CIBC: Service, a strong driver for BBDFrom CIBC Transportation & Aerospece weekly.
BBD Flight Activity Outperforming The Industry
Key Points
While business jet traffic continues to be strong and is trending well above pre-pandemic levels, it is down Y/Y which has weighed on investor sentiment towards the sector. For example, WingX noted recently that business jet departures globally grew 21% in June compared to 2019 but were down 4% compared to a year ago. We also track business jet flight activity through RadarBox and it shows a similar trend – activity is down 2% Y/Y through July 27 but up 30+% versus 2019. Looking at BBD’s aircraft flight activity though, it is outperforming industry trends. Its flight activity is up 2% Y/Y YTD and is up 30% versus 2019. Looking at the month of July, it was the only business jet OEM tracked by RadarBox to post Y/Y growth, up 2%. For reference, the industry total was down 2% Y/Y in July and the other OEMs were ranging from flat (Embraer) to down 9% Y/Y (Falcon).
The RadarBox data supports our view that BBD's service revenue should continue to perform well.
Looking at BBD's business aircraft flight activity versus its Service revenue going back to 2019, there is a 78% correlation. BBD's target is to hit US$2B of Service revenue by 2025 with expectations of generating US$1.6B – US$1.7B in 2023 through 1) an increase in market share related to servicing BBD aircraft (targeting 50% from 35% back in 2020) and 2) an increase in service capacity.
Looking at these two drivers, on the former, BBD sees the available size of aftermarket revenue growing from US$2.8B in 2020 to US$4.0B in 2025. On the latter, BBD added over 1MM gross square footage to its network last year and now has service centres and available capacity in key markets. We would also note that the company generated US$424MM in Service revenue in Q1/23. Annualizing this suggests BBD is tracking towards the upper end of its Service revenue guidance for this year and is in a position to exceed its 2025 targets.
The growth in BBD's Service revenue helps diversify BBD’s earnings while also being higher margin. This along with the company's focus on expanding its Defense revenue should help reduce BBD's earnings cyclicality through the business jet cycle.