What is to be said about 2015? Not the year we’d hoped for, certainly. As I write this in mid-December, the markets are in the midst of another wobble – hopefully before they gather themselves for the traditional December Christmas rally. However, the best that can be said about 2015 is that it is a year when the markets went sideways. Not surprisingly, therefore, since history shows us that business aviation cycles are tightly coupled to market cycles, things have been pretty unexciting this year on the demand front.
Of course it has been far from unexciting as far as progress on the introduction of new aircraft is concerned. In August Cessna’s Citation Latitude was delivered to its first customer and Textron set off on a multi-stop demonstration tour of the US to show off the newest member of the Citation family. NetJets has already made history by ordering 150 Latitudes for deliveries starting in 2016, the largest ever order for a business jet. Air Hamburg Private Jets is set to be the first European owner of a Latitude, again with delivery expected in the coming year.
Cessna also revealed at NBAA 2015 in Las Vegas that it intends to remedy the fact that it does not have a large business jet to compete with the likes of Bombardier’s Globals or the Gulfstream 650ER. The new 4,500 nautical mile jet, to be called the Citation Hemisphere will feature the widest cabin in its class, Cessna says, and is expected to make its first flight in 2019.
As well as racking up orders for the 650 and 650ER, Gulfstream is well on track as far as certification of its two new jets, the G500 and G600 are concerned. They are slated to enter service in 2018 and 2019 respectively and can be expected to add significantly to new jet sales once they become available.
Bombardier, which has had a troubled year thanks to delays and a $2 billion cost over-run in its C-series regional jet program, saw the Signature Series Challenger 650 receive certification from the FAA in 2015. The aircraft was a major feature at this year’s static display at NBAA. Bombardier’s Global 7000 and Global 8000 are still keenly awaited. In November the company showed off the first two flight test Global 7000s to the media. David Coleal, President of Bombardier’s business aviation division told journalists that the entry into service of the 7000, slated for mid 2018, is the number one priority for Bombardier and for him personally.
Nevertheless, the time line on the entry into service of the Global 8000, which was planned for 2019 has become hazy, with the company withholding comment on when it now thinks 8000 certification and deliveries can be expected. Given the cash pressure on the company that is not surprising. However, the second half of 2015 saw a number of orders for Bombardier’s C-series regional jet come in from a variety of airlines, so the company’s cash crunch could improve quite sharply through 2016.
By October 2015 Dassault’s Falcon 8X tri-jet had reached the half way stage in its flight test program and is headed for certification around June or July 2016. This is basically a stretched Falcon 7X with larger fuel tanks and just over a metre more cabin length, giving it some 700 nm more range than the 7x.
On the light jets front, Honda Aircraft’s over-the-wing Hondajet is near certification with deliveries expected in 2016. Honda have been telling us for years that they have 100 orders in the bank for their first jet so that could well add to the momentum being generated in the light jets category by the Phenom 100 and Cessna’s M2.
Turning from new models to the current state of the global economy, however, is like going from sunshine into a chilly drizzle. The year started brightly enough, with markets rallying from a low in early December 2014 to reach a high in April 2015. The German stock market, the DAX, is a good barometer of market volatility and it rallied from a low of around 9200 in early December to a massive high of 12300 by April. A gain of 33% or so in just four months looked like it was going to usher in a storming 2015, a real champagne year.
That, as we now know, did not happen. The next five months saw the markets slowly retreat until, by early September, they were within touching distance, once again, of that December 2014 low.
From September to the very end of November markets rallied once more and the DAX briefly touched the 11400s. Since then it has slid back to the low 1000s, over 1000 points down, which, while not disastrous, is not exactly what business aviation is looking for from Europe.
Geopolitical shocks aside, the two really big features in 2015 were undoubtedly the continued weakness in the price of oil, which should be a boost to much of the global economy, even if it hurts energy stocks, and the continuing slowdown in China. Plus, of course, there is the massive policy divergence between central bank policies in Europe, the UK and Japan on the one hand, and the US Federal Reserve on the other – and this is a theme that will definitely continue into 2016.
As December draws to a close the big story on the economic front is the fact that the Fed decided, at the meeting of the FOMC on 17 December, to raise the interest rate by 25 basis points. While a quarter of one percent might not sound like a lot, it is a massive sea change and signals that in the eyes of the Fed, the US economy is getting back to normal and extraordinary policy measures can be wound down. This confirms that the US is now well set on a path that will take it in the opposite direction from the central banks in Europe, Japan and the UK, where the intention is still to stimulate economies by printing money.
We can expect this policy divergence to have a significant bearing on how the dollar performs against other currencies, particularly the euro, yen and Sterling. There are a huge number of moving parts influencing how one currency behaves against another. The relative performance of their respective economies is arguably at least as important as lending rates, though since the latter is often a proxy for the former, we don’t have to get too hung up about which is more important.
The key point is that as the dollar gains in value against other currencies it is going to be significantly more expensive for people and companies in Europe, Japan and the UK to buy jets made in the USA. However, as far as its impact on the health of business aviation in 2016 is concerned, this is a point that is easy to overstate for two reasons,
First, the demographic that buys business jets is a highly affluent one, and the very wealthy are not that sensitive to what, for them, are minor price fluctuations. If the business case for a private jet stacks up, they are likely to buy regardless of how currency rates are moving relative to each other.
Second, since more than 60% of the business aviation market is local to the US, for that large chunk of the market the strength of the dollar is irrelevant – except for that portion that earns its income from exports. Exporters will be hurt, possibly substantially, by a rising dollar, though that tends to be self-correcting in the medium term (when exports slide an economy does worse, therefore its currency starts to weaken – simplistically put, but not exactly wrong, either).
While at this stage 2016 looks as if it might well turn out to be not much different from 2015 – though hopefully with fewer geopolitical shocks (though that is far from guaranteed) – there are some hopeful signs. Speaking to EVA, Kuldip Shergill, who runs the European Mid-Cap strategy at investment managers Cheyne Capital, points out that Europe is still in the process of recovering from the 2008 crash. Unlike the US, where the economy now has some traction and the figures for new jobs in the economy are improving, Europe is at best just at the start of a potential upturn. For Shergill, this is encouraging. It means that Europe has plenty of room for growth in the year ahead.
For those who don’t follow markets, Shergill defines a mid-cap company as a company with a market capitalization of under 10 billion euros. Above that a company falls into the large cap universe. Below a market capitalization of two billion, it falls into the small company space. Economic indicators in Europe are slowly improving and in anticipation of this, the European mid-cap index which encapsulates many European domestic companies, has posted a year-on-year growth of 14% in 2015.
Moreover, if you take the view, as he does, that mid-cap companies have historically done well at the start of any recovery from a recession, then their performance is a comforting signal that there is enough company specific, micro data to suggest that Europe’s recovery may well be underway. For everyone in business aviation in Europe, that is a view that they would love to see proved right over the year ahead. It is actually no surprise that mid-cap stocks recover faster than their bigger brethren. They are nimbler and tend to be more innovative and carry less baggage, so they can manoeuvre faster and are better able to exploit early opportunities.
For those who don’t follow markets, Shergill defines a mid-cap company as a company with a market capitalization of under 10 billion euros. Above that a company falls into the large cap universe. Below a market capitalization of two billion, it falls into the small cap space. What gives Shergill confidence that Europe is on the mend is that the European mid-cap index posted a year-on-year growth of 14% in 2015. That is a fantastic rate of growth for a whole “universe” of stocks in an economy that has basically flat lined for the year.
Moreover, if you take the view, as he does, that mid-cap companies have historically done well at the start of any recovery from a recession, then their performance is a pretty strong signal that Europe’s recovery is underway. For everyone in business aviation in Europe, that is a view that they would love to see proved right over the year ahead. It is actually no surprise that mid-cap stocks recover faster than their bigger brethren. They are nimbler and tend to be more innovative and carry less baggage, so they can manoeuvre faster and are better able to exploit early opportunities.
If 2016 does indeed see Europe getting pulled out of its multi-year flat patch by the dynamism inherent in its small and mid-cap companies, business aviation will have much to celebrate. We can always hope…