Turbine Edition: Forecast

Up signs in a down economy

Small turbine aircraft catering to owner-operators and other customers continue to sell remarkably well. The established players and products in this market are prospering. Better still, new products promise further market growth.

Turboprops have always been the mainstay of this market. As fuel prices stay high, nothing provides great economics like a turboprop engine. The King Air, TBM 700/850, PC-12, and Avanti offer superb costs, cabins, and range for the price. While slower than jets, for shorter flights the door-to-door time difference is small.

The very light jet (VLJ) has been hyped as a revolutionary change for the turbine owner-operator market. Terms such as disruptive technology are used to describe what is actually an evolutionary add-on for a vibrant, thriving business. Even if VLJs are excluded, the market has enjoyed strong growth in recent years. Turboprop deliveries grew 13.6 percent by value annually over the last five years, and 4.8 percent over the last 10. These numbers are surprisingly strong for a technology purportedly rendered obsolete by VLJs.

However, VLJs have contributed to the market’s health. If VLJs are added, these growth numbers jump to 19.3 percent and 7.1 percent, respectively. These value numbers use list prices in constant 2008 dollars.

Meanwhile, the light jet segment, led by Cessna’s CitationJet family and Hawker Beechcraft’s Hawker 400, has grown at slightly less impressive rates—12.5 percent annually over the past 10 years, and 2.8 percent over the last five. But this slow growth is largely because of the enormous boost this segment received in the mid-1990s when Williams International’s FJ44 turbofan entered service, enabling a new generation of small, efficient twinjets. Some of the slow growth is also attributable to the low end of the market switching to VLJs.

Today, the business aviation market stands in stark contrast with the scheduled air transport market. Airline travel is threatened by higher costs because of fuel prices and slack demand because of a weakening economy. Demand elasticity is quite different for private air transport. There are no signs of a weakening private jet market.

However, the low end of the private aviation market is showing notable weakness. While business jet deliveries continue their double-digit growth, piston aircraft deliveries in the first quarter of 2008 fell by 28 percent compared with the first quarter of 2007. Turboprop growth was relatively soft (7.6 percent compared with 40.8 percent business jet growth).

Therefore, it’s likely that the turbine owner-operator market, while less vulnerable to a downturn than the piston-powered market, is still at risk if the economy stays weak. Individual owners will always be more sensitive to high costs and economic weakness than corporations. On the positive side, government and military demand will stay at a more consistent level, providing a secure market for 15 to 25 percent of light turbine aircraft production.

The anticipated owner-operator downturn will be cushioned by VLJ market growth. VLJ deliveries are rising this year to about 300 aircraft. Next year, Embraer’s Phenom 100 production will likely reach its maximum rate. However, there is a strong risk of Eclipse deliveries declining. The company’s plans for profitability have diminished, and the company has raised the price on its Eclipse 500 from $1.5 million to $2.15 million, greatly reducing its appeal.

In fact, despite the growth of VLJ deliveries, this business has proven to be a new manufacturers’ graveyard. At least seven companies have tried and failed to enter the overhyped VLJ market. Names such as Safire, Century, and Avocet have become mere footnotes in aviation history.

With the bankruptcy of Adam Aircraft, only Eclipse Aviation has any hope of surviving as a new VLJ market entrant. Eclipse’s struggles, however, will likely cast an investment shadow over any future potential new market entrants.

By contrast, turboprops remain a very safe owner operator market for manufacturers. The three big turboprop makers continue to evolve their current models, and plan for the future. In March 2007 EADS Socata began deliveries of its TBM 850, a faster version of the 700. One year later Pilatus began deliveries of its PC-12 Next Generation, featuring Honeywell’s Apex glass cockpit.

In the twin segment, EADS Socata is studying the prospects of building an all-new, eight-seat, twin-turboprop design, with a possible launch in 2009. They would compete against Hawker Beechcraft, which continues its multi-decade strategy of enhancing the King Air product line with new variants of the three basic models.

The light jet market will also be boosted by new models and this segment looks somewhat more receptive to new players than the VLJ business. Chief among these new players is the HondaJet. It features engines mounted above the wings and will enter service in 2010.

These new product introductions, as with VLJs, will continue to stimulate the small turbine/owner-operator aircraft market. Despite the prospects of a market dip in the next few years, the long-term outlook remains excellent.

Richard Aboulafia is the vice president of analysis at the Teal Group, a marketing and intelligence analysis firm serving the aerospace and defense industries. Visit his Web site.