Covid-19—a few months ago, many of us might have thought the acronym stood for a new regional aircraft, under development by a wannabe manufacturer that had yet to earn its stripes, let alone set aside enough funding to develop a certifiable prototype. The speed at which this now infamous and deadly respiratory disease is already at pandemic proportions, stopping all manner of human activities and interactions, is difficult to comprehend. Exceptionally hard hit already are air travel and related industries, which are facing existential threats as flight operations are silenced and a massive number of would-be travelers stay locked behind their doors in the hoped-for relative safety of their homes.
To the extent possible, Working from Home (WFH) policies are being widely enacted to enable business continuity for people who can do at least most of their work online and out of elbow-bump contact of colleagues. Demand for virtual private networks (VPN) has spiked at the same time as Airbnb bookings for salmon river fishing expeditions in the spectacular fjord of Vopnafjörður, Iceland (IATA code: VPN) have vanished—virtually overnight.
The costs of this awful contagion are already incalculable, and its impact on our different ways of life unimaginable.
In a small but remarkable gesture of goodness that these awful developments seem to inspire, online booking site Airbnb launched a version of its service to help medical professionals on the front lines of combating the coronavirus outbreak in Italy to access free accommodation provided by its hosts, with all associated fees paid for by Airbnb. It is heartwarming to know that business and general aviation aircraft owners/operators are, almost to an organization and to a person, amongst the earliest of first responders to help at times like these.
Make no mistake—the rapid shutdown of airline services on what has quickly become a global scale is already without precedent. Simply said, most airlines are ill-prepared for a major disruption in demand from their primary revenue source—fare-paying passengers.
The International Air Transport Association (IATA) is a global trade organization representing the interests of more than 290 commercial air carriers. Civil aviation’s irreplaceable role in nurturing commerce is clearly being disrupted, a reminder to us all of the impact and reach of our industry into every corner of society. As IATA proclaims: “Aviation frees us from the limits of geography, distance & time. Aviation is the business of freedom.”
Despite the often-mentioned differences between commercial and business & general aviation (B&GA), the facts are pretty clear that these segments of civil aviation have much in common and together provide a more complete service than either could deliver on its own.
While B&GA may support an estimated 1.1 million jobs and $247 billion in total economic output in the U.S. alone, as determined by a just-released study conducted by PricewaterhouseCoopers LLP, only a small proportion of the employed ever get to fly in anything but a Boeing or Airbus commercial airliner (if at all).
Air travel and logistics services provided by the airlines are essential for the normal functioning of everything from family life to factory supply chains, without which we are all much worse off. It is not difficult to imagine the disruptions that arise when aircrews and maintenance technicians simply cannot get into position to meet their aircraft, when brokers and dealers cannot get to a pre-buy, or when aerostructures, parts and associated systems cannot be transported on-time to production and maintenance facilities and to line service stations.
The year 2019 was a challenging time for pre-owned business jet sales, which ended the year down about 15 percent year-over-year (YOY), based on JetNet records. This slowdown came at the same time as business jet OEMs were beginning to reap the benefits of years of capital investments in all-new and significantly improved models, with certification and production ramp-up the order of the day last year across multiple companies and platforms. New business jet deliveries were up ~15 percent YOY, buoyed by a much-anticipated increase in firm orders. Backlogs were up an estimated 8 percent over 2018 at the “Big 5” OEMs, the first such increase since the financial crisis of 10 years ago.
While we have been factoring a cyclical downturn into our JetNet iQ delivery forecast models for the years 2020-2029, the immediacy and depth of the swoon in demand that we had already been anticipating have arrived with an unexpected voracity. While the profound impacts of the Covid-19 disease will be the subject of economic research for generations to come, it is already excruciatingly apparent that this invisible viral enemy—apparently born through natural processes from a lowly bat—is powerful enough to infect and kill masses of people, while driving global powerhouse economies, political and business leaders, and innocent people from Wall Street to Main Street and beyond to their knees and into recession.
At the crux of the issue is a simple question that is paramount for our part of the economy: In a recession, do companies and high net worth individuals continue to buy and fly business aircraft? For some, the answer is clearly and enthusiastically “Yes!” As they say, when times get tough, the tough get busy, and they get there ahead of their competition. For others—and experience suggests these are in the majority—priorities are focused on capital preservation, in the knowledge that dry powder is a good thing to have at most times, but especially in a gunfight.
And a gunfight it is, as organizations stress their business plans (and their hard-working analysts) with various “what if” scenarios, while people from all walks of life do their utmost to help where they can, whether by lending a hand, offering an elbow-bump, or practicing simple and time-honored traditions of handwashing and social distancing. Across the business and general aviation industry, the transition to WFH is accelerating rapidly in an effort to stop the spread of a contagion that is already changing our ways of life.
The March 18, announcement of a large-scale rolling four-week furlough at Textron Aviation was an unwelcome but not surprising early warning indicator of what is likely to be more things to come from at least some of the other business aircraft manufacturers. In what was surely a head-shaking and anything-else-but-this decision, president and CEO Ron Draper and his senior leadership team took the brave step of calling it like they see it.
Going into the year with only $1.7B in order backlog - enough to cover perhaps 4-5 months of production at recent rates - industry-volume leader Textron Aviation had relatively little maneuvering room and degrees of freedom to weather any prolonged downturn in orders without production adjustments.
We believe that slower order intake became apparent in the waning months of last year as backlog slipped by about 5 percent, in contrast to most of Textron Aviation’s peers. In Q1 2020, we understand that order rates at some of the OEMs slowed quite substantially. At the same time, asking/getting prices in both the new and pre-owned jet markets slid by double-digit percentages sequentially in some of the most competitive market segments with multiple OEMs vying for the same customers, many of whom were no doubt seeking “smokin’ hot” deals, whether or not they were on offer.
The world turns, OEMs battle for business and customers shop for the best offers. In some ways, nothing ever really changes. Nonetheless, the arrival of Covid-19 is the Black Swan of swans, a shock that is already relegating the Boeing 737 MAX problem to the back pages of industry lore. The sooner the deadly coronavirus pandemic mercifully passes the better, but life—and the aviation industry in particular—will be anything but normal until it does.
