Premium #199 – Business Aircraft OEM Consolidation

In the wake of the NBAA show, the contrast in the relative lack of consolidation among business aircraft OEMs when compared with regional and commercial aircraft, is striking. We’ve seen consolidation in major airframe manufacturers throughout commercial and military aerospace -- Boeing-Douglas, Northrup-Grumman, Lockheed Martin and the Eurofighter and Airbus consortia in Europe. Among regional producers, we’ve seen a major change, with Fokker, BAe, Saab, Dornier and others falling by the wayside, leaving ATR, Bombardier and Embraer. Even the airlines have consolidated - United-Continental, Delta-Northwest, America West-USAirways-American, Southwest-AirTran, Air-France-KLM, IAG with BA-Iberia, and Etihad-Alitalia, JetAirways, Air Berlin and others. Why haven’t we seen much consolidation in business aviation and business aircraft? The Lack of Consolidation There are several reasons that business aircraft OEMs have been able to remain independent, and remain competitive. First, business aircraft are a niche product, with high margins, focused on a small customer base. If you build a successful product, the market will find you, whether a relatively small Swiss company like Pilatus or a focused player like Dassault. Second, one doesn’t necessarily need a full product line (family) to compete across the board in general aviation, and while Cessna, Embraer and Bombardier offer wide product lines, others that are equally or more successful, including Pilatus, Gulfstream and Dassault Falcon Jet, do not. But that doesn’t mean the competitive dynamics of this sector are static. Embraer, over the last 15 years, has emerged from a regional aircraft manufacturer offering a corporate version of one of its regional jets to a major full line player, with more than 1,000 business jets delivered. Embraer's history in this aviation segment is little short of amazing; how it emerged as a one of the industry's major players in a decade is perhaps unprecedented. Competition remains fierce, but new players with innovative products can push out older players with less efficient aircraft. While Textron, which owns Cessna, recently acquired Hawker-Beechcraft after bankruptcy, there has been relatively little consolidation in the industry. There has been some consolidation though. It is not easy for a new entrant to successfully launch a new product, because of barriers to entry in terms of capital requirements, service and support networks, and technology, remain high. While Eclipse was able to gain funding for a personal jet, the result of its initial efforts were bankruptcy, and its in a comeback mode. Cirrus is entering the single engine jet market after selling the company to the Chinese to ensure adequate investment capital, and Kestrel, headed by a founder of Cirrus, merged with Eclipse to form One Air to help fund their turboprop development. It appears to be getting tougher for entrepreneurial new entrants to find funding for market entry with new products. Can the market continue to support Gulfstream, Bombardier, Dassault, Embraer, Cessna, Hawker-Beechcraft, Pilatus, Daher-Socata, One Aviation, Kodiak, and others? The answer appears to be yes, because niche players with strong products can succeed. But as competition gets tougher, will niche players continue to survive? We believe the answer is a qualified yes, as those players with unique products (plus capital) and unique applications will continue to succeed, while “me too” products will fail. Differentiation Differentiation in general aviation applications typically comes from one of three sources - speed, range and cabin comfort. Higher speeds can differentiate an aircraft from its competition, and is one reason the Daher Sochata TBM-900 is a successful single-engined turboprop -- it is faster than its competitors. Similarly, cabin size and flexibility are a reason a key competitor, the Pilatus PC-12 has market leadership in its sector. The PC-12 has the flexibility to carry up to 10 passengers or be configured for medical evacuation or cargo, with a unique large access door. It is the SUV in its market. Range can often differentiate an aircraft within a size class, as range defines the potential missions for an aircraft. Being at the top of the category in range is often advantageous for customers with specific missions they need to complete that extra capability. Rarely does one find a single aircraft with the highest speed, most comfortable cabin, and longest range within its competitive class. Each company evaluates the trade-offs in design, and develops a product for its specific niche in the market. As with other aviation segments, engine technology typically drives aircraft performance, and as new generations of engines are introduced, aircraft are typically built around them. The Market The general aviation market took a hit in the 2007 recession, with the low end of the market being hit the hardest by the downturn. While the market is slowly improving, that growth has been agonizingly slow when compared with record growth levels from 2003-2007. Expectations are now more modest, but the business aircraft market is growing again, and is expected to continue a slow uptick over the next decade. Can that slower growth still support all of the participants without further consolidation? While it remains to be seen, we believe the market can, and will continue to embrace competition. Meanwhile creativity continues with the very interesting Pilatus PC-24 having sold out its first year of production. Textron is preparing to launch a single engine turboprop using the new GE ATP engine - no doubt to chase the TBM-900. Even as GE offers this new turboprop, PWC is almost certainly going to respond with its own competitive engine, and given its massive industry footprint, will quickly find the appropriate aircraft to power. Because there are so many players, and customers are discerning, innovation is the most critical element to stay in the game. The Bottom Line Business aviation still offers opportunities for smaller players to excel, without the need for consolidation. Innovation, meeting specific customer needs, and attention to detail remain key factors in this market, driving requirements and performance, in which only the nimble thrive.

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