:: January 2009 Letter ::


Dear Fellow Post Vacation Re-Adjustors,

Itís time for my annual travel/aircraft market newsletter. Every January we go somewhere fun and I try to spin it into something aviation market related. But it didnít work out so great this year. First, like a lot of people who booked a trip before the economy collapsed, I spent my vacation with my Blackberry closer than Iíd like, and a vague feeling of unease. Second, Hawaii, while paradise, isnít a great place to find aviation market intelligence. I pounded out two paragraphs about Pan Am Clippers and long-range flight before a helpful colleague pointed out that markets were imploding while I was droning on about flying boats. I hit ďdeleteĒ and realized I was back to my day job. That warm post-vacation mood usually lasts a little longer into the new year. So instead of a totally Hawaiian letter, Iím going to try to cheer myself up with four reasons to be optimistic.

Reality reared its ugly head before we returned. With the bankruptcies of ATA and Aloha, a lot of capacity came out of the Hawaii market. American and other majors have moved to fill that void. In fact, our outbound 757 morphed into a very crowded 767 at the last minute. Yet the news here isnít all bad. While tough on workers, ATA and Alohaís bankruptcies represent creative destruction at its best ó weak, marginal players giving ground to larger and relatively healthier ones. The post-9/11 market downturn was worsened by Chapter 11 airlines suppressing pricing for everyone else. We probably won't have that problem this time. Despite a disastrous economy, the airline business is not going to hell, at least not yet. Thatís Reason #1.

Reason #2, believe it or not, concerns business jets. First the bad news. December business jet landings at Kona were down 18% year over year. That roughly follows the broader market. The FAA says business jet operations were down 19.4% in December, just slightly better than November's stomach-churning 25.5%. Business jet market health indicators are all way down, particularly jet availability. Delivery rates are plummeting ó Cessna 2009 delivery guidance has gone from 525 Citations to 375 in the space of three months. Politicians are falling over themselves to paint business jet owners as villains. Bill Garveyís January 31st New York Times op-ed was a brilliant defense of business jets as productive tools, but let me do my part: Sure, a tiny fraction of business jet users are overleveraged greedbags and bailout-seeking executives; the overwhelming majority are honest and productive members of society.

And hereís a nice Hawaiian postcard: When we were at Kona, 51 private planes were on the airport tarmac, which is close to the maximum of 61. Almost half of them were Gulfstreams. Many economists believe thereís a lot of money sitting on the sidelines, waiting for the situation to stabilize before it heads back into the game. When investors start committing cash again, the credit crunch will de-crunch, assets will start to reflate, and the economy could begin to recover. Maybe those 51 business jets at Kona are a reminder that thereís still money out there, waiting to make things better. In my quest for reasons to not hide in my attic, thatís good enough for me.

Money makes people happy. And at government treasuries all over the world, printing presses are working overtime to keep people happy. Defense procurement programs are the ultimate shovel-ready projects. When governments are bailing out loser car companies and zombie banks with hundreds of billions of dollars, a few extra billion to save the C-17 and F-22 production lines (and their thousands of jobs) will look like money well spent. Over in Europe the impossible A400M contract will likely be restructured, helping to save the program. Eurofighter Tranche 3 should get a boost too.

This defense cash will certainly be followed with government financing for jetliners. To everyoneís shock and surprise the French Government moved first, providing cash to directly support Airbus sales. The US and other governments will likely denounce them, and then enact similar measures. Thatís Reason #3. Our beloved industry is eligible for welfare benefits. The commercial jet subsidies might be inefficient, and they definitely distort markets, but thereís a strong argument for the additional defense platforms. And all of it provides cash and jobs for our industry.

For Reason #4, letís go back to those flying boats. In their exotic way, they symbolized globalization. Flying from lagoon to lagoon, they took four or five days to cross the Pacific at a cost similar to todayís first class fares. Yet when we talk about those Pan Am Clippers weíre talking about a few dozen planes carrying a few dozen passengers, an insignificant amount of traffic. Asia/Pacific traffic fell 9.7% in November, according to IATA. Thatís very bad. But thatís still over 60 billion revenue passenger kilometers per month for the Asia/Pacific airlinesí international traffic alone. Draw a trend line from those Clippers. Despite decades of ups and downs, youíve got superb long-term growth. Globalization and economic development will still be with us after this crisis. And aviation will still lead the way.

Putting aside those four semi-happy post-vacation thoughts, letís focus on the horrors at hand. The US has lost 3.6 million jobs since December 2007. Well over $1 trillion in assets has been destroyed over the past few months. According to Bank of America (whose name might turn out to be all too accurate) thereís another $10.5 trillion in highly suspect assets out there waiting to be dealt with in the coming years. From a civil aviation standpoint, weíve got two huge challenges: slack passenger and cargo demand and low availability of credit.

Perhaps by my next monthly letter these problems will have all been solved. Meantime, January aircraft updates include the S-92, E-6, MiG-29, AW101/US101/VH-71, C-212, E-6 TACAMO and ERJ 145. I hope your 2009 has begun on a high note, or at least with minimal portfolio destruction.

Yours, Until Hawaiian Shirts And Large Business Jets Come Back In Style,
Richard Aboulafia

© Richard Aboulafia 1997-2006, All rights reserved.
  ~  Last updated on January 08, 2006