Business Jet Primer
Market dynamics support continued growth
Our view: Our in-depth analysis of the business jet market increases our conviction in the long-term
demand trends and upside avenues in aftermarket services for leading OEMs. We note several positive trends in higher utilization, supportive demographics, and mix shift to larger variants, which support our Outperforming ratings on Bombardier and General Dynamics. Supply chain challenges remain a key risk with regard to build rates, though we believe improvements are likely to take hold by next year.
Our supply/demand analysis supports the view that the industry is relatively under-supplied, offering potential upside to longer-term estimates. Industry fundamentals remain strong. A surge in private travel interest drove exceptional business jet demand through 2021 and 2022. Although demand is normalizing, it persists at higher levels than previous trends, as evidenced by elevated activity levels and robust order backlogs. This extensive backlog is expected to encourage disciplined production scaling and rate increases that align with supply chain constraints, ensuring the preservation of value and pricing stability in the sector. Near-term demand trends among fleet operators and HNW individuals favor long-range large-cabin jets, which in our view is a positive for the market leaders in the space, Bombardier and General Dynamics.
Fleet demographics support demand. The business jet fleet is the oldest in more than two decades, supporting demand for new jets and planned production rate increases. With used inventory levels remaining significantly below the typical range before the pandemic, we expect robust forward demand and pricing support for bizjets, especially for large jets, which remain at the lowest inventory levels among the three major jet categories.
Our supply/demand analysis supports view that the industry is relatively under-supplied. We believe that from 2020 through 2023, the increase in the total bizjet fleet did not keep up with the strong increase in global billionaires and global GDP, though total bizjet delivery growth historically has had modest positive correlations with these metrics. We believe consensus estimates for total bizjet deliveries through 2026 are supported by this supply catch-up and conservative estimates for the growth of billionaires worldwide and global GDP.
Supply chain remains a gating factor. While supply chain pressures have eased with normalizing
demand, the availability of technicians and parts continues to temper build rates. Engines, parts, and
avionics are in short supply due to factors such as global chip shortages, supplier disruptions, and
increased demand. Labor shortages continue to be a top challenge, with some skilled workers leaving the industry during the pandemic, leading to quality control issues at some suppliers. While the supply chain continues to be a near-term headwind, we see this easing by 2025.
Services likely a source of upside for leading OEMs. OEMs are increasingly developing their in-house services divisions with the aim of taking on a larger share of the MRO market for their aircraft.
This trend is influenced by the more stringent and costly certification requirements, leading jets to
remain in operation for extended periods, thereby bolstering the demand for maintenance services.
We observe that aircraft retirements are at low levels, suggesting that aircraft are being utilized for
longer durations before decommissioning. This extended use necessitates increased maintenance and servicing. Consequently, aftermarket services and parts sales not only are essential for maintaining these older aircraft but also tend to offer higher margins, thereby improving overall profitability. Amplified usage rates from both commercial fleet operators and defense customers have resulted in a higher frequency of maintenance and need for parts replacements.
Additionally, there has been a surge in the popularity of large long-range jets, which, as they comprise a growing proportion of the installed base, contributes to a rise in average expenditure on maintenance due to their more substantial and complex service requirements. With the average age of a business jet being slightly over 18 years, we see runway for more extensive maintenance packages reflecting the higher bill sizes that come with servicing older aircraft.
Still bullish on covered companies BBD and GD. The favorable age profile of the existing fleet
and the sustained high levels of usage, coupled with the significant opportunities for growth
in the services sector, are key factors that support our favorable view on Bombardier’s stock.
Our analysis supports our Outperform rating on GD with respect to the company’s Aerospace
delivery ramp, conservative margin assumptions, defense strength, and capital allocation.