Ever since the pandemic motivated well-to-do travelers to avoid the close-quartered airline experience back in 2020, the stampede to private air travel has yet to abate. But just as new business jet sales begin to take off after more than a decade in the doldrums, some manufacturers are temporarily stuck on the sidelines unable to fully capitalize on the upswing.
While the business jet charter, fractional and preowned segments began flourishing in mid-2020, it took awhile for new aircraft sales activity to catch on. Finally by mid-2021 manufacturers unanimously began reporting brisk sales, with new airplane unit sales nearly double the amount that were being delivered, rapidly swelling backlogs.
The timing of the long-awaited sales uptick couldn’t have come at a worse for time for General Dynamics’ Gulfstream division, which reported 4Q 2021 order activity beyond anything seen since 2008 and a sales backlog up 40% from the year before. At the same time the company is bringing its wing production in-house and acquiring another set of tools and fixtures, all of which stifles adding any more production capacity much before 2023. Now saddled with a temporary wing shortage, they only expect to produce 4 more jets than last year at a time of increasing demand.
While longer term the wing vertical integration has the chance to improve production control and profitability, it can be at the expense of short-term sales. Once in place there is a plan to bring up production meaningfully. Still, buyers who can’t get their aircraft within a reasonable amount of time have the option of looking elsewhere.
Competitor Bombardier isn’t in much better shape to capture the market upswing right away. Despite a fourth quarter book-to-bill ratio of 1.5:1 (1.5 new sales to each 1 aircraft delivered) and backlogs swelling by $1.5 billion last year, 2022 deliveries are only ramping up by a “little bit” compared to last year according to the CEO.
While suggesting that it’s keeping production constant to be “conservative”, one other possible explanation is that the company does not want to bloat already high debt levels any further by spending even more on procurement and capacity expansion. Another contributor to shipments remaining flat is from the closing of their Learjet division which added 10 unit shipments last year in its final gasp.
As with Gulfstream, Bombardier is signaling a more aggressive 15-20% production increase in 2023. Constrained production capacity could ding both their market shares in the interim until more units eventually start coming off the line.
For the industry as whole, demand exceeding supply will translate into longer wait times for customers, and the ability to raise prices and improve margins for OEMs. Still, there will be an opportunity loss for those who lose sales due to insufficient capacity. Fortunately, production and demand usually find an equilibrium sooner or later.
Despite these constraints and barring any unforeseen shocks, it’s still believed that worldwide jet shipments will get out of their 700 unit per year rut and approach 900 units as soon as 2024, but not later than 2025. While many industry peers are not yet as optimistic, it’s hopeful that the continued flow of positive quarterly reports will demonstrate a more convincing, positive outlook.