Civil aerospace is the type of industry that industrial policy wonks might call “strategic.” Whether in placing heavy upfront “bets” on research and development (R&D); building up and sustaining large workforces with talents in STEM, design, manufacturing, operations, and business fields; or investing in sprawling facilities to test, build, and support a fleet of modern aircraft, an aviation original equipment manufacturer (OEM) is a source of pride, production, and sometimes even profits.
Although classic barriers to entry in aircraft manufacturing are exceedingly high, new entrants into the business jet manufacturing business have emerged over the past several years—Embraer, Honda, Pilatus—with the primary focus of their investments aimed at disrupting the light and midsize jet categories.
At the beginning of 2018, there are seven OEMs competing for new business jet orders worldwide, with 28 different in-production models. In addition, three of these OEMs have a total of four jets in advanced stages of flight-test certification, with expected service entry in the next 12 months or so. For the purposes of this discussion, and to simplify the math, I am excluding Airbus and Boeing bizliners, as well as Cirrus single-engine personal jets at either end of the price spectrum.
JetNet iQ’s just-completed new business jet delivery forecast includes 648 business jet unit deliveries in 2018, with a list price value of $17 billion. For those still following the logic, that represents a typically delivered average value of $26.2 million per aircraft—representing a price point at the top end of the so-called “super-midsize” segment. Think about that for a minute: the market’s center of gravity has shifted from the light and midsize segments up to the super-midsize class, and largely in the span of the last 15 years or so.
Assuming that the 2018 delivery forecast is reasonable, and with 32 models vying for new orders, the worldwide market this year represents about 20 units on average per model line. That’s 1.69 aircraft per month—hardly the output volume that gets anyone in the C-suite very excited, and certainly a small base from which to pay down the program’s capital expenditure investments.
In the hotly competitive environment of business jet manufacturing, with high costs of production tooling and R&D, OEMs have had to become adept at managing their aircraft model lines through their product life cycles if they hope to ever generate product line profitability. A typical business jet model takes about seven years to go through its normal product life cycle, at which time an investment in a new or upgraded version is already past due.
In what can make for an awkward conversation with the CFO, a decision to invest in a new or upgraded model is a topic for deliberation—and, better yet, decision—when the current production model is basking in the glory of its maximum production rate, or typically three to four years after initial certification. Refreshing a product line—think Challenger 600 to 601 to 604 to 605 to 650—requires engaged management, continuing R&D and tooling investments, and prudent sales and marketing execution on the part of the OEM.
When successfully executed, the result is long and more profitable production runs—there have been more than 1,000 Challengers 600-family deliveries worldwide since 1981—and rich annuity streams of parts and service revenues. Although some owners/operators might balk at the hourly minimums, there’s a reason Bombardier calls the Challenger cost-per-hour program “Smart Parts”: both parties have a vested interest in managing their costs and keeping the aircraft where it works best: in the air.
In today’s hyper-competitive marketplace, some OEMs have their work cut out for them if they want to keep their product lines refreshed. Although an OEM might swing back and forth between pursuing margins or market share, it is our experience that what leadership, investors, and other stakeholders really want is margins and market share. This is the math that really works.
Rolland “Rollie” Vincent is president of Rolland Vincent Associates, a Plano, Texas-based aviation consultancy with a focus on market research, strategy and forecasting. Vincent is also managing director at JetNet iQ. He can be reached via email or by telephone at (972) 439-2069.
