MARKET ANALYSIS I 42 One of the enduring narratives in bizav since the Great Financial Crisis has been the decline in the market for small and midsize aircraft and the relative resilience of large cabin, long-range jets. This was largely enabled by the long bull run in oil prices, which sprang new business jet demand in Emerging Markets. This offset the overall drought in demand in mature US and European markets, which had brutally exposed the smaller aircraft end of the market. The last few years have seen OEM production lines migrate towards the more robust top end, typified by Textron, the archetypical light aircraft manufaturer, launching Latitude and Longitude models into the Super Mid and Large cabin segments. The impact of the pandemic has thrown this migration into question. The economic impact of the virus has precipitated the collapse in oil prices, hobbling the petrodollar earnings of many emerging business aviation markets, also hitting the once-booming shale sector in the US. Reinforcing the economic impact of lower energy prices, the virus effect on public health will significantly blunt demand for international travel. At the extreme end, quarantine measueres for all international arrivals will have a drastic effect on movements. Even with an optimistic pathway towards relaxing suppression, the absence of a vaccine for at least the next 18 months is going to see significant decline in international business and leisure travel. In terms of preference for aircraft type, the airline industry is already anticipating this effect will show up in the demise of wide-body sales in favour of narrow-bodies. For business jet manufacturers, these trends suggest that customers may decide that midsize and smaller jets offer more versatility and certainly most cost-acceptability than ultra-long range models. We may see this trend start to pan out in the next couple of months. For now, as shown in Chart 4, most of the surviving business aviation activity has shifted to turboprops.
Next step : adaptation and innovation Looking into the crystal ball, how do we see business aviation evolving in the next 12 months and beyond? The first caveat is that we are still at an early stage of the consequences of the pandemic, and indeed there are downside risks that the virus has secondary waves to run. But assuming that the imminent public health crisis is manageable, whilst a vaccine is not going to be available in the nearterm, we believe we could see a multi-phase progression in recovery, which we might characterise as a flattened W. We’ve seen the worst of the first downward slope, with a low-point of 70% below normal. Now the first upward recovery is in progress and should accelerate in the next 2 months as suppression policies are relaxed in Europe and the US. For many reasons, business aviation will fare better than commercial activity during this phase: sectors are shorter, and much of the traffic is domestic, where restrictions are lighter; cabins are easier to clean, and passenger density is not an issue; private terminals are much easier to enter and exit. Perhaps most importantly, passenger motivation for flying private, whether lifestlye or business, is probably more resilient than it is for flying commercial; in short, the same objective cannot be achieved by Zoom. Then inevitably will come the second down-draught, most likely not a return of the virus but rather a secondary and more consequential economic impact. The massive government support enacted when the virus first hit cannot be extended indefinitely. Small business loans and subsidised furloughs will translate into bankruptcies and unemployment. The repercussions, even if we discount the more damaging impacts on political and civic stability, will radiate out across economic supply chains and significantly dislocate all travel demand. Business aviation flight activity will likely see this slowdown by the autumn of 2020, both in terms of the broad decline in economic production, also the direct effect on its many small suppliers which will run out of cash flow. There will then be a renewed recovery, as disruption inevitably generates adaptation and innovation. Business aviation will have the opportunity to step up to fill gaps left in scheduled connectivity, especially in galvanising regional networks. The historically low penetration of business aviation in the wealthy population may start to change as the convencience and privacy of flying private are seen as benefits well worth paying for. A shake-up of the operator market will see scaled up fleets and innovative business models focused on providing effective utility services, unencumbered by the need to provide luxurious standards of service. We are likely to see a successful return and scaling-up of seat sharing and shuttle charters, with on-demand travel fostered through membership programs cohosting trusted travel communities. As traditional scheduled airlines retreat for the foreseable future, this crisis may herald a much larger personal aviation market which emerges from the resilience of business aviation. Ultimate Jet I 43