business aviation q1 2015 review & outlook demonstration...

Business Aviation Q1 2015 Review & Outlook Demonstration Version

Author: Michael Riegel (AviationIQ)

1© Copyright 2015 Michael C Riegel (AviationIQ) - All Rights Reserved

© Copyright 2015 Michael C Riegel (AviationIQ) - All Rights Reserved

we obsess about market, competitive, safety, pricing and financial risk so you don’t have to…

Why You Need Our Support This report isn’t exactly a best-selling book! We developed this format, twenty-five years ago, to use during discussions and support for every single client: business jet users and investment professionals. If you could see the thirty spreadsheets we compile, showing the business jet market, starting in 1966, you’d be falling asleep within seconds!

This report is our way of showing the foundation of the work we do. I have designed three highly-successful business jets, using this data, plus detailed research of thousands of consumers. Getting to know the market, industry players and the people who use business jets has also allowed us to develop a Business Jet Demand Index. If you skip ahead, a few pages, you will see the “master curve”. This index uses the ten aircraft-based criteria business jet buyers point to, when they go shopping for a jet. They also tell us about subjective criteria, such as brand strength, peer referrals, support quality, and half a dozen other key issues. By using these criteria, weighted in the same way consumers weight them, we create a breakdown of demand, by aircraft type.

The graph you can see, on Page 7, was created in 2007, and we have attached details of what happened to the nine aircraft types that fell below the “line”. We now use this index, in addition to fresh research and analysis, to help you understand which aircraft types will be most successful, and how many orders they should capture, compared to their competitors.

We also have access to information very, very few people can tap about new aircraft programs and the definition of each type: cabin volume, speed, range, and other key variables. We use current, and future program information, so we can tell you how demand, or values, for your chosen aircraft type will change looking ahead.

We exist to provide measurable, and actionable, insights that can be turned into better, less risky, and more financially rewarding decisions.

Our clients cover a wide spectrum. We have more than 2,000 clients, across the full range of investment, consumer and consulting businesses. Just over 450 consumers have come back to us for two, or more, repeat assignments. They tell us that, even when they are committed to one provider, like Netjets, they prefer to have us assess the quality of their offers, and to reality-check their plans. At the bottom of the fractional market, every single provider started to re-purchase shares at hefty discounts to Blue Book Average Retail aircraft values. Of course, market values fell heavily, after 2008. Some types are still falling in value, today. However, there ARE tremendous differences between best-in-class residual values, and some of the aircraft types Netjets and their competitors have purchased. Even in the lower-priced light jet segment, Netjets purchased one aircraft type whose five-year residual values fell to 30%, while best-in-class values remained close to 70%. Netjets provide an excellent service, but they are by no means immune from buying the wrong aircraft types.

In the whole aircraft market, we can provide typical market pricing, the medium to long-term value prospects for any aircraft type, and we can talk you through new designs, like the Cessna Longitude, and help you to understand, BEFORE you invest your money, whether this aircraft type is the best way for you to spend your money.

We have heard many aircraft and share owners tell us that they can handle their own negotiations. While this might be true, I can make you aware of risks and contract clauses you need to understand, before you sign on the dotted-line. I offer a free initial call, and I have a 90% conversion rate when clients get even basic feedback out their offers.

The Power Of Up-Front Advice Our services cost about the amount you would expect to pay for 1-2 hours of flying, more than this for whole aircraft support. We remain involved through until closing, no matter how long this might take. I won’t be retiring for at least twenty years, so I’ll be around, if you will be!

Case Study - Whole Aircraft Purchase

An existing client was using 300 charter hours, per annum. He was annoyed by the refusal of the charter company to leave the aircraft with him for his regular long weekends. We calculated his total cost per occupied hour at $8,000. He needed 6-8 seats, and was based in the Dallas area. We presented the idea of a used Learjet 45XR. We detailed a handful of used options, each with engine insurance, and brand new paint and interiors. A DFW-based management company was found, and their fleet allowed our client to trade hours with owners of larger, and smaller jets. He bought the Lear for under $3 million. His flying fell to 250 “occupied” hours, with two trips, each month, to his holiday home. With about 150 hours of charter use from other managed fleet owners, his first two years of flying cost him under $6,000 per occupied hour. He loves the Learjet 45XR, and now makes two extra trips to visit his kids in college, every month. He has saved more than $1.5 million for his flying, and has complete control over his own travel requirements.

Case Study - Buying A Fractional Share

Another client was using a Sentient card, and ad hoc charter from two local charter companies. He came to me, unhappy with the time and hassle he faced, deciding on the operator, and aircraft type, for each flight. His wife is a white-knuckle flier who visits kids in college, and elderly parens, every month. They purchased a share in an XLS, with Netjets, giving them 100 occupied hours. They also own a share with Executive AirShares, in the Phenom 100, which is used for their shorter runs in the mid-West. Costs are under $6,500 all-in, and they can travel anywhere at short-notice. No more white knuckles with identical aircraft in each fleet.

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Our report offers 4-6 options, prov ider rev iews, r isks the providers don’t mention, all-in real-world costs, and negotiation tips and concessions we have seen in recent deals.

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Where, when, with who, how long, how much baggage, capital risk versus hourly cost risk, and half a dozen other questions we ask you during our first call.

we support consumers from needs & offers to contracts & closingOur Objective: We Give Clients Factual, Supportable Advice For Buying Quality & Low-Risk Flying

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Key Metrics & Insight

Industry forecasts and deliveries use widely varying standards for an aircraft “delivery”. Other short-term delivery spikes are driven by one-off c i rcumstances non-industry specialists fail to take account of. We can also help r e s e a r c h e r s u n d e r s t a n d roadblocks to unconstrained growth in emerging business jet markets.

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We h a v e a d v i s e d o v e r 8 0 investment and private equity firms. Our expertise running major business aviation companies allows us to add insight & contact to widely used data!. Example: how risky are major fractional orders?

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Cessna recently announced a refurbishment program for older Citation X aircraft. We can explain the downside of such programs, and the underlying risks Cessna aren’t explaining. We also use our demand index to assess the future impact of brand new designs that might not have been launched, to date.



innovation that gives you the upper handMarch 2015: Business Jet Demand Index

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market summary for business jet users and analysts

New Aircraft Deals New aircraft deliveries, in 2014, were more than 25% below 2013. In fact, at about 750 aircraft, deliveries were more than 900 aircraft below the 2008 market peak!

If you are thinking of a new jet, your biggest risk is value loss. Used aircraft numbers have stabilized, but we have seen no indication that prices are recovering. We have now seen prices fall, or remain stable, for a total of six years: by far the longest slump in the history of modern aviation!

If you are interested in a new private or business jet, you will need expert advice. Put bluntly, the difference between best in class, versus worst, has now reached more than 30%. Even with a light jet, selling for $5-7 million, choosing a weak product will cost you close to #2 million compared to market or segment leaders.

To complicate your decision, it is now vital that you look ahead, to any new jet designs that are under development. With every segment becoming overcrowded with new aircraft designs, it is important to get a view of the future. Which current designs are equipped to stay competitive, and hold their value?

We produce a value index, you can read about on the next slide. We have been using this mathematical model for many years, to predict which aircraft types would remain popular, and successful, versus the duds! We use almost thirty years of consumer research, client feedback, and refining our model. As you will see, we used this model, back in 2007, to highlight nine aircraft types the model scored below the level of “viable”. As you’ll see, the nine predictions we made were spot-on, with six now out of production, and the other three selling in numbers that are 1/3 of segment leaders!

Used Aircraft Market Our demand model helps us to review used jet inventory that is listed to sell. Again, the volume of sales, days on market, and asking prices are always scored below the line in our model.

The great news is that there are hundreds of very, very good used aircraft deals available to buyers. At the light jet end of the market, excellent Learjet 45’s, Cessna Excels, Citationjet 2’s and 3’s are available at 1/4 to 1/5 the cost of new aircraft. If you can buy a used aircraft with engine insurance, no damage history, and major maintenance checks completed, you will have many years of low-cost flying available to you. We have dozens of clients who have

Armed with the world’s most boring mathematical forecast and index, I put the models to work. The best way to share the results is by using the output of a 2007 index run. The next slide shows the index output for all current, and several under-development business aircraft. The red line determines the tipping-point: the level of demand that should assure an aircraft type success within the appropriate market category. You will see that there are nine aircraft types that fall below that red line. I’ll quickly list them, together with their current status:

• Hawker 400XP (out of production)

• Premier 1/1A (out of production)

• Learjet 40/70 (in production, but with 31 delivered in 2013/4 versus 119 for leader Phenom 300);

• Hawker 750 (out of production, and sold in small numbers when pitted against super-light jets);

• Learjet 60 (out of production);

• Gulfstream 150 (in production, with 41 deliveries in 2013/4 versus 109 Cessna Sovereigns). Both aircraft types will face stiff competition from the Legacy 450, which is scheduled to enter service in 2016;

• Gulfstream 200 (now out of production, and replaced by the follow-on Gulfstream 280, sporting a new wing). Over the last three years, the Gulfstream 280 has delivered 75 units, versus segment leader Challenger 300/350 with 149 deliveries and a Netjets order for 200 more of the Challenger 350 variant;

• Global 5000 (in production, but with 53 deliveries over the last three years, versus 148 deliveries for the older, slower, and lower-technology Gulfstream 400 series, which is being replaced by an all-new Gulfstream 480 model).

With five out of eight aircraft types we rated as “under-performing” now out of production, and the other three delivering a combined 169 aircraft compared to segment leader deliveries of 407 aircraft, I hope you can see the predictive capabilities of our index, when assessing deliveries of current aircraft types. We also run regular simulations that allow us to add or delete aircraft programs, and to make accurate predictions regarding the impact such programs will have on segment and competing aircraft deliveries in the future. Our Business Jet Demand Index is the most thoroughly-researched, and the most accurate predictive model available in business aviation.

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Business Jet Demand Index2007 Output Of Business Jet Demand Index - Shows The Fate Of Weak Aircraft Programs

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timely and accurate predictions: the best training & tools

Business Jet Demand Index I have been in the aerospace industry since I was 23. My first aerospace business was a flying training business I established in 1982. I was earning my first Master’s degree, in applied aeronautics. The subject was boring to the point of craziness, but did allow each student to experience six hours of flying using Cranfield University’s light aircraft. Once I had flown, I wanted to get my Private Pilot’s License (PPL). The local flying clubs were much too costly, so I approached the owner of a Cessna, and asked him what he would charge for the use of his aircraft. After adding-in all costs, I leased the initial Ceesna 152 and hired part-time instructors to train our club members.

By the time I graduated from Cranfield, my flight training school was leasing six aircraft, and had trained more than fifty students for the 43 hours needed to get a British PPL.

Zooming ahead, to fifteen years ago, I was researching a new aircraft model, now called the Challenger 300. We had access to every demand forecast used in business aviation, but found that all of these forecasting models failed to provide, well, much of anything! Even the better demand models failed to accurately forecast the timing, or magnitude of market ups and downs. Worse was their complete lack of demand information by aircraft type.

As I studied forecasting in more detail, I realized that there was one major reason why the business jet forecasters had failed to provide accurate demand numbers: the politics of money! Several forecasters used a short-term “buying intentions” survey to help break demand down by aircraft segments, or even by aircraft type. Existing aircraft owners were asked to tell forecasters which aircraft model they favored for their next purchase.

Flawed Forecasting & Favoritism Forecasting total business aircraft delivery numbers isn’t too difficult, with measures of corporate profit trends as the mainstay of most current models. Buying intentions survey results, even when they are used, aren’t accurate, because the outlook period is no more than 2-3 years, and many buyers would be largely ignorant of upcoming aircraft designs. Gulfstream, in launching the G650 accumulated more than 200 orders within the first year of their launch. In addition, I had heard whispers, from several reliable sources, that Gulfstream had the G650 design well under way before they officially launched the aircraft type, giving them first-mover advantages. Finally, with Bombardier pre-occupied with other programs, Gulfstream were able to attract a great deal of future demand in the “ultra long-range” segment, well before Bombardier or Dassault could formulate a response.

Forecasters have faced several major challenges over the last seven years. I was advising clients, back in 2006 and 2007 that I was skeptical of the impressive backlogs many manufacturers were recording, during this period. With a broad spectrum of clients, from around the globe, I was deeply concerned that international business was a complete unknown, to the business jet industry, and that our lack of history made current backlog data, at best, unreliable. My argument was simple: most forecasters, and manufacturers viewed international customers the same way they viewed customers from mature markets, like North America, Western Europe and much of the Middle East. The reality was very different, as the industry was about to learn! International position-holders melted away very quickly after wider global economic indicators suggested an imminent, and deep, decline in global economic conditions.

Forecasters were caught by surprise, having never encountered a down-turn that cut so deeply, for so long. Backlog estimates had to be re-evaluated as international orders melted away. To be blunt, international markets, like China and India, had long traditions of using trains and airlines for business travel, making it easier for them to cancel business jet orders.

Business aviation was also guilty of leaving forecasting in the hands of industry players whose forecasting models needed to yield to commercial needs. Developing a forecasting model that could break demand down by aircraft type was well within the reach of forecasters, but the consequences of truthful forecasting might not be attractive! Not all business jet engines have been successful. As the first sales manager to take Hawker 1000, serial number 4, into Europe for two weeks of demonstrations in Italy and Switzerland, I can tell you the above in vivid detail, should you call me! With engine makers positioning themselves as leading forecasters, how could they provide complete objectivity, when doing so might require that they call one of their own kids ugly?

Bias explains why forecasts have remained fairly generic, across the entire industry. Even when major financial players, like J P Morgan, and UBS, have tried their hands at forecasting, they have tried to build demand down into a series of metrics. I like metrics, too, but demand for business jets is heavily influenced by emotional, and tough to measure, influences, such as brand strength, channel presence, support reputation, or referral strength. Unless you have access to the full spectrum of buyer criteria, how to measure each, weight each according to buyer importance and how backlog, product launches and used market dynamics impact demand, the best you will be able to offer is guesswork. Our index dispenses with guesswork!

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AC 1 AC 2 AC 3 AC 4 AC 5 AC 6 AC 7 HB 400XP HB P1 B L40XR BL45XR AC 8 HB 750 AC 9 B L60XR AC 10 G 150 AC 11 HB 4000 AC 12 G 200 AC 13 AC 14 AC 15 B 5000 G 450 AC 16 AC 17 AC 18 D 7X

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aviationiq proprietary demand indexIndex Prediction Made In 2007

Hawker 400XP

O u t o f p ro d u c t i o n . O l d e r airframes being purchased By N e x t a n t A e r o s p a c e f o r replacement of engines, flight deck and interior.

Learjet 40/70

A cut-down fuselage derived from the Learjet 45/75. In production, but with just 33 delivered over the last two years versus 108 for the closely-matched Phenom 300.

Hawker 750

Out of production. An attempt to use a Hawker 800, with a very basic feature and options list. Just 48 were delivered 2008-2012.

Gulfstream 200

Out of production. Replaced by an updated, re-winged version that has delivered in disappointing numbers. Just 51 delivered in three years, versus 136 Challenger 300/350 aircraft. Unless deliveries improve, the G150 and 280 marques might need to be shut-down, or replaced.

Gulfstream 150

Just 30 delivered, during the last six years, versus 127 Cessna Sovereigns. The G150 is unlikely to be generating significant margins at these low output rates, with increased competition from above and below. I would expect an all-new design, or a product-line shut-down very soon.

Premier I/IA

Out of production. Once said to be a “game changer” that would sell more than 5,000 units, the Premier I/IA saw just 31 deliveries during it’s last three years in production, and just 279 during twelve years in production, this was. Another composite program that has gone the way of the Starship 2000,

Learjet 45/75

A well-designed machine, with the singular limitation of lacking enough headroom for the five-hour flights that are possible in this aircraft. Simply-put, the Learjet 45 was guaranteed to struggle the moment Cessna countered with the Cessna Excel, off e r i n g 5 ’ 7 ” o f s t a n d - u p headroom.

Learjet 60

Out of production. Though fast, the Learjet 60XR fell short of the al l-round range, speed and versatility of the Hawker 800 program. With an under-sized wing, the Lear 60 had no-where else to go, developmentally, in a market segment that research showed to be populated with users who were looking for more.

Hawker 4000

Out of production. Another ill-fated composite design, the H4000 took seven years to go from launch to delivery, versus almost half that time for segment leader Challenger 300. By the time the H4000 was certified, the Challenger 300 was approaching 200 deliveries, Gulfstream had launched the G280, and the Legacy 500 was poised to capture more cost-conscious buyers. Netjets had 75 on order, but canceled the order, which may have triggered the collapse of Hawker Beechcraft.

Global 5000

Still being produced, I have long felt that shortening an existing design is a weak response to weak demand for the larger variant. The G5000 has managed just 36 deliveries, over the last four years, versus 73 for the aging Gulfstream 450. The Global program will boast four separate models when the 7000 & 8000 enter service, to add to the three Gulfstream, and three Falcon rivals. The Global 5000 is likely to remain a lower-volume option in the $40 million+ space, with so many larger, faster, longer-range and more flexible designs in the hunt for buyers.


feature article - the cirrus SF50 - game changer?

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© Copyright 2015 Michael C Riegel (AviationIQ) - All Rights Reserved© Copyright 2011 Michael Charles Riegel - All Rights Reserved11

AviationIQ Quarterly Business Jet Update February 19, 2015

Cirrus SF50 Single-Engined Jet • During the last business jet upswing, the

industry saw almost a dozen twin-engined very light jets (Twin VLJ's) vying for a market segment they all thought would create demand for thousands of aircraft;

• Today, a couple of these programs have survived the realities of the cost, time, and potential for Twin-VLJ's. Hundreds of millions of dollars have been lost fighting over a market segment I didn't believe existed;

• Cirrus, the market leader in piston-powered single-engined aircraft, started looking at a single-engined VLJ before the business aviation market collapsed, in 2008;

• They have been through an acquisition that has injected much-needed capital, from China, that has been put to good use, recently;

• With three flight test Cirrus SF50's working towards a 2015 certification, I am now tracking Cirrus, carefully, to see if they can make the tough, and costly, transition into production;

• With 550 orders on their books, the Cirrus design should make an effective competitor to current twin-VLJ's, and single-engined turbo-props;

• For business aircraft users, the Cirrus offers the speed and comfort, not to mention 30-40% savings in operating costs, to make this aircraft fit nicely into several individual, group and quasi-fractional business models;

• As 2015 continues, I will track the Cirrus program, to see if my clients can take advantage of this interesting business and general aviation product.

The Cirrus SF50 is a rare smaller jet. The interior can seat five adults, and two children. That means a family of six, if you choose to hire a pilot to fly you around.

I am 6’3” tall, and weighed 300LBS when I sat in the mock-up of the SF50. More than a dozen of my friends or clients have ordered the Cirrus SF50, and many others are ready to shop for a delivery position once the aircraft is in production.

Copyright 2015 Michael Riegel (AviationIQ) - All Rights Reserved �1

© Copyright 2015 Michael C Riegel (AviationIQ) - All Rights Reserved 12


Detailed Editorial Back in 2005 I was under contract to design a new jet for a non-US aircraft manufacturer. I actually defined two jets, which would benefit from a high degree of component compatibility: wing, engines, flight deck, and many others. By 2006, I had completed the definition, and had met with key engineering people to refine dozens of more detailed design parameters.

In the Fall of 2007, I was attending the National Business Aviation Association show, or NBAA, when I noticed my designs on the exhibit of another manufacturer. My guest, who was a senior investment executive with Janus, stood confused as I took a closer look at these new aircraft models. I felt genuine pleasure that my designs were going to enter the market, but peeved (I might have used stronger language, at the time) that details of my designs had made their way into the hands of a company I had never dealt with. I had charged a great deal less for my design work than I would have for the manufacturer whose exhibit I was standing on, because I believe in the "little guy", and my client was a former colleague, and a good egg!

Back on-point, when I was defining the two aircraft mentioned above, I had occasion to visit a major jet engine builder. Engine-makers produce industry forecasts. I have never been a fan of industry forecasts, to put it mildly, mostly because they are often inaccurate, but because they are rarely detailed-enough to be usable by my clients in the investment world. Forecasting market volume, with color-coded aircraft segments won't help with actionable data. In addition, the small number of forecasters that try to break market volume down use "buying intentions" surveys.

Such surveys can provide a short-term look at demand for existing designs, but they become highly questionable beyond a year, or two, and they fail to take account of programs that either haven't been launched, or are in the midst of development. My company produces a forecast that takes account of more than shifts in corporate earnings. We also produce a "kick-ass" index that builds upon decades of grey hair creation, measuring hard and soft buying criteria used by consumers, weighting each according to their relative impact across current, and the occasional emerging segment (such as single-engine VLJ's. I developed my forecasting models because I could see the dilemma for engine makers. An engine, on it's own, doesn't guarantee the success of an aircraft program. Therefor, engine makers must avoid offering product-specific demand predictions, out of a natural fear that they would have to call some children ugly! If your forecast remains a little vague, you can benefit from people thinking you are smart, without the natural recriminations, and verbal violence that would ensue, if you were to admit that you sold good engines, or bad ones, for use on an aircraft that attracts low levels of demand (a dog, to be specific!).

As I mentioned, I visited a major, leading engine maker, and was asked to assess engine opt ions for my a i rcraf t designs. Our discussions started with a discussion about the current market, and the eleven twin-engine Very Light Jets (VLJ's) that were under development. The head of my host's forecasting team was giddy with excitement about the huge delivery numbers that twin-VLJ's would attract.




This VLJ champion pointed to the low price-point for the VLJ's as the main reason for his optimism, and the reduced ownership costs he felt would fuel demand.

I had studied VLJ programs in great detail, over many years, and upset the host's apple cart by disagreeing with their logic. Firstly, VLJ's were creeping up in price, by hopelessly unrealistic business plans that focused too much on design and certification, and nowhere near enough concerning the cost of moving into production, and service, with the tens of millions that would be needed to fund spare parts inventories, in-service engineering support, support personnel, and many other downstream costs. I had learned many important lessons about aircraft development. For example, the cost of taking a small jet to market wasn't appreciably different to doing the same for a large aircraft. I tried to focus on VLJ competition: used light jets, and new very light jets, like the Cessna Mustang. VLJ's simply weren't compelling game-changers, which might explain why all of the significant VLJ programs were either driven into bankruptcy, ran out of willing investors, or had to scale-back their ambitions, forcing many investors to write-off hundreds of millions.

By the time I had discussed my concerns, it was obvious that this executive team had already gone "all-in", and had convinced themselves that the demand was there. They had even developed a new engine to cater to twin-VLJ’s. As I’ve seen in every business av ia t ion market segment , a lmost a l l development decisions are made by program stakeholders. For example, too many industry executives draw their industry data and news from sources who depend upon revenue from their customers to survive: ad revenue, editorial, or revenue. Go figure…

A Potential Game-Changer? Enter the Cirrus SF50 single-engine jet. I keep myself up-to-date with development programs.

Even if manufacturers are trying to maintain secrecy, there are multiple resources that can be used to track development programs, if you have the right contacts. The Cirrus Single-VLJ has not become a sure thing, in my view, but they boast an appealing backlog, of 550 aircraft, they have three flight test aircraft grinding away towards certification, and they have a Chinese parent that will likely have the deep pockets required to transition into production. I see some weakness in support, marketing and competitive analysis functions, but one can only hope that Cirrus have the leadership to make their program work. Almost invariably, smaller producers of aircraft that are trying to move into segments they aren't already occupying believe that infrastructure and commercial strategies and resources change little. I'm afraid that this is a wildly inaccurate belief. While I love the SF50, there are still obstacles Cirrus could trip over as they head towards production.

The Cirrus SF50 has been a stop and go program, a process that was impacted by many problems, few of which had anything to do with their basic aircraft design. With the purchase of Cirrus by a Chinese company, the cash became available for Cirrus to place three FAA-conforming aircraft into the flight test program. I often field questions about flight testing, and why so many aircraft are required. Most flight test programs require four to five aircraft. Serial number one is generally used as a static test article. The airframe lacks an interior, or the electronics, engine and other systems that will be fitted to flying test articles.




Number one is put through an accelerated series of take-offs and landings, with the pressure vessel (the cabin of the aircraft) going through thousands of pressurize/de-pressurize cycles to make sure the airframe can sustain decades in service, with tens of thousands of hours, and thousands of landings.

The base design is ingenious, with seating for a pilot plus six passengers, in a comfortable cabin, 300 knot maximum cruise speed, the single Williams jet engine mounted at the rear, with the air intake nicely protected on the upper surface of the fuselage, and a V-tail design that allows engine thrust to clear the airframe without impacting any control surfaces. Pricing started well-below $2 million, but has rightly been pushed to just under $2 million. It wouldn't surprise me to see one of two changes made to the Cirrus business plan. They have set an initial target of just over 10 aircraft each month. I suspect that they will either need to increase output, to allow both backlog, and new sales, to develop, or the price will need increasing. I would not be at all surprised to see Cirrus establish a second production site, to meet possible demand in emerging business aviation markets, (in China perhaps?).

Will Demand Remain Robust? This is a question I have assessed, dozens of times, over the last few years. The US business jet market totals some 20,000 business jets. As you would expect demand falls into a pyramid, with entry-level jets at the base of the pyramid. Very Light Jets start at about $3.5 million to buy, when new. The general aviation market, world-wide, is populated by single-engine and light twin-engine piston-powered aircraft that are typically under 12,500 pounds in take-off weight.

There are more than 200,000 such general aviation (GA) aircraft, in the US alone, and there are more than 600,000 pilots who are trained to use these aircraft. There are several popular single-engine turbo-props, from the Pilatus PC-12, the Piper Meridien to the European SOCATA TBM-900. The lowest cost single-engine turbo-props start at $2.2 million, and go up to almost $4.5 million. So, the Cirrus jet offers an attractive package for under $2 million. Very attractive, if they can invest additional engineering resources to open up multiple distribution channels.

Looking at the profile of private business owners, and owner/pilots who use lighter aircraft for business use, the market potential for a competitive single engine jet would be very significant. Indeed, the basic rules that were used to enable US fractional aircraft ownership find their origins in the GA market, where the vast majority of aircraft are owned by groups of enthusiastic pilots. I would expect a high percentage of Cirrus SF50's to be owned by multiple owners, each of whom would share their aircraft costs. Here are some interesting numbers for you: Airliners typically fly more than 12 hours per day, with the most costly routinely peaking at 16-20 hours of flying each day. Business jets average about one hour per day, with 2-3 hours use in well-run fractional jet programs. In general aviation, however, many aircraft will go for months between flights. Even active groups will usually have members who fly well-under 100 hours per year. Thus, with range limited to roughly 1,000 nm, the Cirrus would create a natural radius of operation, added to it's attractiveness for private pilots, business owners, and even non aircraft owners who would have a group-owned aircraft flown by an experienced pilot.




When you start to research distribution channels, geographies, existing data for GA users, and the low operational cost of a single-VLJ, I have no doubt that a well-managed aircraft program could see long-term production rates that would almost be begging for Cirrus to exploit their to-market advantage, just as quickly as they can, safely.

Competitive Advantage The most significant advantage a single engine jet aircraft offers is low operating costs. The Eclipse 500 VLJ costs about $900 per hour in fuel, engine insurance and maintenance. The Cessna Mustang costs about $1,000. A Pilatus PC-12 will cost around $900 per hour, with the lower-cost Piper Meridien costing about $600. The Cirrus will have a single jet engine. The lighter Citation aircraft have two Williams or PWC engines. For two engines, fue l consumption is about 90 US gallons per hour. Engine insurance costs about $110 per engine, for twin-jets. The Cirrus is slated to burn about 60 gallons of fuel per hour, with engine insurance, for it's Williams FJ-33 that should be around $100-125 per hour. In other words, even if we leave maintenance costs at light jet levels, a Cirrus SF50 should cost at least $250 per hour less than a very light or light jet to operate. My experience suggests that the savings should exceed $300 per hour. The Cirrus offers cruise speeds of up to 300 knots, with seating for a pilot, four adult passengers, and two children. Between seating capacity, initial cost and operating costs, the Cirrus will offer a significant step-up for almost any other general aviation aircraft. The vast majority of piston aircraft offer seating for pilot + 3, with the bulk of twin piston aircraft offering room for one pilot + 4-5. Even the Cessna Mustang only offers seating for pilot + 5. In other words, by purchasing the Cirrus, you spend up to $2.5

million less than light jets, and a full $1 million less than popular very light jets, with comparable speeds, more comfortable seating, and operating costs that will likely be 25-35% lower.

Market & Program Summary My research, and my experience at assessing single and twin-VLJ market potential suggests that an aircraft, like the SF50 could do all of the above, and could also create a sub-fractional ownership business model that would be highly attractive to the 4,500+ US, and non-US potential markets. Cirrus are at a critical tipping-point, operationally and commercially. To succeed, they will need to execute their program flawlessly, or risk allowing a second competitor to emerge. At this point, Cirrus have a good-looking value proposition, but still have numerous opportunities to trip themselves up. In business aviation, it helps to have an attractive aircraft, to succeed, but I could name a handful of highly-successful aircraft that achieved segment dominance with an inferior product, simply by executing better.

By the end of the year, I hope that Cirrus will be delivering SF50's, and that they have the people, skills, knowledge, financial resources, market and competitive knowledge to make certain that early owners have an outstanding ownership experience.



market historical demand & insights

16

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014Single Turbo-PropTwin Turbo-PropLight JetsSuper-Light JetsMid-Size JetsLight Super Mid-Size JetsHeavy Super Mid-Size JetsLarge JetsLong-Range JetsUlta Long-Range Jets

demand forecasting - flying a plane using the rear-view mirror!

17

Standard Industry Graph: Useless! The graph below is by far the most widely-used by all of the industry forecasting companies (Honeywell, Pratt & Whitney, Rolls Royce Aero Engines). Early in my aviation career, I learned about regression analysis, and using historical demand for forecasting future demand. There’s a catch! Firstly, this method breaks down fast when the “future” market misbehaves: the world’s greatest understatement used to characterize more than seven years of record-destroying demand and used business jet value collapse! The 2001/2 downturn is clear to see at the left-hand side of the graph. Although most forecasters attribute the 2001 downturn to the 9/11 tragedy, the lead indicators we track were already quite evident in the third quarter of 2000. Even with the events of 9/11, the market rebounded very quickly, in 2003/4 before going through the strongest upswing in new jet deliveries we have ever seen.

By 2007 manufacturers and industry “pundits” were suggesting that the market surge would continue until 2012, followed by a modest downturn that would end in 2014.

Manufacturers were hailing increasing demand from emerging markets, like India and China, with leading manufacturers attributing 75% of their backlog for popular aircraft types as having been international in origin. As we got closer to late 2007 manufacturers were heaping praise on the emergence of demand from non-US or other mature market sources, that had been in most leading forecasts for several years.

In my newsletters, published between 2005 and today, I expressed extreme skepticism at international business aircraft orders. We simply had no experience with buyers in these markets, making it impossible to tell if a world-wide economic downturn would cause a collapse in backlog numbers, or not. My view, based upon client feedback, was that backlog would collapse.

The problem I had was simple: after two decades spent tracking global markets for light aircraft, aircraft support services (engine overhaul and spare parts), and business jet charter, fractional and whole aircraft sales,

I was quite certain that backlog from emerging business jet markets would collapse, quickly. I was right, in a rare example of my emotions wishing for my analyses to be wrong. Thousands of people lost their jobs.

By 2008 manufacturers were forced to re-assess their backlog volume, triggering the loss of many billions of dollars in aircraft orders. Even today, with several major manufacturers, like Bombardier, Cessna and Embraer announcing multi-billion dollar aircraft “orders” from Netjets, we are seeing a fresh round of blindness to historical events. Netjets have canceled major aircraft orders before, with their 2002 order for Citationjet 2’s, and a more recent order for 75 Hawker 4000’s as high-profile precedents. Former Hawker Beechcraft executives have told me that their bankruptcy was triggered by the loss of the Netjets order for Hawker 4000’s. Needless to say, we remain skeptical of this graph, and it’s broad-brush approach to a market that requires laser-guided precision! I find it sad, and quite scary, that such a huge industry, with unlimited resources available, has failed to put in place robust forecasting and volume predictors that I have developed, alone!



fractional aircraft & major fleet companies

18


2004 2005 2006 2007 2008 2009

10

11511386

164

111

New Fractional Aircraft Deliveries (2004 to 2009)

Avantair CitationAir Flexjet Flight Options Netjets PlaneSense

77878

12

Owner to Aircraft Ratio - Share Owners Only

Avantair CitationAir Flexjet Flight Options Netjets PlaneSense

80

70

6265

55

88

Sold to In-Service Percentage - Share Owners Only

19

fractional aircraft ownership - the major US players pre-2010

Fractional Ownership: Key Metrics The three graphs, above, show key operational data that was last updated in 2009. Since then, providers have seen their fleets shrink in size, with Avatar going into bankruptcy.

Netjets, the industry leader in the US and Europe, lost almost 100 US-based aircraft, and about the same number of jets from Netjets Europe. Their European fleet, however, started at about 180 aircraft, showing you the far greater impact that downturns have in markets where business jet users are less inclined to keep costly business jets when their companies, or wider regional economies, start to tank.

In the US, Netjets now operate about 409 aircraft, and have announced their plans to replace virtually all of their existing aircraft, world-wide, over the next 7-10 years. For the hundreds of share owners who retain us, the news is not good. Used aircraft values are starting to stabilize, but Netjets could not possibly have chosen a worse time to be asking, some might say “telling”, their share owners that they must either leave Netjets, or transition into new jets at 3, 4 or 5 times the capital requirement.

Fractional Aircraft Repurchasing Sadly, the major fractional providers seem to be taking a rather one-sided approach to their fleet renewals. Even when their new aircraft types, like the Phenom 300, offer substantially-reduced operating costs, little of the benefit seems to be offered to long-standing Netjets share owners. The result is substantial improvements in both share-related and operational margins, for Netjets, while their share owners lose record percentages when trading their used shares back to Netjets.

The fractional business model is one we have spent over twenty-five years studying. We have developed a new model for fractional services, which we are converting into an investment prospectus. Upon completion, we will see if there is any appetite for existing providers to use a business model that reduces their own costs, while also reducing costs and risks for share owners. Existing providers argue that this is not possible, but five minutes over the telephone would be enough to prove that simply is not so.

Fractional ownership isn’t a bad concept: quite the opposite! It’s simply being badly executed…

3052

76

83

99

504

Netjets USAFlight OptionsFlexjetCitationAirAvantairPlaneSense


market performance by aircraft category

20

Category Demand - What Our Subscribers Receive Our actual report provides additional details, by aircraft type. We discuss hard number differentials between current aircraft types, versus future programs that are under-development, or are expected to be announced during our 3-5 year outlook.

Segment performance is measured in terms of volume, margin, channel coverage, geographical potential, and short, medium, or long-term game-changers. Our non-demo version provides these additional details, which have a profound impact on existing aircraft categories.

Utility turbo-props are attractive to a wide range of buyers. Companies, like FedEx. FedEx operate a fleet totaling 667 aircraft, including a staggering 112 Boeing 757’s, 71 Airbus A300’s, 60 MD-11’s, and 243 Cessna Caravans. At present, the Cessna Caravan is the ideal aircraft for high-volume, low weight freight use, out of smaller, regional airports. As an indication of the depths we go to in researching demand, the US remains one of very few countries that allow the commercial operation of single-engined aircraft for night-time IFR (instrument flight rules) flying. While analysts might believe the night freight business, in emerging markets, will strongly boost demand from this category of aircraft, you need to understand market realities. These can involve operating regulations, air traffic control coverage for night-time operations, and the alternative options available in many key markets, In Europe, for example, the UK postal service taps airliner capacity for urgent packages, all the way down to using high-speed rail services, that offer similar speed to the airlines, with the ability to deliver packages closer to high-demand cities.

Whether looking at infrastructure, tax and operational regulations, operational restrictions, political momentum, alternative options, service costs, or any of another dozen variable, it is impossible to accurately assess global demand for ANY business aircraft. Our research has long monitored limitations, and trends, regarding business aircraft applications in key usage categories, which define the true market potential we can use for forecasting purposes. Today, too many forecasters, and especially those produced by financial institutions and companies who don’t go to the trouble of understanding the realities of each segment, in each geography. This is where our insight is essential. We tap hundreds of contacts, in every significant market, globally, to keep us updated regarding the market, and the environment available to business aircraft users.

Our annual subscription adds details that that are critical in assessing market potential, and performance, for each category and aircraft type. Considerations can become very intricate. For example, we found, via research, that one fleet operator of a leading large jet selected a slightly smaller, and brand new design, because the older design could not make short flights, when starting with full fuel tanks. The older design was favored for cabin size, but was unable to offer a variant for such shuttle services, because there was a 12,000 pound difference between the maximum take-off weight, and the maximum landing weight. This often happens with designs that are “upgraded” over many years. Manufacturers are readily able to get take-off weights increased, using the original testing done on the under-carriage and the wing. However, with the stress associated with landing an aircraft, manufacturers rarely get approval to increase maximum landing weights. This, seemingly ridiculous, item illustrates why industry experience is so important!


single-engine turbo-props

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

0 70 140 210 280 350

227

342

280

235

174

173

147

186

190

186 Historical Category Deliveries

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

TBM 700-900 FamiltPiper MeridienPilatus PC-12Cessna Caravan Family

Model Deliveries (2006 to 2009)

21

Segment Demand Insight Segment demand has remained strong, with steady growth since 2010, driven by the unusually wide array of distribution channels being tapped by Pilatus, the high-performance TBM-900 and the widely-used Cessna Caravan family of utility turbo-props. Utility segments have continued to grow, with the addition of China, India and former Soviet countries needing aircraft that can be used for freight, people moving, air ambulance, regional government and in other industrial sectors, such as utility power-line inspection, pipeline construction, and flight operations into short, or unpaved airfields that are often little more than dirt patches or grass. In more mature markets, the faster PC-12, TBM-900 and Piper Meridien have each traded upon cabin volume (PC-12) or near-jet cruise speeds (Meridien and TBM-900) to sell well with high-end owner-pilots who have chosen to transition out of piston designs. To summarize, turbo-prop singles have very wide applications, from FedEx package deliveries, through Australian flying doctors, to private pilots who want a flexible aircraft to use.

Segment Outlook & Upcoming Entrants I expect continued growth among utility and freight users, especially in emerging markets, where the need for regional travel exceeds the number of available airports. Such utility use will be offset by the migration of owner-pilots into a brand-new aircraft category: the Cirrus SF50, a single-engined jet, which is slated to commence deliveries this year. With the price of the Piper at $2.2 million, the Pilatus at $4.55 million, and the TBM-900 at $3.7 million, all three designs will lose volume to the Cirrus SF50, which is priced at just under $2 million, and with an estimated backlog of 500+ aircraft. With it’s dorsal air intake, I would expect Cirrus to offer a rough airfield kit to help buyers take advantage of the superb airfield performance offered by the Cirrus jet. With the financial backing of a Chinese parent, I would expect to see Cirrus split production, between their Duluth HQ, and, most likely, China, where we see continued strong growth of flexible singles, especially the Cirrus, which offers speed, a large, comfortable cabin that seats seven, low hourly costs and tremendous role flexibility.

Growth DriversBroad geographical demand

Multi-channel appealTapping strengthening owner/

pilot segment in USA.

Strongest CompetitorTBM-900 since 2011

PC-12 strong since 2005, but each over-priced.

Weakest CompetitorPilatus & TBM900 vulnerable on price with emergence of

Cirrus SF50 late 2015/6

Segment ThreatsCirrus SF50 (Very Strong)New King Air model long

overdue: hinted by Textron.

Potential For Growth (3-5 Year Outlook)

Segment will over-perform with expected volume above 300

units for 12-24 months.


market performance by major aircraft manufacturer

22


embraer aircraft deliveries2000 To 2014

0

31

63

94

125

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Legacy 500Phenom 100Phenom 300

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

1713

19202018

16

1114

2421

23

Manufacturer Market Percentage Market Share Of Deliveries

Cumulative Aircraft Deliveries By Type


embraer aircraft details

24

Aircraft Type Phenom 100 Phenom 300 Legacy 500

Compare Five-Year or Three-Year Residual Values Of Leader

Year Entered Service

Number Built

Price Versus Competitors

Maximum Cruise Speed

Range @ High Speed Cruise

Cabin Height & Width

Key Competitive Pro

Key Competitive Con

Margin Strength

Three-Year Program Deliveries Versus Segment Leader

Segment Threats

Outlook

Short-Term (1-3 Years) Medium Term (3-5 Years) Long Term (5-10 Years)


embraer aircraft details

25

Aircraft Type Legacy 450

Primary Versus Segment Leader

Year Entered Service

Number Built

Price Versus Competitors

Maximum Cruise Speed

Range @ High Speed Cruise

Cabin Height & Width

Key Competitive Pro

Key Competitive Con

Margin Strength

Three-Year Program Deliveries Versus Segment Leader

Segment Threats

Outlook

Short-Term (1-3 Years) Medium Term (3-5 Years) Long Term (5-10 Years)


embraer aircraft editorial

26

Aircraft Models Commentary Covering Learjet & The Learjet 70/75 Models

Embraer Business Jets

Embraer started to deliver business jets in 2008, and have quickly taken over segment leadership from Cessna. Within two years of full production, they owned 40% of the very-light through super-light segments. Embraer are also ambitious, with their Legacy 450 & 500 programs either entering service, or close to this milestone. The 450 & 500 offer large, stand-up cabins, impressive range points, runway performance and baggage volume. These designs are an exact match to definitions I created in 2005, so I am confident that they will take market share from the Cessna Sovereign and Gulfstream 150

Phenom 100

A capable intra-regional jet, offering just under 5’ of headroom, and around 1,200 nm of range. I am disappointed by the maximum cruise speed, at Mach 0.70. This is below the long-range speed of the

50 year-old Hawker 800 design. The design is not flexible enough for wide-spread fleet use. If the Phenom 100 can de limited to regular 1-2 hour milk runs, it should sell quite well. At present, the

Phenom 100 competes against the Cessna Mustang, which doesn’t offer the cabin cabin height (five inches less with the Mustang, but is similar in range and speed capabilities. The Phenom 300 and

Cesna Mustang are likely to encounter stiff competition from the upcoming Cirrus SF50.

Phenom 300

The Phenom 300 remains in the light to super-light segment. The cruise speed is an impressive 453 knots. The cabin cross-section offers minor advantages over the Citationjet 4, but this aircraft will

attract strong fleet and single-ship customers, with almost 2,000 nm of range, a very large baggage hold, and very low operating costs at high cruise speeds. The Phenom 300 has been purchased by Netjets, Executive AirShares and Flexjet, in the US, which will make this type the default jet for three

leading fleet operators. The upcoming Pilatus PC-24 will compete well with the Phenom 300, offering a longer cabin, and an excellent combination of speed, range at speed, and airfield performance. With

2013 pricing set at $9 million, the PC-24 should also be price-attractive.

Competitive Outlook

Competitive Outlook: Increased market share for 1-3 years, with increasing market share, and margin, pressure when the Pilatus PC-24 enters service. Cessna will have more margin to play with, given the derivative design of the Citationjet 4. Early indications suggested that Embraer might increase output to 10 Phenom 300’s per month. I have a more conservative take. Combined Phenom 100 & 300 might approach 10 per month, but Embraer will need to be careful with the market: if they allow fleet sales and deliveries to increase above 10-20% of total production, they will create surplus used aircraft

entering the market over the next 5-10 years. With the PC-24 expected to enter service in 2017, and with Cessna’s Citationjet 4 competitive-enough for Cessna to fight for volume, the Phenom 300 should be able to maintain production rates of up to 8 per months, for the next 18-24 months, after which their competitive position will weaken. They should also try to keep fleet sales below 25% of production, to

avoid flooding the used market with used aircraft when the next market down cycle kicks-in.


market share trend by major aircraft manufacturer

27


1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 YTD

OEM 1OEM 2OEM 3OEM 4OEM 5OEM 6

28

trends in manufacturer market share2000 To 2014


used business jet market metrics

29

Used Aircraft Recent Days On Market All of the providers of business aviation market analysis, especially forecasters, largely ignore used aircraft activity. I don’t. In the years leading-up to the 2008 new aircraft demand collapse, the used market had been behaving in ways we understood. During the 2001-2003 downturn, used aircraft values fell by an average of some 15%, and used aircraft volumes stayed within the parameters we were used to seeing, with modest variations. By late-2007, it was obvious that used aircraft volumes were climbing steeply, while manufacturers were still maintaining production rates that crashed, hard, during the next two years. The manufacturers made some bad calls.

Fleet operators, as with the fractional industry, held back with replacement programs, resulting in aging fleets they started to dump as share owners exited their shares. We had a perfect storm, with rapid increases in used aircraft for sale, collapsing demand for new and used aircraft, all of which caused used jet values to go into free-fall.

Today, we continue to wait for signs that used jets are selling more quickly (see the curve for “days on market” below. We also track used transactions, to see if used inventories are being reduced at increasing rates. Finally, we carefully track used aircraft pricing, using transaction prices we receive every month from the Aircraft Price Digest Blue Book, and their quarterly value updates that are often slightly out of sync with the actual market

Used Market Impact On New Sales During past market cycles, used values, for the most popular aircraft types, have remained within 60-70%, or higher versus the prices that were charged when these aircraft were new. Today, this situation has changed, drastically. For example, the popular Challenger 300, now replaced by the upgraded Challenger 350, can be purchased used for well-under $8-9 million. The new price is presently above $24 million, making used Challenger 300’s an outstanding opportunity for aircraft buyers. To be blunt, with engine and spares insurance, and a realistic 30-year life, I would struggle to recommend a new Challenger 350, or almost any new aircraft, when used examples are available for 1/3 to 1/4 the cost, with all of the advantages they had when new.

30

300

375

450

525

600

Septem

ber 20

14

October

2014

Novem

ber 20

14

Decem

ber 20

14

Janu

ary 20

15

Februa

ry 20

1520

45

70

95

120

Septem

ber 20

14

October

2014

Novem

ber 20

14

Decem

ber 20

14

Janu

ary 20

15

Februa

ry 20

15

Large Jets Recent Transactions Per MonthMedium Jets Recent Transactions Per MonthLight Jets Recent Transactions Per Month

Average Days On Market Trend By Aircraft Category Monthly Used Aircraft Transactions Per Month By Size

used aircraft market trends09/2014 to 02/2015


business aviation q1 2015 review & outlook demonstration...

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