COL Colliers Intl

The global economic crisis is forcing corporate belt-tightening in many business sectors, putting the brakes on a five-year upswing in demand for multimillion-dollar business jets.

Cessna Aircraft Co., a unit of Textron Inc. (TXT), announced this week that it would lay off 2,000 workers, in addition to 500 jobs cut in December, to "ensure our long-term stability and success," as customers deferred orders.

The market for business jets, including small companies, wealthy individuals and corporations, has been fueled by strong demand from new customers in Asia and the Middle East, as well as in the U.S. and Europe.

The record pace of ordering cooled off in mid-2008, and now more buyers are expected to cancel new aircraft orders, or sell planes they own, according to analysts.

They expect to hear more details when aircraft makers and their suppliers report fourth-quarter earnings in coming weeks.

Textron reports earnings Jan. 29, with Honeywell International Inc. (HON) following on Jan. 30 and fellow supplier Rockwell Collins Inc. (COL) on Feb. 3. Hawker Beechcraft Corp. (HBAC) is expected to report next month.

"The market is going down so fast that we're all getting bloody noses," said Brian Foley, a New Jersey-based consultant.

He expects order cancellations to reach double-digit levels in 2009, followed by a very slow recovery. Market speculators, hoping to buy new planes and "flip" them to buyers further back in the order book, contributed to a bubble that's not typical in the relatively stable business aircraft market, Foley said.

Fractionals And VLJs Falter

Business jet manufacturers risk order deferrals from "fractional providers," which Foley considers to be "the most financially solid part of the market." But even leading companies such as NetJets Inc., a unit of Berkshire Hathaway Inc. (BRKA BRKB), are losing money.

What's worse, Foley said, "where previous order books were speckled with fleet orders from a handful of fractional providers, current order books sport a cadre of unproven, startup fleet purchasers launching amid a worldwide recession." These businesses have placed hundreds of orders for new business jets, Foley said.

The nascent market for very light jets has been particularly hard-hit with Eclipse Aviation Corp., the leading manufacturer, in bankruptcy protection.

The industry had expected this new aircraft type, which is relatively cheap to buy and operate, to spur a burgeoning air-taxi business.

Stefan Vilner, head of the European Air Taxi Association, said last year the startup group had 14 founding members. "Now there are only five left," he said.

In the U.S., Florida-based DayJet, an ambitious startup air-taxi service, liquidated in November after less than a year in operation. The company said it couldn't raise enough capital to stay aloft, or even to reorganize in Chapter 11.

Vilner, who is chief executive of Ireland's JetBird, another prospective air-taxi operator, said the company is going forward with plans to begin service this spring, based on a 100-aircraft order for the Embraer Phenom 100, a four-seat very light jet.

"Our timing was very good," Vilner said. "We were able to get financing before the downturn in the credit market, and we got a 'launch price' on the new aircraft."

JetBird secured a combination of bank and manufacturer financing, he said. "We think the business downturn may actually help us," Vilner added.

"We have a low-cost model for our business, and low-cost airlines can do well in a recession, whether they are big airlines like Southwest or private jets."

JetBird still plans to take delivery on 13 of the Embraer aircraft this year, 25 in 2010 and 20 planes in each of the next three years.

 
   Used Inventory Rises 
 

Recently reporting fiscal third-quarter results, Canadian business jet maker Bombardier Inc. (BBD.B.T) said it booked 48 new orders in the quarter, down from 112 in the same period a year ago. "This reflects a recent softening of demand for business aircraft in light of the current worldwide economic environment, and the fact that Bombardier Aerospace received a record level of business aircraft orders" a year ago, the company said.

Joseph Nadol, aerospace analyst at J.P. Morgan, said 2008 ended badly for the industry, with the inventory for used business aircraft rising on 15 of 23 different models he tracks. "Hawker Beechcraft was the only manufacturer exhibiting lower inventories," he wrote in a recent report.

Business jet prices fell 3.5% in December from the previous year, Nadol said, the biggest drop since October 2001, the beginning of the last downturn in the aircraft industry.

A healthy inventory of newer used aircraft means some buyers will opt to purchase a used aircraft, which can cost around 40% less than a new one, said Foley, the consultant.

Business jet flight operations, the number of takeoffs and landings at airports, plummeted 25.5% in November, the most recent data available, compared with the year before. "We are concerned with the impact that flight ops could have on the aftermarket, particularly Rockwell Collins and Honeywell," J.P. Morgan's Nadol said.

About half of business jet customers pay cash for their purchases, Foley said. The other half of sales are financed, a problem now, as many banks just aren't lending money.

When the current recession comes to an end, the business jet market is expected to grow, along with the global economy. In Honeywell's annual industry forecast released in October, a survey of customers found that, over the next ten years, up to 17,000 new business jets are expected to be delivered to them.

-By Ann Keeton, Dow Jones Newswires; 312-750-4120; ann.keeton@dowjones.com

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