April 02nd, 2012
As I sit writing this I am waiting for my flight to depart Shanghai. A long journey home ahead, but also plenty of time to reflect on an interesting week.
It is clear from this week that business aviation is now poised to take off in China. At least 20 aircraft were sold during the show. With each one pulling in around 30m USD these aircraft mark a significant confidence boost for the industry. When Magnus Henriksson, Business Director of Avinode BI, and I attended the Corporate Jet and Helicopter Finance conference in London last February the OEM predictions for growth in China sounded an awful lot like wishful thinking. Now in the spring sun of Shanghai it feels real and tangible.
While exciting, these numbers need to be put into perspective. With the recent registration of Jackie Chan’s Embraer Legacy the Chinese registry now has exactly 200 aircraft on the books. This number includes helicopters and piston aircraft, in addition to jet aircraft. Business jets, in fact, account for around only 130 of those aircraft. If we compare this to the US the equivalent number would be over 13,000. Over the next 5 years China expects approximately 120 aircraft deliveries. At this rate it is clearly going to take some time for the market to become established.
For the OEMs new deliveries is the headline story and it is a good story. Chinese buyers are not edging their way into the market with mid-sized options. They are jumping in at the top end with heavy and VIP segment. These purchases are the luxury yachts of the air and reflect the newly established individual and corporate wealth in the region. Finance is therefore not an issue. While capital remains a constraint for growth in other parts of the world it is not currently an issue in China.
So should the industry be celebrating? Let me take a step back before I answer this. To have a sustainable and a viable industry in China there will have to growth and luxury toys will need to be flown more hours. Infrastructure will need to be developed, airspace opened up, and the regulatory environment shaped to meet the demands of clients. This will take time, but in China, where the 5-year state plan remains the tool of economic growth, it will happen and dizzyingly fast. It will happen at a rate that will surprise anyone who has not watched a skyscraper go up in Shanghai.
Where does charter fit into this? At the moment charter plays a restricted role. At best it is a limited segment, with the limited number of aircraft. At present charter is constrained by two factors, availability and demand. That may feel like a contradictory statement, but it is not as the two are linked. Limited availability means that for established players in the region, like Deer Jet, charter is not yet an interesting enough option, which is reflected in both pricing and organization.
For newer players such a Hong Kong Jet and Lilly Jet it is a small but potentially profitable business segment. International demand is there for lift in China, but domestic demand has yet to emerge. This is perhaps not terribly surprising. Commercial aviation in China has really proliferated over the last 20 years. Awareness that an aircraft can be chartered for private or corporate use takes time to become established. International brokerages such as Chapman Freeborn are in market expanding operations and doing their part to raise awareness, so it is certain that demand will come.
So should the industry be celebrating ABACE 2012? Yes, is undoubtedly the answer. The NBAA should be congratulated for organizing a business aviation show that is likely to be remembered as the start of business aviation in China. Aircraft sales lay the foundations for business aviation in the region. Hong Kong, Singapore and Bangkok will continue to play an important role in the region, but it is the dragon that needs to stir and in Shanghai, this week, the scales groaned.