Uninterested in used aircraft, Chinese buyers may wield considerable clout in business aviation markets
When a group of buyers insists on buying new products, never secondhand, and likes to update frequently, it wields disproportionate influence on the market. Business aircraft buyers in China, it seems, comprise such a group.
Chinese buyers like big aircraft. Unless their tastes change considerably—and so far there are scant signs that they are—mainland China is likely to heavily import newly built large, super-large and ultra-long-range business jets, plus corporate versions of airliners. It will export them as used aircraft. Logically, that will boost the supply of big business aircraft in the global secondhand market, perhaps nudging their prices lower.
The phenomenon, if it fully develops, will be driven by a widely understood cultural factor, the Chinese keenness for prestige. A big aircraft is more prestigious than a small one. A secondhand aircraft simply will not do. And an owner will not want to be seen flying around in the same jet after six or seven years.
So far, the strong preference for size and newness is confirmed in the belatedly blossoming Chinese business aircraft market. The habit of frequently updating aircraft is only expected by some, and suspected by others. The market took off only five years ago, so it is too soon to gauge the average frequency of updates.
Of mainland China's 193 business aircraft, 61% are large, super-large or ultra-long-range jets, or corporate adaptations of airliners, according to a survey conducted by Hong Kong business aviation consultancy Asian Sky Group. This preference was expected when the Chinese market first began to move. About two years ago, manufacturers began reporting rising interest in smaller aircraft, and they did so again at the Asian Business Aviation Conference and Exhibition held here April 16-18.
But Asian Sky Group's figures show little trend movement in favor of the smaller aircraft. Although there are more of them in mainland China now than a few years ago, from late-2011 to late-2012 the most prominent rises in mainland Chinese business aircraft fleets were still among the big ones, notably the larger Gulfstreams, Dassaults and adapted Airbuses and Boeings.
“In the past three or four months I have had several customers who have wanted an aircraft and said 'I just want the biggest one,'” says Ronan Li, head of the private leasing operation of ICBC Financial Leasing.
One reason for surmising that the mainland Chinese market will normalize and begin to seek more small aircraft is that users will begin to see aircraft more for their utility than their showiness. Moreover, manufacturers note that early buyers in a market, usually the richest, inspire people with less means to buy necessarily smaller aircraft as the market matures.
Interestingly, however, the dominance of large aircraft is more obvious in figures that also encompass Taiwan, Hong Kong and Macau—which are more mature markets than the mainland but still ethnically Chinese. For all of so-called Greater China, large aircraft account for 70% of the total.
China is far from dominant in the global market, however, and by the time the country is highly influential its tastes may have changed. Growth is fast from a low base: the late-2012 fleet of 193 was up by 55 (or 40%) on a year earlier. But globally, manufacturers delivered about 700 business aircraft in 2012, and more than 1,200 in their last good year, 2008.
Only a tiny fraction of mainland Chinese users want secondhand aircraft. Gulfstream has sold two used aircraft into the market, says Roger Sperry, senior vice president for international sales.has sold “a few,” says Bob Horner, senior vice president for sales. Notably, both succeed by selling used aircraft under conditions that most nearly matched those of new aircraft: supplied by the manufacturer with its warranty.
Horner, cautiously, believes business aircraft users are likely to trade in or trade up more frequently in China than elsewhere, but adds that it is hard to predict how often. Sperry believes it is too early to make any predictions. Li, on the other hand, is looking forward to a wave of business in the next few years as buyers begin replacing. (He also believes that most potential buyers have already bought, although that is not evident in the recent fleet growth.)
One factor that should facilitate frequent updates is easy finance, says a Hong Kong executive with long experience in obtaining money for aircraft. “They can get 100% even 105% financing,” she says, noting that lease arrangements also bring tax benefits for Chinese mainland buyers.
However the Chinese market develops, the big winner so far has been Gulfstream.
When mainland Chinese buyers enter an unfamiliar foreign market, they naturally reach for a known brand. In business aircraft, the name that they know best is Gulfstream. Among those large aircraft that dominate the Chinese market, users operated 48 Gulfstreams at the end of 2012, according to Asian Sky Group. There were 27 Bombardiers and 12 Dassaults.
Because potential Chinese buyers are quickly learning more about other brands, Gulfstream's challenge must be to translate that starting advantage into a long-term strength in the Chinese market, relying on recommendations from its early customers, say industry executives keenly watching the company's progress. Word of mouth is a powerful factor in selling business aircraft, notes Sperry.
Not surprisingly, then, the U.S. company and its partners are investing in keeping Chinese customers happy, opening a service center at Beijing in November and building up stores of spare parts worth $56 million at that facility and in Hong Kong and Singapore. A training center with a simulator for the Gulfstream G450 and G550 opened in Hong Kong in February. Like other manufacturers, Gulfstream is assigning staff to show Chinese users how best to exploit their aircraft.
The industry finance expert credits Gulfstream with cleverly reinforcing its brand in China around 10 years ago by selling a single aircraft cheaply to Metrojet. The manufacturer knew that the Hong Kong management company would use the aircraft for charters, so the first business-jet flight for many mainland Chinese would be on a Gulfstream.
Not all the market advantages are with Gulfstream. Bombardier's Challenger 800 and 850, like other business aircraft adapted from airliners, offer a lot of cabin space for their price. For a buyer seeking prestige, the performance of a powerful, long-range aircraft with a smaller cabin is not so valuable. Horner believes that in this respect the Chinese market is changing, however. Customers increasingly appreciate the performance of dedicated business jet designs, such as the Bombardier Global series, he says.
In another development in the Chinese business aviation market, HNA Group aircraft operating company Deer Jet has begun offering China's first fractional ownership service, partly in response to requests from users who have found they were getting little use of their airplanes.
In its first stage, the company is offering shared ownership of G450s, G550s and7Xs, beginning with one of each type, says Wu Wen-ding, deputy general manager of Deer Jet's aircraft asset management department. For the second stage, the offerings will be Bombardier Global 6000s and 5000s, Challenger 605s and Gulfstream G280s.
While many Chinese customers will find fractional ownership unattractive because it is not as prestigious as owning a complete aircraft, Wu says some potential customers would not care.