What economic clouds? Private aviation sees blue skies

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Speculation and wavering that the United States is heading into a recession has yet to reach the private jet set, which is gathering in Florida this week for what promises to be an optimistic conference. There will be little pessimism in the conversations between attendees who will be drinking champagne and munching hors d’oeuvres in the cabins that tower above the Orlando Executive Airport and showcase planes and services.

Private jet sales and flight activity have been robust since the pandemic hit in early 2020 and the wealthy shunned commercial airliners. Flight hours continue to rise this year even after a banner 2021 and next year will likely surpass the industry’s all-time high in 2007, according to Honeywell International Inc., which makes aircraft components, jet engines at the controls of the cockpit.

The sector was hammered by the Great Recession and never fully recovered as measured by the number of annual new aircraft deliveries. This fear of economic catastrophe simply does not exist this year in an industry that pays close attention to financial markets. This is a crowd of shrewd investors who already knew trouble was brewing in early 2008 when Bear Stearns went bankrupt and hit the exits of the business jet industry in September. , when Lehman Brothers went bankrupt and credit markets froze.

The 2008 financial meltdown affected both businesses and consumers. Businesses have been forced to cut costs amid falling sales and a scramble for credit. Business jets were among the first to go. The industry’s reputation had a stain that took years to fade after automaker CEOs flew their corporate jets to attend a hearing on Capitol Hill where they urged the Congress to bail out their companies.

The mood is much different now, even though the S&P 500 index has lost a quarter of its value this year, inflation is raging to its highest level in four decades and the Federal Reserve is aggressively raising interest rates to control price increases. Changing demand patterns during the pandemic, coupled with the effect of government stimulus measures, have made many wealthy people even wealthier, and they feel somewhat insulated from the impacts of rising interest rates and rising interest rates. an economic downturn.

The optimistic mood is reflected in Honeywell’s annual survey of private jet operators, which predicts 8,500 new business jets will be delivered over the next decade at a value of $274 billion. That’s a 15% increase from last year’s delivery forecast and 12% from the pre-pandemic survey in 2019. Flight hours are expected to end this year up 9% from to a record year in 2021, and this growth will stabilize at a normal rate. 2% in 2023, but to a new plateau that equals or surpasses a record year in 2007, said Javier Jimenez Serrano, who, as head of strategy and market research at Honeywell’s aerospace unit, is in charge of the investigation.

In addition to increased demand fueled by stimulus-generated wealth that has accumulated at the top, a slew of new travelers have entered the business aviation market after the pandemic virtually shut down planes from commercial line in 2020. These newcomers are well-heeled passengers who would traditionally travel in first class seats but never thought they needed to fly private. After getting a taste of the service — avoiding the disruption of canceled flights, crowded airports and Transportation Security Administration employees barking to remove shoes and belts — many are hooked. Often they start with charter flights and then take the plunge to purchase an aircraft. These new customers are sticking around even as commercial flights rebound.

This has made second-hand aircraft rare, especially for mid-size and large-cabin aircraft. Aircraft manufacturers, including General Dynamics Corp.’s Gulfstream, Textron Inc. and Embraer SA, all have large backlogs and are beginning to ramp up production as much as the supply chain allows. The demand is strong even if the big companies have not yet fully returned to the market. Even if the economy slows, pent-up demand will keep deliveries going, Jimenez Serrano said.

Honeywell expects production of new jets to hit 820 next year, up from around 700 this year. In 2019, deliveries were 720 but fell to a low of 565 in 2020.

While the super-rich have the option of paying cash for planes and staying sheltered from the economic downturn so far, demand for used planes at the lower end of the market – jets that cost less than $15 million – cool, said Janine Iannarelli, founder of aircraft brokerage firm Par Avion Ltd. It’s not just the price of the aircraft and higher interest rates that influence a purchase decision. An owner constantly has to shell out for pilots, fuel, maintenance, hangar space, and other expenses, all of which are impacted by inflation.

While 2008 was “bearish and gloomy,” that’s not the sentiment at this year’s show, Iannarelli said. Some buyers are waiting on the sidelines for a correction in the second-hand market to pull the trigger. The upbeat music could end sometime next year if major economies slip into recession, but no one is talking about a crash, she said. There could be a flurry of transactions in the United States before the end of the year due to the end of the so-called bonus depreciation in which the full value of a business jet can be deducted taxes immediately instead of spreading out over several years.

Any market downturn would create more acquisition targets for investor Kenn Ricci. It raises up to $430 million in capital using a special purpose acquisition company to sell shares to the public for the first time in Flexjet, which operates a fleet of more than 250 private jets and offers fractional ownership services , leasing and jet card. . Flight revenue hours have jumped 60% at the business jet operator since 2019, the company has customers waiting to buy flight time and ‘business has never been stronger’ , said Ricci, president of Flexjet.

The “frugal rich,” as Ricci dubs newcomers to private aviation, will stick around, increasing the long-term customer base even if the economy stumbles. In a downturn, private aviation is one of the first industries to take a hit and one of the last to recover, Ricci said. No one is heading for the exits yet, he said.

“I’m a paranoid optimist,” Ricci said. “These are great times, but I don’t think you should be recovering from your skis right now.”

It’s easy to photograph the world of business jets. They are expensive and sometimes luxurious machines that the vast majority of people will never set foot in. These planes also consume significantly more fuel per passenger than commercial airliners. Still, business aviation in the United States supports more than a million jobs, including about 105,000 manufacturing jobs, and it’s one of the few U.S. industries with a positive trade balance, according to the National. Business Aviation Association, which is the organizer of this week’s conference. Many aeronautical innovations are first adopted by business jets.

The economic pain of inflation and rising interest rates squeezing the middle class isn’t impacting the wealthy as badly as the 2008-09 recession, a potential sign that a downturn could be short-lived duration. If business aviation is a canary in the coal mine, that bird is still alive and flying.

More from Bloomberg Opinion:

• Air travel resumes. Airlines companies ? Not so much: David Fickling

• Airlines continue to abuse passengers. Regulate Them: Adam Minter

• Do not cancel private jets. Here’s a better idea: Chris Bryant

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Thomas Black is a Bloomberg Opinion columnist covering logistics and manufacturing. Previously, it covered US industrial and transportation companies as well as Mexican industry, economy and government.

More stories like this are available at bloomberg.com/opinion

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