NBAA LAS VEGAS, October 10, 2004 Honeywell (NYSE: HON) Aerospaces 13th annual Business Aviation Outlook projects continuing demand for new business aircraft, with customers expecting to purchase more than 8,300 jets valued at more than $131 billion for the period 2004-2014.
The outlook projects sustained near-term sales for traditional business aircraft (gross take-off weight [GTOW] less than 100,000 lbs.). The survey indicates continued recovery in delivery levels over the next 12 to 18 months, based on the current U.S. economic outlook, and if Gross Domestic Product growth projections exceeding the 3 percent range over the next four-to-six quarters are achieved.
Improved order rates, established new model backlogs, continuing expansion in fractional ownership in North America and Europe and sustained economic recovery are key factors supporting a longer-term outlook for growth, said Bob Johnson, President and CEO, Honeywell Aerospace. Operators continue to tell us they recognize the benefits of business aircraft and express strong interest in new technology and new models with improved value propositions.
Manufacturer backlogs remain at nearly 1,500 aircraft orders, options and deposits. About 40 percent of them are attributed to fractional ownership programs, which enable users who cannot justify the cost of sole aircraft ownership to purchase a share of an aircraft. Close to two thirds of the total order backlog is currently for new models, amounting to more than 1,000 aircraft. Examples are Challenger 300, Gulfstream 150, Citation Sovereign, Citation Mustang, Falcon 7X and Hawker Horizon. Continued growth in fractional ownership combined with a favorable world economic outlook and the existence of new aircraft models positions the industry for a near-term period of sustained deliveries at higher levels.
Many aircraft manufacturers have been reporting higher sales activity this year than last, which supports strong planned increases in production next year. This is also consistent with the pickup in economic growth combined with the positive impact of bonus depreciation, where 50 percent of the purchase price of a new jet can be written off in the first year of ownership.
After a record peak in 2001, deliveries declined more than 30 percent over the next two years and reached bottom in 2003. This occurred as backlogs for many current models were either deferred or severely depleted and many buyers postponed new orders due to uncertainties leading up to the decision to go to war with Iraq or pertaining to the pace of economic recovery. Additionally, some aircraft development programs suffered technical delays, deferring aircraft certification and expected delivery schedules.
The past three years have been a testament to the resiliency of the business aviation industry, Johnson said. Aircraft manufacturers and suppliers continued to invest in the future despite the decline in industry billings. As a result, we are enjoying numerous new aircraft and system introductions now, and more are on the way, Johnson added.
Honeywell is currently tracking more than 20 additional all-new or derivative business jet programs that are in various stages of study or preliminary design, many of which are expected to enter service during the next 10 to 12 years. There is also a great deal of activity in the general aviation and personal jet segments, with several personal jet and small turboprop programs in development plus others under consideration, Johnson added.
The survey data and econometric analysis indicate that order intake is likely to remain healthy into 2005. This suggests solidification of order backlogs for many current models, and supports higher aircraft deliveries in the near term when coupled with the impact of new models entering service this year and next.
The combination of forecasted sustained economic growth and a series of new model introductions suggests that 2005 will mark the beginning of a sustained expansion of deliveries that could last for several years, absent further shocks. Later in the decade, new aircraft offerings will support sustained market of around 800 aircraft deliveries per year.
Survey results showed that demand for commercial transport aircraft configured as business jets remained steady compared to a year ago. This years survey data indicates this segment should continue to support total deliveries of about 125-130 of these aircraft, valued at approximately $7.4 billion, between 2004 and 2014.
First half 2004 deliveries of 238 turbofan aircraft represented a 2.6 percent increase over levels recorded in 2003. Honeywell Aerospace expects operators to take delivery of approximately 525 to 550 new business jets (GTOW of 100,000lbs. or less) in 2004 (compared to 506 a year ago) and rising to more than 650 in 2005. These delivery levels compare favorably to those enjoyed by the industry during the late 1990s industry expansion. Deliveries in 2006 are expected to be in the range of 650 to 700 aircraft.
Purchase Expectations Survey
Supporting the preparation of the 2004 outlook, Honeywell conducted interviews with more than 1,000 corporate flight departments worldwide. In addition, the company contacted major business aircraft manufacturers and compared its assessment with its own perspective on industry conditions. This process provided a crosscheck of the survey findings. The 2004 survey measured operators expectations for the purchase of new turbofan-powered aircraft over the next five years.
Based on the stable and relatively strong level of buyer interest in the current survey, and historical analysis of the survey expectations vs. actual industry behavior, Honeywell projects new aircraft order rates to remain steady as economic growth in the U.S. continues at a 3 percent or better rate. New jet deliveries will increase significantly next year, driven by strong orders placed in 2004 and favorable new model backlogs. Overall, 2005 is shaping up to be a very good year for business aviation in terms of both new aircraft deliveries and world fleet operational tempo.
Survey purchase expectations have remained generally steady and at a relatively high level since 2001. Given the cycle in the economy and resultant industry activity, these levels of buyer interest indicate substantial pent up demand for new aircraft exists. With improved economic conditions, the stage is set for several years of expansion in new jet deliveries. A key element of purchasing plans is interest in new models. In this years survey, new models accounted for more than 40 percent of all jets mentioned for purchase during the next five years. Some examples of new models that received strong customer interest include the Challenger 300, Citation Sovereign, Citation Jet 3, Citation Mustang, Falcon 7X, Gulfstream 550, and Learjet 40. In total, 2004 survey respondents mentioned twelve new models for purchase during the next five years.
A projected positive economic outlook, substantial new model backlogs and continued fractional ownership demand for new aircraft, plus strong purchase expectations results in a five year world market estimate for new business jet deliveries that is about 4 percent better than the industrys performance over the last five years. This was a period, which saw both historic peak delivery levels in-1999 - 2001, as well as substantial contractions in the last two years.
Globally, 2004 new jet purchase expectations were up slightly compared to last years survey findings. Based on continued strong response levels, respondents said they expect to replace or expand the equivalent of about 25 percent, of their fleets, or approximately 3,450 new jets during the next five years. Honeywell believes the strength in purchase expectations is consistent with operator expectations conditioned by recent U.S. economic performance and projected GDP growth rates of around 3 to 4 percent extending throughout most of 2005 and beyond. This should be viewed as a leading indicator of order and delivery levels in the near term.
Current backlog levels and continued fractional ownership demand for new jets combine with the survey to produce a near term outlook calling for modestly higher deliveries in 2004 and stronger growth beginning in 2005. Following the 2004-2005 period, the industry should enjoy steady growth for several years, barring any unexpected economic or geopolitical shocks, drastic changes in government regulations, fees or taxes on business aircraft.
Despite unsettled conditions persisting in the Middle East and the upcoming U.S. Presidential election, purchase expectations rose slightly above last years levels in North America and all other regions surveyed except Europe. In the Asian regional survey, the five-year fleet replacement and expansion percentage rose somewhat compared to last years level and has remained consistently higher than in any other world region for the last five years.
Fractional Ownership Still A Key Component of Industry Demand
A major contributor to the strength of the industry continues to be fractional ownership. Share sales rebounded this year and activity levels are strong. The fractional segment continues to grow by extending the benefits of business aviation to new customers. Jet cards, with allow a customer to purchase a specific number of flight hours on fractional aircraft without a long-term financial commitment, represent an important growth area. Jet cards have opened up an entirely new and large customer base for the fractional providers.
Although fractional operations account for only a little over 6 percent of the global business aircraft fleet and service more than 4,400 shareholders, Honeywell estimates that roughly 40 percent of the current aircraft order backlog is from fractional operators. On an annual basis, fractional demand in the near term contributes around 12 to 13 percent of annual deliveries but could increase into the 15 to 17 percent range by 2014, as older aircraft in the fractional fleet begin to be removed and are replaced with new jets.
Honeywell Aerospace believes that demand for new jets in fractional service is sustainable for many years. A sizable portion of the current fleet will be replaced with new aircraft in addition to the needs of an expanding shareowner base and the growing importance of Jet Cards as growth driver, said Lynn Brubaker, Vice President & General Manager, Commercial Aerospace.
North America remains the largest business jet market, and operators say they expect to replace or expand the equivalent of 24.2 percent of their jet fleet with new aircraft during the next five years. This years survey projects approximately 74 percent of all new jets will be sold in North America during this period. This is virtually unchanged from the North American share of purchases compared to last years survey. The higher purchase expectations measured in North America reflected a growing optimism about the future, specifically concerning the economy. U.S. operators continue to note that changing requirements for reduced vertical separation minimums (RVSM), traffic alert and collision avoidance systems (TCAS), and Enhanced Ground Proximity Warning systems (EGPWS) or terrain awareness and warning systems (TAWS) are marginally affecting their operations as are high fuel prices, but for the most part, these were minor factors in their purchase decisions.
In North America, the age at which aircraft purchased new are expected to be replaced with another new aircraft rose about a year from last years results to 11.6 years. Aircraft age and range were the reasons most frequently mentioned by North American operators to acquire new jets. Improved cabin space and a desire for more speed were other key factors cited. North American interest levels in acquiring all new or derivative models is up about 10 points over last year, accounting for just under 45 percent of expected purchases. The most frequently mentioned aircraft classes in the North America survey were light, midsize and long range jets.
Five-year fleet replacement and expansion expectations fell in Europe to 24.2 percent from 26 percent last year. Reported economic conditions differed somewhat by country in Europe but most operators seemed more upbeat about economic conditions in their region than last year. As in North America, the high cost of fuel and compliance costs with changing regulations and mandates were concerns but not major factors affecting purchase decisions.
Western Europe is expected to provide about 11 percent of total business jet demand for the next five years, down slightly from 12 percent last year. Aircraft age was the most frequently mentioned reason by European operators for expecting to purchase new aircraft, followed by range and cabin comfort. New models continue to be very important in stimulating the European operators purchase expectations. Similar to North America, about 45 percent of the jets European operators expect to take delivery of during the next five years are recently or soon-to-be-introduced new or derivative models. The most frequently mentioned types in the European survey are longer-range jets and new very light jets coming on the market. Select midsize models also garnered significant interest.
Economic and political conditions and concerns in Latin America continue to be negative, but there is more optimism that the situation, especially in the larger economies, will improve in three-to-five years. The longer-term optimism is reflected in improved purchase expectations for the region. The five-year fleet replacement and expansion expectations rose from 15.8 percent in last years survey to 21 percent this year.
Purchase expectations in Latin America, expressed as a percentage of its current fleet remains lower than in any other world region. Projected five-year Latin American expectations account for only 6.3 percent of global business jet demand, up from about 5 percent in last years survey. Aircraft age and the preference for better cabins and more range were mentioned most frequently as reasons for plans to purchase new jets. The average age at which aircraft are to be replaced by Latin American operators fell to 12 years in this years survey again reflecting the better long-range view of business conditions in the region. About 32 percent of the new aircraft Latin American operators expect to take delivery of over the next five years will be all new or derivative aircraft. Most frequently mentioned aircraft were in the medium through large classes.
Operators in Asia were surveyed for the fifth time in 2004. Once again the enthusiasm of Asian respondents continues to support the prospects of long-term business aviation growth in the region. Asian expectations rose slightly over last year to 40.9 percent, and remain the highest per capita of any region that has reported in the last 10 years. Respondents from this region report that their economies, although impacted by instabilities in Africa and the Middle East, are doing relatively well. Many are enjoying strong private and government investment levels as well. Asia-Pacific should account for a significant percentage of total business jet demand over the next five years, around 8.5 percent, if conditions in the region remain stable. After aircraft age, range continues to be the most important reason for aircraft replacement. New technology and warranty coverage were the next most frequently cited reasons, followed by cabin size, operating and maintenance costs. Operators expect to replace older aircraft at roughly twelve years of age, a modest increase in average retention from last years results. Most frequently mentioned aircraft were longer-range platforms as expected, but substantial interest was shown in medium and very light models as well.
The Purchase Expectations Survey presents a snapshot of expected business aircraft sales at a point in time and reflects the operator communitys view of current events, such as economic conditions, fuel costs, and the outlook for regulations, new taxes or proposed user fees, that would affect expected sales in the near term.
Honeywells Business Aviation Market Outlook does not reflect the impact of unforeseen events such as a war, major economic shock, fuel crisis, or new regulatory restrictions. The Outlook is based in part on Global Insights baseline economic forecast assumptions that call for economic growth at quarterly rates exceeding 3 percent to be sustained throughout 2005 and 2006.
Business Aviation Market Outlook
Survey findings and program assessments in Honeywell Aerospaces Business Aircraft Outlook continue to provide insight into trends in various market segments:
Long Range and Ultra Long-Range: Deliveries of these aircraft are expected to average nearly 110 per year during the forecast period. For 2004 and 2005 the numbers will be somewhat lower, taking into account the stage of economic recovery and the introduction of new models later in the decade. For the period 2004-2014, Honeywell Aerospace forecasts worldwide deliveries of 1,195 Long-Range and Ultra Long-Range aircraft. In the second half of the decade, annual deliveries will begin to grow, reaching around 120 aircraft per year as product upgrades and new aircraft models enter these segments. Cabin comfort, range and speed are significant purchase factors. Fractional ownership plans continue to extend access to this class of aircraft to a larger customer base. New models in this category are the Gulfstream 500 and 550, Global 5000 and Falcon F7X. Current production models include the Falcon 900EX, Falcon 900D, Global Express and Gulfstream 450.
Large: Honeywell Aerospace forecasts deliveries roughly 760 aircraft in this category for the period 2004-2014 at annual rates averaging 70 aircraft per year. Aircraft cabin size/comfort and range are significant purchase factors for this class of aircraft. Fractional ownership programs are also contributing significantly to aircraft demand in this segment. Aircraft in this category are the Challenger 604, Gulfstream 300 and 350, Falcon 2000, Falcon 2000EX, and Embraer Legacy.
Medium and Medium-Large: Honeywell Aerospace projects deliveries of 2,460 aircraft in these classes by 2014. Steady growth is projected for these segments based on the service entry of several new aircraft in the near term and planned introduction of additional new models later in the forecast period. Annual delivery rates will grow rapidly, from current levels of around 135 aircraft to about 270 per year by 2014. The medium-large or super-midsize class aircraft like the Bombardier Challenger 300, Citation X, Gulfstream G200, Falcon 50EX and Hawker Horizon have large market growth potential due to very high perceived customer value, favorable backlogs and significant interest by fractional share operators. The medium segment includes new aircraft such as the Citation Sovereign and G150 plus successful models currently in service such as the, Gulfstream G100, Hawker 800XP and Learjet 60. Some medium models also enjoy sizable fractional ownership positions and backlog.
Light and Light Medium: Honeywell Aerospace anticipates deliveries of nearly 2,350 of these aircraft by 2014. Aircraft in this class have strong survey interest in most regions and the market should continue to be stimulated by the introduction of new models, some of which are already announced. Aircraft in this market include the Hawker 400XP, Citation Bravo, Citation Encore, CJ III (525B), Citation Excel, Learjet 40, and Learjet 45/45XR. Near-term delivery quantities will lie in the180 aircraft range, while modernization and new product entries will take these segments to rates well over 200 aircraft per year during the middle of the forecast period.
Very Light: Demand for this class of aircraft remains solid. This segment has a reasonably steady production outlook for the next few years with good aircraft value and several new models being introduced. Over the term of this forecast, deliveries are expected to average more than 140 aircraft annually, with deliveries at around 80 aircraft per year in the near term, then accelerating in the out years. Delivery volume will start to ramp up in 2006 and for several years thereafter when the Cessna Citation Mustang begins to enter service with a large backlog. Honeywell Aerospace forecasts deliveries of 1,560 jets in this class during the forecast period. Production and announced aircraft in the Very Light segment include the Cessna CJ I and CJ II, Mustang, Premier I, and the Sino-Swearingen SJ30-2.
Ultra Light or Personal Jets: Emerging Ultra Light jets such as the Eclipse, Adam 700, Diamond Jet, Avocet Projet, Honda Jet and others are not included in the Business Aviation Outlook. While these aircraft offer the exciting possibility of ultra low cost solutions appealing to the owner flown, high-end piston and single engine turboprop markets, we do not extend detailed coverage to them in our outlook. We do record purchase interest in these specific models from our corporate survey respondents if indicated, but based on recent surveys, the core of demand for this class of aircraft seems to be in the owner pilot segment. Recent studies undertaken by Honeywell in the general aviation segment corroborated this view and found broad familiarity with emerging Ultra Light jets as well as indications that a potential demand for up to 8,000 such aircraft over the next 10-15 years may exist. Based on current aircraft specifications and pricing, purchase expectations were substantial, as expected, in the owner-flown segment of aircraft operators. As a result, these aircraft are classified in the General Aviation segment rather than the Business Aviation Outlook.
Additional entrants are vying in this segment and we hope to see a number of successful programs emerge in future years.
Honeywell International is a $23 billion diversified technology and manufacturing leader, serving customers worldwide with aerospace products and services; control technologies for buildings, homes and industry; automotive products; turbochargers; and specialty materials. Based in Morris Township, N.J., Honeywells shares are traded on the New York, London, Chicago and Pacific Stock Exchanges. It is one of the 30 stocks that make up the Dow Jones Industrial Average and is also a component of the Standard & Poor's 500 Index. For additional information, please visit www.honeywell.com
Based in Phoenix, Honeywells aerospace business is a leading global provider of integrated avionics, engines, systems and service solutions for aircraft manufacturers, airlines, business and general aviation, military, space and airport operations.
This release contains forward-looking statements as defined in Section 21E of the Securities Exchange Act of 1934, including statements about future business operations, financial performance and market conditions. Such forward-looking statements involve risks and uncertainties inherent in business forecasts as further described in our filings under the Securities Exchange Act.