Teal Group Forecaster Says "This Industry Will Come Back,
Wichita Will Too"
Aviation analyst Richard Aboulafia was the inaugural speaker
when the Wichita Aero Club formed in late 2008. At that time, the
industry decline was just beginning. More than two turbulent years
later, Aboulafia made a repeat appearance at the organization's
monthly luncheon on Tuesday, April 12 and this time his
presentation had a different angle.
"In good times, an analyst is a cheerleader," said Aboulafia, a
vice president of analysis with Virginia-based The Teal Group. "In
bad times, he's a therapist."
In a presentation titled "Okay the sky has fallen, it will rise
again," Aboulafia delivered a dose of optimism for Wichita. Among
many feel-good messages, he told the audience, "This industry is
coming back, and Wichita will too." Aboulafia said The Teal Group
forecasts general aviation production to begin to rebound in 2012,
and called the firm's prediction of 10 percent compounded annual
growth rate for the next six years conservative. He also shared his
analysis of the jetliner/regional, defense and rotorcraft markets,
but he spent most of his time talking about the business jet
market, specifically Wichita's role.
Aboulafia revisited thoughts he'd shared with the WAC in late
2008.
- There are five great aviation clusters in the world today.
Wichita is one of them. Clusters cannot be created; only destroyed.
(Still true.)
- Of these clusters, Wichita has the highest exposure to the
business jet market, the fastest growth segment, but with very high
cyclicality. (What nobody saw coming was the bifurcation between
the top and bottom half. I also thought the business aircraft peak
would come in 2009, just after my speech; turned out it was in
2008. I'd also point out that Wichita has the most diverse
industrial base of any cluster.)
- Business jets are well behind the other aviation segments in
outsourcing, a possible threat to manufacturing jobs in Wichita.
While it's also an opportunity (with Spirit), there's no guarantee
that work will be performed here. (Still true.)
- I'm skeptical about KC-X. But the military overhaul/upgrade
market is growing. (Very wrong on the first, right on the
second.)
- São Jose Dos Campos wants some of your business. (Still
true.)
Of the five clusters - Wichita; Montreal; Dallas; the Puget
Sound area in Washington; and Toulouse, France - Aboulafia said,
"Wichita was the epicenter of all pain. Really, the only cluster
that wasn't sheltered on the whole globe was Wichita." However, he
added, Wichita "is not going to be a destroyed aviation
cluster."
The reason Wichita felt so much pain, he said, was a one-two
punch of bifurcation and emerging competition. While the upper half
of the market - aircraft priced at $25 million and higher - held up
during the downturn, he explained, the bottom half of the business
jet market saw an unexpected 57 percent drop from 2008-2010.
Wichita is most connected to that bottom segment. "This was a
profound change on how the industry was structured," he said,
adding that nobody could have predicted that kind of split.
The impact of that split was compounded, Aboulafia said, because
it coincided with Embraer bringing to market a less expensive
product. He noted that this was the business jet market's first new
competitor since 1969. "This only happens once," he said. "There
are no other Embraers and the entry barriers to the market are
still quite high." Aboulafia also said Embraer seems to be
turning its attention away from developing more new business jet
models to other areas of its business.
Aboulafia's dose of optimism was tempered with an analysis of
key market indicators - aircraft utilization is on the rise;
pre-owned business jet inventory is lowering but is still too high;
it'll be another six months before pricing rebounds; corporate
profits are recovering nicely but there's still a general sense of
uncertainty in the economy. "You are seeing a lot of signs of
growth that point toward an increase in production in 2012. We
don't know how much growth, but we can look at the past upturns and
typically they've been double-digit," he said. "So there's a lot of
hope moving forward."
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