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Business jet makers deepen discounts to fly out of turbulence
[BENGALURU] Business-jet makers such as Bombardier Inc and Textron Inc are offering more discounts and incentives to prevent buyers from cancelling orders or delaying purchases amid sluggish global growth, analysts and dealers said.
Higher discounts on older models that are bloating inventories, as well as on some newer models, are expected to keep prices depressed and weigh on margins through the rest of the year and possibly in 2017 as well.
Planemakers have little choice.
Billionaires in key markets like China, Brazil and Russia have tightened their purse strings in response to weakening economies. Oil tycoons have retrenched in the face of low oil prices, while companies have slashed budgets.
"Business conditions in the executive jets industry have proven to be more difficult than expected thus far in 2016, with continued pressure on new jet sales coming from high levels of pre-owned jet inventories and a highly competitive environment," Marco Pellegrini, CEO of Embraer Executive Jets, told Reuters.
Business jet deliveries are expected to drop 11 per cent in 2016, according to Jefferies analyst Howard Rubel. That would be the steepest percentage decline since 2009.
Prices are being further pressured with many aircraft owners putting planes on sale, partly to avoid high maintenance costs - typically US$1 million-US$4 million annually - adding to the glut in the market. These jets have long shelf lives and planes that are 5-10 years old are considered as good as new.
This has driven planemakers to cut prices by at least 5-15 per cent on the list prices of mostly midsize and large business jet models, the most severe in the past four years, according to analysts and dealers.
Discounts of about 5 per cent on average were the norm a couple of years ago. "If you are not discounting today, you are not in business,"said Dennis Rousseau, president of Aircraft Post, which provides market data on business jets.
Sometimes the discounts are much higher.
Some of Bombardier Inc's mid-sized Learjet 75s from the 2015 inventory, which had a list price of about US$13.8 million, are now being sold for about US$9 million, according to sources who have run inventory checks.
Jet companies are also offering an increased number of pilot training packages, parts-service credits and trade-in options to attract customers.
But these efforts are unlikely to bear fruit anytime soon and things could get worse, analysts said, citing fewer-than-needed production cuts as the biggest reason.
A spokesman for Bombardier did not have anything to add beyond information already available publicly.
At least five General Dynamics Corp large-cabin Gulfstream G650 jets from 2015 and 2016, listed at US$64.5 million, were sitting in hangars as of June end, said a McLean, Virginia-based dealer who did not want to be named.
"Most of them are owned by Chinese companies, contracted for these three-four years ago. Now it's time to deliver and they can't afford to take delivery," the dealer said, adding that the jets could have been sold by now but that he could not confirm the sales.
General Dynamics declined to comment on the story.
It is difficult to predict how many planes these companies have in their inventories because they don't disclose inventory numbers.
Still, there are some bright spots on the horizon.
The North American business jet market - the biggest in the world - has proven resilient despite the oil price slump.
"The North America economy differs from emerging markets by having a record-setting stock market level and high corporate profits," said Brian Foley, business aviation market analyst at Brian Foley Associates.
"There is also some level of pent-up demand as North American buyers had delayed purchase decisions until there was more confidence in the economy."
Production cuts are slowly happening as well, though weak demand has forced most major aircraft makers to either lower sales or delivery forecasts for business jets for the year, or warn that demand will stay weak.
Bombardier, which analysts and executives said has been the most aggressive in cutting prices, said last week it would halt completion work for its Global 5000 and 6000 business jets during certain periods in 2017. The Canadian company had the largest share of worldwide business jet shipments last year.
General Dynamics said earlier this year that it had trimmed production rates of its Gulfstream G450 and G550 aircraft partly to match demand and partly to ease transition to newer models.
France's Dassault Aviation SA, maker of Falcon business jets, said in July it was getting ready for low production levels.
Dassault and Brazil's Embraer, which makes the Phenom 300 and Legacy 650 aircraft, both cut their 2016 delivery forecast for business jets.
Dassault said it did not want to comment beyond what it had said on its earnings call in July and Textron declined to comment.