280 sales (formerly around $27 million new) were threatened by cheap G450s (formerly around $47 million new). Challenger 300s (formerly $26 million new) started displacing mid-sized jets, helping to kill Bombardierís own Learjet 85, which was to sell for $19 million. And these are just new prices; cheap heavy metal got even cheaper when it was a few years old.

This problem will get worse, particularly since the market top line remains stuck. Next year Bombardier will start delivering its Global 7000, a belated (thanks to the CSeries) response to the G650, and even more expensive. Since thereís an up-front order book of eager early adapters, and a manufacturer eager to bring in cash, thereís no way to stop several hundred more large jets hitting the market in the next few years, accompanied by many trade-ins and existing large jet sales. Thereís also talk of a new large Dassault FalconJet, probably the 9X.

The bottom half of the market, on the receiving end of all this top half trickle-down tyranny, has yet to recover to its 2008 peak. It wonít get back there any time in our ten year forecast. And our top half forecast doesnít call for a return to the 2014 deliveries peak until 2021. With the new ultra high end models, and that Falcon 9X, and the Gulfstream 500/600 all coming on line in the next few years, there will clearly be some disappointing returns on investment.

Aside from general market pessimism, my one conclusion from all of this is that OEMs should differentiate themselves. These new heavy models conform to the usual cabin + range/price formula. It might be time to think creatively.

Speed is one possibility. Iím not 100% convinced that thereís a business case for a supersonic business jet, but Aerionís SSBJ has gotten some traction recently, with an agreement with GE announced at EBACE to study engine requirements. In addition, OEMs might consider differentiation with alternative airframe concepts Ė anything from trapezoidal wings to blended-wing-body configurations. This is a conservative industry (the Starship and Avanti stories prove that), but when your market is getting commodified fast (with profits falling in tandem), out-of-the box thinking might be useful.

This brings us back to that Singapore A380 announcement, which may be the first of many such A380 announcements. No matter what the business aircraft market topline does, the very top of the market may have an A380 problem. The last of 235 A380s will be delivered by 2020 (Tealís forecast). Many will retire in the 2020s. Most will be retired by around 2033. Again, thereís no secondary airline market, and there wonít be cargo conversions. If these planes have any kind of value, it will be as VVIP conversion candidates. At least a few heads-of-state may wind up with jets larger than the next Air Force One.

There will likely be just a few A380 VVIP takers. Airport access would be terrible, and twin (and single) aisle jetliners have always been available for VVIP conversion, with relatively little impact on the broader market. But we canít rule out a dozen or two sales, producing a deflationary downward cascade effect on the other business jetliners. After all, thatís just an exaggerated, jumbo-sized version of whatís afflicting the entire business jet market today.

May Aircraft Binder updates include the F-16, CH-47, AH-64, S-92, OH-58D, F-15, and E-8 JSTARS reports. Have a great month.

Yours, ĎTil Teal Group Springs For An A380 Fractional Share,
Richard Aboulafia
 

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