Bombardier’s Business-Jet Recovery Shows Bigger Is Better
Bombardier Inc.’s (BBD/B) large and mid-sized jets are leading a recovery in business aircraft sales as U.S. corporations upgrade their fleets with cash stockpiled after the 2008-09 financial crisis.
Those planes offer a bright spot in a market battered by slumping demand for the smallest models, said Steve Ridolfi, president of the business-jet unit at Montreal-based Bombardier, the world’s biggest maker of business aircraft by revenue.
“We’ve had the U.S. corporates come back into the marketplace, which was something that was lacking in 2009 and 2010,” Ridolfi said in a telephone interview. “They’re back in, looking to re-fleet and they are a big driver of that marketplace.”
Business buyers are one of three pillars of the private-jet industry, along with wealthy individuals and operators such as NetJets, the aviation unit of Warren Buffett’s Berkshire Hathaway Inc. Each type of purchaser represents about one-third of the global market, Ridolfi said.
Bombardier’s earnings report tomorrow will give analysts and investors an opportunity to seek information about business-aircraft performance in the first quarter. The manufacturer drew about half of its $8.6 billion of aerospace revenue from such planes last year, and growth in deliveries outpaced a global decline.
“Manufacturers have been giving out perspective on what they are seeing, and it seems things are fairly positive,” Cameron Doerksen, an analyst at National Bank Financial in Montreal, said in a telephone interview. “Activity is OK.”
Bombardier projected about 180 business-aircraft deliveries this year. That would be in line with 2011, when shipments grew 21 percent from 150 the year before, according to data from the General Aviation Manufacturers Association.
The value of business-jet deliveries will probably climb by 6 percent this year and 8 percent in 2013, market research firm Teal Group said in a report published last month. Shipments of the planes sank 29 percent from their 2008 peak until the end of 2011, Teal Group said.
Sales at Bombardier have benefited most from rising demand for large aircraft such as the Global 5000, which has a list price of $49 million. Bombardier had a backlog of future orders amounting to 34 months of production for its Global jets as of Dec. 31, exceeding its 24- to 30-month target.
The Global 5000 can seat eight to 17 passengers, depending on the cabin configuration, according to the planemaker’s website. Its maximum range of almost 6,000 miles (9,600 kilometers) is almost 50 percent farther than the distance Boeing Co. (BA) lists for its 737-800 jetliner.
Worldwide deliveries of large-cabin jets, weighing more than 50,000 pounds (22,700 kilograms), were little changed at 200 last year, General Aviation Manufacturers Association data show. Deliveries of medium-sized jets -- weighing 12,500 to 50,000 pounds -- rose 15 percent to 375 units. Shipments of light jets dropped about 46 percent to 106.
“The light aircraft space is still very challenging,” Ridolfi said. “Our competitors there are suffering as well.”
Last week’s bankruptcy filing by Hawker Beechcraft Inc., the private-jet maker owned by Goldman Sachs Group Inc. (GS) and Onex Corp. (OCX), showed the strain on the industry. Hawker, maker of the Hawker 4000 business jet and Beechcraft King Air turboprop, reported more than $900 million in net losses in the past two years as plane sales and U.S. military contracts waned.
Business-jet sales typically lag behind growth in company earnings. U.S. corporate profits climbed sequentially for 12 straight quarters through the end of 2011, reaching $1.99 trillion in the three months through December, according to the most recent data from the Commerce Department.
“You’re starting to see the utilization of aircraft trend back to more normal levels,” said Peter Arment, a Sterne Agee & Leach Inc. analyst in New York who has a neutral rating on Bombardier. “We’re still seeing globally the high-end market is very strong.”
3M Co., the maker of products ranging from Post-it Notes to fuel system tuneup kits, said in February it plans to upgrade its corporate fleet. St. Paul, Minnesota-based 3M buys new planes periodically to ensure safety and improve efficiency, Jacqueline Berry, a spokeswoman, said yesterday.
Ridolfi said Bombardier expects to get “a lot of contracts done and dusted” at the European Business Aviation Convention & Exhibition, which begins May 14 in Geneva. Qatar Airways Ltd. has already said it plans to announce a large Bombardier business-jet order at the event.
The prospect of recovering private-aircraft sales hasn’t been enough to buoy the stock. Bombardier fell 5.4 percent to C$3.69 at the close today in Toronto, the most since March 1. That extended the shares’ slide to 9.1 percent in 2012, trailing the 2.3 percent drop for the benchmark S&P/Toronto Stock Exchange Composite Index.
Bombardier may report first-quarter earnings of 10 cents a share on sales of $4.51 billion, the average estimates of analysts surveyed by Bloomberg. The figures aren’t directly comparable to last year’s, because Bombardier switched to a calendar-year reporting schedule in early 2011.
While Cessna parent Textron Inc. (TXT) has signaled that it may consider bidding for parts of Hawker Beechcraft, Bombardier has no interest in the insolvent plane maker, Ridolfi said.
“We are focused on internal product development, and we think that’s where we should be investing,” he said.
New Bombardier products include the Learjet 85, which will enter service in 2013 and sell for about $20 million. The manufacturer has begun assembling prototypes of the mid-sized plane at its Queretaro plant in Mexico, and Ridolfi said about 1,800 people, including suppliers, are involved in the project.
Interest in the plane is high, Ridolfi said, citing a “significant number of launch customers” who have placed firm orders. The Learjet 85 will compete with Cessna’s Sovereign and Embraer SA (EMBR3)’s Legacy 450, he said.
“We expect to have a significant backlog of deliveries going on in the first few years of production,” he said. “That will tie us through to a more general pickup in the marketplace.”
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