With a significant overhang of used jets still available at attractive prices, demand remains anemic and backlogs continue to decline, according to JP Morgan’s Aerospace and Defense’s Business Jet Monthly for January.
“We see this as the major question for the industry coming into the New Year,” writes analyst Joseph Nadol. “We see potential for further rate cuts if orders do not pick up. However, there are reasons for optimism.”
The report notes that global corporate profits were up an estimated 46% in 2010, and they have historically been correlated with business jet deliveries, although there is a one-two year lag. In addition, used inventories have trended down gradually since mid 2009.
“The good news is that they are approximately 300 basis points (bps) off the peak, including a solid 40 bp drop last month; the bad news is that even after this decline, inventories remain at a level identical to the 2001 peak,” says the report. “If demand begins to pick up later this year, we see a strong possibility that deliveries can meet our forecast for approximately 20% growth in 2012; however, if orders do not start coming in, the recovery should get pushed out, with potential for further rate reductions.”
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