Business jet results in the first quarter of 2020 have been “hammered by COVID-19,” and results could worsen in the second quarter before a potential recovery in the second half of the year, Cowen analyst Cai von Rumohr wrote in a note to investors.
“Business jet deals ground to a halt in early March,” and first-quarter 2020 deliveries were affected by travel restrictions that prevented pretransaction aircraft inspections and timely shipments, von Rumohr wrote. Some contract completions were also delayed by aviation attorneys working remotely, and financing has become difficult, he said.
“As a result, most Q1 deliveries likely missed, lucrative service work tanked and orders probably were negligible as buyers were focused on COVID-19,” von Rumohr wrote.
There may be more order cancellations in the second quarter depending on how long travel restrictions and lockdowns last. As a result, second-quarter deliveries, which traditionally are higher over first-quarter shipments, could be down compared to the first quarter, although they could improve in the third quarter should flight restrictions ease. “This should result in a pickup in pre-owned activity by yearend Q4,” he wrote.
Hagerty Jet Group says that business jet transactions have come to a “near halt” in the past four weeks and predicts a “slow and gradual” return to normal.
“The industry is faced with many challenges,” Hagerty Jet Group says. “It’s easy for deals to fall apart in this economic environment, but it’s much harder to make transactions come together.”
Hagerty says it has heard of financing falling apart at the end of a deal, and many transactions have “cratered over the past few weeks.”
“The term ‘force majuere’ is making its way back into our vocabulary after nearly 10 years following the Great Recession,” Hagerty said.
For motivated sellers, the good news is there is activity, although “opportunistic buyers” have been making offers at 20-30% below market value in the first quarter, Hagerty said. Sellers who agree to discounted prices will want larger deposits and stricter terms and conditions.
“There is no doubt that aircraft values will be immediately impacted by the current global economic recession,” Hagerty Jet Group says. “We can’t predict where things will go, but transaction levels won’t be back to normal for at least another year or two.”
At Bombardier, Cowen’s von Rumohr expects business jet revenue to rise in the first quarter despite COVID-19 restraints as deliveries of five to six Global 7500s had slipped from the fourth quarter of 2019. Still, margins likely were down as the 7500 still has below-average profitability and because Bombardier’s service business was off.
At Embraer, the company is likely to receive some government support as Embraer is “Brazil’s national champion,” he wrote. “But specifics are sparse.”
Jefferies expects Gulfstream to have delivered 28 business jets in the first quarter, compared to an earlier expectation of 32. Sources have indicated that few business jet deals have closed since the coronavirus emerged as an issue in late February and business jet flights fell dramatically in March, which restrained first-quarter deliveries, von Rumohr said.
At Textron Aviation, von Rumohr expects a 16% drop in business jet deliveries in the first quarter, with lower legacy jet shipments partially offset by Citation Longitude deliveries. Service volume was also likely down in the first quarter. “Aviation profits may have dipped by 50%+ in Q1,” he wrote.
Cowen forecasts Bombardier to deliver 122 business jets in 2020, compared to 142 in 2019; Embraer to deliver 90 business jets, compared to 109 in 2019; Gulfstream to deliver 126 jets compared to 147 in 2019 and Textron to deliver 177 jets compared to 206 in 2019. Together, the four companies are projected to deliver 515 business jets, compared to 604 in 2019.
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