THE COWEN INSIGHT
The Covid-driven business jet demand surge is a sign of an extended upcycle thru 2023 – longer if the Delta variant persists. Improving pricing and solid volume/mix shifts should yield strong profit/margin gains. Yet, investors haven’t adjusted to the big change from the sector’s lengthy stagnation.
Business Jet Sector Exiting Decade-Long Period of Stagnation
Business jet deliveries have been stagnant since 2010 except for a short-lived 14% spike in 2019. This anemic trend reflected the long unwind of a huge inventory of pre-owned planes for sale with declining prices, few groundbreaking new products, and an unsupportive Obama Administration.
This Recovery Is Different; Longer Upcycle Likely
The current business jet recovery is starting from a depressed 2020 base with many cyclical drivers. Driver include a strong stock market, recovering economy, shortage of pre-owneds for sale, rebounding pre-owned prices, and healthy growth in ultra-high-net-worth individuals (UHNWs).
However, the key catalyst has been Covid-driven safety concerns. It has produced an unprecedented first half sector book-bill of ~2.2x with a surge in first-time buyers. Corporate and foreign buyers are just starting to return to the market. These factors augur an extended recovery at least through 2023. With the Delta variant bolstering safety concern buying, there’s some chance for an even longer shift in the business jet demand equation.
Producers Well Positioned for Strong, Extended Profit Recovery
Robust book-bills are extending lead times, reversing the long backlog unwind since 2008. This is yielding better productivity and firmer pricing. Producers also seem cautious about raising output until backlogs are stronger for fear of restraining pricing; and cannibalization impact of recent new products is past. Thus, profitability, which is well below the 2000-2008 average, has runway for growth, barring supplier disruptions or a major economic downturn.
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