Tuesday, January 27, 2009

The Truth Behind Private Jets

After Vikram's Falcongate incident, and of course the CEOs of the Detroit aka Default-3 companies making quite a PR splash in D.C. begging for bailout money after a cushy two hour flight in ultraluxury, the entire private jet industry will likely be under massive scrutiny with the resulting fallout likely to result in many new companies inducted into our Death Watch list. We do agree with Mark Haines that private jets are straw men for public anger venting, but we can think of no more appropriate symbol of the financial excesses of recent times than your garden variety Gulfstream V.

As a result we have pulled a presentation put together by Textron (full link here), the largest maker of private jets in the world, with a 50% market share through its Cessna division. Granted the company has other businesses, notably a military helicopter program, unmanned surveillance aircraft, golf carts and a captive financing business (which we believe is in some serious trouble), but the core of its operations is making aircraft for the ultra wealthy.

Looking at the industry participants on the left, it is ironic that Dassault, which was Vikram's pick for a security-gate skipping vehicle in the form of the Falcon 7x, has only a 1% market share. What is concerning is that the bulk of the companies that make private aircraft are U.S.-based. As one can kiss all private jet backlog good bye for at least several years, many of these companies will simply not survive, and while we do not have the number of people employed at each handy, it would seem that a lot of innocent people will end up on the unemployment line for mistakes committed by others. Very sad state of affairs.

The next slide presents the specific brands of private jets and what their associated cost is. Not surprisingly, Dassault is the Rolls-Royce of this business... Could Vikram maybe have gone for a bargain-basement Eclipse? Perhaps the public outcry would not have been as dramatic.

This slide shows just how much of an impact the huge backlash against private jetting will have on jet producing companies. The backlog of Cessna deliveries for Textron alone is $11.5 billion. If one extrapolates based on its size in the industry, there is currently roughly $23 billion in backlogged orders. It is safe to say that this number will be drastically cut. After all, the biggest purchasers of private jets were the U.S. financial industry, Russian and Arabian oligarchs, and political figures: all of these have private jet purchases last on their mind in right now.

There is much more information available in the above presentation, which we encourage our readers flip through.
Some implications of all these transportation scandals: one has to be very pessimistic about the prospects of private jet manufacturers, especially the public companies, even more especially companies that have associated captive financing units (little GMACs waiting to grow up). How about fractional jet ownership companies? Not too clear. Warren Buffet of course disagrees, but it is possible that as major financial companies clamp down on spending, high execs will have no choice but to fly commercial like the rest of us mortals. Plus have you read a RobbReport recently? Each magazine is exactly one article and roughly 1000 ads for companies that want to sell you timeshares on their permanently parked G-5s. And of course, we feel bad for all the employees, as many of them will have to look for jobs quite soon. Then again with unemployment headlines hitting a runrate of 100,000/day, they will end up being just another statistic.
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LangoneRedStudyGroup said...

It's a Cessna Citation Mustang, not an Eclipse. But I agree.

Really enjoy your blog. Keep up the good work.

LangoneRedStudyGroup said...
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Adam Twidell said...

This article summaries perfectly the rapid decline in private owners, fractional shares and block hour purchase of private aviation. However the upside is that it has never been so cost effective to charter someone else's jet! At www.privatefly.com the online brokering network, the cost of private jet flights has reduced by 20% in the last 4 months. Many private jet customers are now choosing to charter a jet on an ad-hoc basis with no capital investment required.

Robert Paulson said...

I agree with everything you have said. Good stuff. I am Jacks economic downturn, if I don't leave Jack doesn't have a job.

Vigilis said...

Casual viewing of air traffic at our nearby regional airport confirms slackening of commercial passenger traffic.

However, there can be little doubt private jets have been landing here in record-setting numbers. Major projects are in the offing (despite the financial gloom and doom).

For Cessna not to benefit handsomely from continued jet sales, the world economy would have to turn completely socialist. That is not in the cards. And, while its backlog may suffer for a while, higher prices will meet the decliners later.