Why Large Business Jets Will Rule the Skies

Do customers believe that bigger is better when buying a business jet? Both industry insiders and experts seem to think so.

According to Ascend Advisory research , the market share of the smallest business jets was more than halved from 28% in 2003 to 13% in 2012. Honeywell also expects larger business jets to contribute more than 80% of new jet purchases in the near future. Insights from business jetmakers Textron , Embraer and General Dynamics tell a similar story.

Weak demand for light business jets
Textron is the clear leader in the light-to-medium jets category, with 53% market share; however, that does not make it immune to the weak light business jet market. Textron saw its jet deliveries drop from 41 a year ago to 25 in the third quarter of 2013. Consequently, Textron suffered a $23 million quarterly loss for its business jet segment. Its current business jetbacklog of $1.07 billion is also a far cry from the record $8.5 billion it registered in 2007.

Light jet deliveries for the entire industry have fallen by more than half from their peak of over 600 jets in 2007 to less than 300 jets in 2012. Recent trends carry the same message - light jet sales in the first half of 2013 fell by 42%, compared with the same period last year.

Buyers of light business jets tend to be relatively more economically sensitive than those who purchase the larger business jets. As a result, the Global Financial Crisis of 2008 led to an oversupply of light and medium-sized jets, which has persisted till today. In contrast, larger business jet demand from ultra-high-net-worth individuals and larger corporations has been more resilient. In addition, the shift in customer preferences toward larger and longer-range business jets will further depress light jet demand for the foreseeable future.

Going forward, Textron's dominance in light jets, the weakest segment of the business jet market, suggests that its near-term business outlook will be negative. Textron's business jet segment contributed a quarter of its fiscal 2012 revenues, while its other business arms are also underperforming. In the third quarter of fiscal 2013, Textron's defense and industrial businesses registered weak revenue growth rates of 1% and 4% respectively; while its helicopter business saw segment profit fall by 20%.

Emerging markets sing a similar tune
In line with global demand trends, customers in emerging markets such as China are also indicating a preference for larger business jets. Embraer released its 10-year 2014-2023 outlook for China business jets in September 2013, forecasting that the large business jet category will represent close to fourth-fifth of the value of total Chinese business jet deliveries going forward. Consistent with its outlook, Embraer is targeting the Chinese market with its larger business jets, showcasing its Legacy 650 at the Chinese International Business Aviation Show in September 2013.

While Embraer has exposure to the large business jet category with its Legacy 650 business jet, it is still very much light-jet-focused. It boasted of 21 light jet deliveries but only four large jet deliveries in the third quarter of 2013. Moreover, there is a glaring gap in Embraer's large-jet market presence, since it does not have an ultra-long-range business jet in its portfolio. In fact, based on its own forecasts, ultra-long-range business jets will be the largest contributor to industry revenues over the next decade among the different categories of business jets. Embraer is paying a hefty price for this light jet focus; its business jet backlog has fallen by more than 60% from $7.2 billion in 2008 to $2.8 billion in 2013 year-to-date (October).

Big is better
Unlike Textron and Embraer, General Dynamics has no exposure to the weak demand of light business jets. Its product portfolio also has the strongest concentration of larger and longer-range business jets among the three. In contrast to the declining backlog numbers for Textron and Embraer, General Dynamics' ultra-long-range business jet G650, launched in 2012, currently boasts a four-year backlog .

In addition, a used G650 was recently sold at 10% above listing price. The buyer was willing to pay a premium because he didn't want to wait beyond 2017 to get his hands on the only ultra-long-range business jet currently available. This is another sign of strong customer demand for larger and longer-range business jets. General Dynamics is a step ahead of competitors in this category. Bombardier's competing product line, including the Global 7000 and Global 8000, will only enter the market in 2016 and 2017, respectively. 

Size matters when it comes to picking business jet manufacturers as investment candidates. General Dynamics stands out from its peers by virtue of its strong presence in the larger and longer range business jet category.

The article Why Large Business Jets Will Rule the Skies originally appeared on Fool.com.

Mark Lin has no position in any stocks mentioned. The Motley Fool recommends Embraer-Empresa Brasileira. The Motley Fool owns shares of General Dynamics and Textron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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