Post by
Tempo1 on Sep 16, 2024 7:53am
RBC: Positive view from an expert
BizJet KOL sees optimistic delivery and positive fractional outlook, continued normalization
Maintaining Outperform on Bombardier and General Dynamics
Our view: On Friday, we hosted Brian Foley, a well-recognized industry expert on business jets, for a discussion on the evolving industry dynamics and fundamental backdrop. The discussion focused on the current business jet fundamentals, macro outlook and implications for demand, current backlogs and production expectations, as well as a look into the supply chain. Foley remains optimistic on expected production and delivery plans into 2025 (his target is ~810 deliveries) and sees the industry holding at a ~1x book-to-bill into 2025. While we view the outlook as generally positive for the business jet outlook, Foley called out a significant mix shift to fractional ownership, which can be a positive for higher utilization levels (services and accelerated replacement cycle) but can also limit individual sales. Declining interest rates are not expected to be a tailwind, and Foley sees less ESG risk, but greater tax, fuel and flight tracking and shaming as watch items for the industry. We continue to rate shares of both General Dynamics (Gulfstream production increases, margin upside, G800 cert) and Bombardier (services and defense upside, 2025 free cash flow inflection on increased Global deliveries) Outperform based on our bullish bizjet sector view
Industry expert call supports a strong 2024–26 production outlook for business jets. Brian Foley sees the industry delivering more than 800 aircraft in 2024 and averaging ~800/year through 2033. Foley discussed that he specifically models conservatively, adjusting for global pullbacks every ~10 years. We view his insight as cautiously optimistic on the industry fundamentals, as Gulfstream and Bombardier have significant backlogs for their fleets (~$20B and ~$15B, respectively). Despite the elevated backlogs, Foley detailed bizjet utilization as hitting a historic high and remaining significantly higher compared to 2019. His view that the industry can hold a ~1x book-to-bill even as the OEMs work through backlogs is one that we also share. The demand for business jets remains robust, and despite some bearish sentiment in the market, we see orders as being largely unaffected by geopolitical or macro factors, a slight divergence from prior ordering cycles.
Strong mix shift to fractional ownership. Our discussion with Foley highlighted the notable surge in fractional ownership activity since the pandemic, which presents a favorable tailwind for aftermarket services. In North America, fractional activity has risen by 12% YoY and an impressive 52% since 2019, whereas individual and corporate-owned aircraft have experienced declines of -10% YoY and -3%, respectively, over the same period. According to Foley, this uptick in fractional ownership can be attributed to several factors, including flight-tracking capabilities, the stigma associated with private aviation (“flight shaming”), and decreased tax incentives for individual owners. These challenges are easily addressed through fractional programs, making them an attractive solution for many customers. Notably, fractional aircraft tend to operate at significantly higher utilization rates than privately owned aircraft (5–6 times higher), generating greater maintenance needs and replacement parts requirements. Nevertheless, Foley also acknowledged two key risks related to large-scale fractional purchases: 1) they often yield lower profit margins for OEMs due to bulk discounting; and 2) they may divert attention away from individual owner sales, potentially reducing total jet sales.
We maintain our Outperform rating on Bombardier (BBD). Key takeaways from our discussion with respect to BBD centered around three primary themes: 1) a favorable demand environment for aftermarket services; 2) ongoing popularity of large-cabin jets; and 3) a robust industry delivery forecast. Considering these factors together in the context of BBD’s modest delivery target of ~150 aircraft annually after 2025 increases our confidence in the company’s 2025 FCF targets and represents attractive upside optionality for deliveries