Buyer's remorse -- before buying?

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Billionaires Aren't Buying Enough Private Jets

Justin Fox is a Bloomberg View columnist. He was the editorial director of Harvard Business Review and wrote for Time, Fortune and American Banker. He is the author of “The Myth of the Rational Market.”
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Economic turmoil in Russia and the slowdown in China have together claimed another set of victims: Canadian aircraft workers. The problem this time is that billionaires in those countries and in Latin America aren’t buying enough private jets. From a press release issued this morning by Montreal-based Bombardier:

Bombardier Business Aircraft confirmed today that current economic conditions and geopolitical issues in some market regions, such as Latin America, China and Russia, have impacted order intake levels industry-wide. As a result, Bombardier Business Aircraft will reduce its production rate for Global 5000 and Global 6000 aircraft.

This will mean 1,750 layoffs, most of them at Bombardier’s Montreal operations, but also in Toronto and Belfast, Northern Ireland.

Bombardier vies with Gulfstream (a division of General Dynamics) for bragging rights as the biggest maker of what people in the industry call “business jets,” with Gulfstream currently slightly ahead in revenue. Trailing well behind those two are Cessna (a division of Textron), Dassault and Embraer. These companies are quite aware that billionaires are a big part of what makes the private-jet business go. This is from Bombardier Business Aircraft’s annual market forecast, issued last summer:

It could be that this chart, with its misspelling of “billionaire,” is the source of Bombardier’s problems. “You cannot even spell what I am,” I can hear some Russian oligarch saying. “Why should I buy your stupid jet?”

Actually, that’s probably not it. But selling to oligarchs has definitely become an issue. Reports Bloomberg’s Frederic Tomesco:

“A lot of the oligarchs made their money with oil, and right now oil prices are being challenged,” Eric Martel, president of Bombardier Business Aircraft, said Wednesday of Russian jet buyers. “Also, taking money out of the country right now is challenging. All of this put together results in the slowdown we can see now.”

A broader issue is the shift of the business-jet market from small planes that fit a chief executive officer and a couple of aides to spacious jets that can hold a serious entourage and fly longer distances. Bombardier’s Global 5000 “can be configured to seat 17 passengers in complete comfort.” With the 6000, that goes up to 19. Rival Gulfstream’s G500s, G550s and G650s seat as many as 18. The G650, incidentally, is the hottest business jet of the past few years, and the only one (I think) to have a No. 1 hit sung about it.

Bombardier also owns Learjet, the iconic maker of small business jets. Fifteen years ago, Learjet accounted for the majority of the business jets it sold. Since then, though, Learjet sales have plummeted. The same thing has happened to small-jet sales across the industry. As a result,   private jet sales are still well below the levels that prevailed before the financial crisis:

Thanks to rising sales of bigger, more expensive jets, though, the industry’s estimated billings last year topped $22 billion for the first time:

A couple of comments here: One is that the business-jet market has clearly grown a lot during the past two decades. Another is that, at $22 billion in revenue, it’s still relatively small. Between them, the commercial-aerospace divisions of Boeing and Airbus reported $115 billion in revenue last year.

So now we have a business-jet market that is increasingly skewed toward the ultra-high end. This is in part a reflection of the continued growth in income inequality. I don’t think there are any signs that this trend is played out. These jets, though, are so expensive that even a billionaire -- or a big corporation -- is unlikely to buy one on a whim. A new Gulfstream G650 will cost you at least $64.5 million. The Bombardier Global 5000 runs about $48 million. It’s also been around long enough that there are a lot of used ones on the market, with an average price of $21 million, but that creates its own problems for the manufacturer. This seems to be a business that has both matured and is becoming more sensitive to slight changes in sentiment and/or economic conditions.

That’s OK if you’re Gulfstream, and have a three-year backlog of G650 orders to work through. In an earnings call at the end of last month, General Dynamics Chief Executive Officer Phebe Novakovic said Gulfstream too is seeing fewer orders from Russia, Latin America and China, but because of the backlog won’t be cutting production. Bombardier can afford no such luxuries.

  1. Boeing and Airbus also refit some of their airliners as very large business jets, but that accounts for only a tiny fraction of their revenue. 

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Justin Fox at justinfox@bloomberg.net

To contact the editor on this story:
James Greiff at jgreiff@bloomberg.net