Forecast pitfalls: Prognosticators Adapt To Evolving Times

A tumultuous business jet market over the past decade—from the rapidly climbing deliveries of the roaring 2000s to the recent low mark in 2017—has made forecasting tricky business. Unit delivery predictions made a decade ago have been overly optimistic, understandably. But in a market full of contradictions, the dollar predictions have been much more on target.

“It has never been easy to be the forecaster in the room, and less so now,” said Rolland Vincent, president of Rolland Vincent Associates and JetNet iQ creator/director. “Forecasting is an inexact science, despite all our high-powered analytical tools, deep data, and what we think we know about customer behavior. Fundamentally, most of our forecasting tools are calibrated on past behavior; whenever possible, we look for patterns, correlations, and divergences in prior data, sprinkle in some sensible interpretation, and do our best to project these relationships into the future.”

But when the market doesn’t follow past practices, it makes that job all the more difficult.

Market Bullishness

In 2006 the business jet market was in a heyday, with shipments soaring, fractional operators filling order books, new charter models making their way into the market, and emerging markets beginning to take root.

NetJets, the largest of the fractional operators, was experiencing close to 25-percent jumps in flight hours and revenues. Charter operators also found business booming. According to Bombardier, which rolled out its first annual 10-year forecast a year later, the corporate operator still ruled the market, accounting for an estimated 78 percent of the orders in 2006.

In that year, business jet makers handed over 887 aircraft, 137 aircraft more than a year earlier and double the number delivered a decade earlier. Orders were on the increase and backlogs approached 2,500 units, foretelling a continued steep climb in deliveries and reasons for long-term bullishness.

In the mid-1990s the business jet market was a $3 to $5 billion business. By 2006 that number had swelled almost fivefold, and Wall Street, which had long followed the aerospace industry, became acutely aware of the business jet market and followed these forecasts, noted Jens Hennig, vice president of operations for the General Aviation Manufacturers Association (GAMA).

One such closely followed forecast was the one compiled by Honeywell Aerospace, which bases its predictions on surveys of 1,500 business jet operators worldwide. In 2006, Honeywell marked the 15th anniversary of the public release of its Business Aviation Outlook and the 20th anniversary overall of that forecast. That forecast predicted the business jet market would top 1,000 aircraft for the first time in 2007, making it a banner year. The aerospace giant also had a long-term bullish forecast, predicting the delivery of 12,000 aircraft through 2016 valued at $195 billion.   

Embraer, which has kept a rolling forecast, was equally rosy about deliveries, predicting a market for 11,115 new business jets over the next decade (Embraer forecast over a 10-year period from 2007-2016, while Honeywell’s covered 11 years, from 2006-2016). Embraer was a little bit more modest about new business jet market value, predicting new jets sold would total $169 billion through 2016.

Rolls-Royce, meanwhile, forecast out to 24,000 business jets over the next 20 years with large and mid-cabins accounting for half that total.

When 2007 rolled around, Honeywell’s prediction for that year proved to be on target. According to GAMA data, business jet deliveries topped 1,000 for the first time in 2007, jumping almost 30 percent to 1,137. And through nearly the first three quarters of that year, new aircraft orders soared, up 100 percent with a 2:1 book-to-bill ratio.

With business still rocketing upward in 2007, forecasters remained bullish. When Bombardier publicly revealed its forecast for the first time in 2007, the manufacturer saw a market for 9,950 business jets through 2016 that would be valued at $228 billion.

Honeywell, meanwhile, scaled up its 11-year outlook, painting a long-term picture for 14,000 deliveries valued at $233 billion through 2017. In the short term, Honeywell predicted 2008 business jet deliveries would reach another new high, topping 1,300.

Honeywell’s short-term estimates were correct again, with 2008 business jet deliveries growing 15 percent, to 1,317.

But that became the last year business jet deliveries would top that level.

Market Turns

By late 2008, powerhouse financial institutions such as Lehman Brothers and Bear Stearns had collapsed, fueled by sub-prime mortgages. On September 29 of that year, the stock market marked its single largest point drop to date.

While deliveries remained strong in 2008 as manufacturers worked through backlogs, this was the beginning of what would become a precipitous drop. It became worse when the heads of some big automakers made an infamous trip to Congress seeking aid. The trip to Washington, aboard corporate aircraft, produced national headlines and put a bullseye on every corporation that owned an aircraft. Corporations closed flight departments, sold aircraft or hid them in hangars. The industry had become a favorite target of Washington in 2009 and 2010. Fractional operators began laying off and dumping orders.

The dynamics of the 2008-2009 time frame were changing so rapidly that they gave forecasters pause. Honeywell and other manufacturers scaled back their forecasts. By 2009, Honeywell saw manufacturers cutting output to 750 to 800 a year. Rob Wilson, then president of Honeywell’s business and general aviation business, noted that credit had dried up faster than anyone predicted. As a result backlogs evaporated.

The Teal Group’s Richard Aboulafia noted in 2010 that the business jet market was hit harder than other areas of aerospace and predicted deliveries would continue to drop through 2012, before conducting a slow climb-out. Aboulafia also said he didn’t see the market returning to peak levels until at least 2017.

Business jet deliveries fell by about one third in 2009, dipping below the 2006 level, and—as forecast by the Teal Group—continued to slide each year until 2012, reaching 672. Since then, deliveries have stabilized, going up slightly for three years until dropping back down to 661 in 2016, half of the 2008 high-water delivery market.

These dynamics though—dynamics that few could foretell—completely upended long-term forecasts, at least from a unit shipment standpoint. GAMA data shows that 9,129 business jets were delivered between 2006 and 2016, almost 3,000 shy of the Honeywell 11-year predictions from 2006. For Embraer’s 10-year outlook presented that same year, the deficit was almost as much. Bombardier’s forecast for 2007-2016 also was off by close to 1,700. This was a pattern repeated throughout most closely followed forecasts. Even Teal’s forecast, which had tended to be more conservative than others, had overestimated deliveries by 1,518.

Billings Greater than Forecast

The plunge in deliveries has painted an incomplete picture. Until the most recent years, the market for small aircraft has languished for most of the past decade. Ultra-long-range and long-range aircraft have fared better, and a market once dominated by midsize and small aircraft has shifted notably. Teal was among those who saw this shift, with Aboulafia in 2010 describing this market split. “The market has never seen bifurcation like this in any previous downturn or growth spurt,” he said, predicting that large aircraft would account for as much as 58 percent of new deliveries over the next decade.

With a higher number of the top-end aircraft reaching market, the revenue brought in by those aircraft pushed billings upward. As such, forecasts in the billings area were actually conservative when compared with the billings brought in over the past decade. In 2006 Teal forecast $141 billion in billings through 2015 and Honeywell in 2006 saw a market value of $195 billion in business jets through 2016. In fact, according to GAMA data, that value was $193 billion through 2015 and $211 billion when including 2016 data.

While billings growth had been impressive, Aboulafia cautioned in 2014 that “All of this growth came from large-cabin jets…All the smaller segments remained firmly stuck in first gear.”

These dynamics have made it all the harder for forecasts; few predicted that this recovery would be much different from other recoveries. It took several years before the realization of a “new normal,” with deliveries at rates that would remain lower than the 2007-2008 peaks.

Gaetan Handfield, currently senior manager for market research at Honeywell Aerospace, recalled the difficulties of all forecasting when the market crashed. In 2009, while he was with Pratt & Whitney Canada, industry officials were at a gathering attempting to evaluate different recovery scenarios. “We had W-shapes, V-shapes, hockey-stick shapes, flat shapes, U-shaped recovery, and we were all speculating in that room, forecasters from different companies, and nobody predicted that eight years later we would see this many used aircraft for sale,” he said.

Market analyst Brian Foley in a recent forecast noted that 2008 marked a near perfect storm: credit was easy to obtain; a weak dollar made it cheaper to buy U.S. products; a number of markets were emerging; and commodity prices were soaring. That changed almost overnight and hasn’t returned. “Today, it is almost a complete flip-flop,” he said. “If you are not in the U.S., you are probably seeing some sort of economic weakness. The dollar is a lot stronger, so buying offshore is more expensive…and commodity prices fell off a cliff.”

While corporate profits came back, Foley pointed to a “business mentality in corporations that you have to do more with less. Even though economic indicators are up, everyone is still a bit skittish.”

“What we have seen in the last eight or nine years is that the corporate profit engine has been primed by corporate cost reduction rather than top-line growth,” added Vincent, underscoring the difficulty of nailing down exact forecasts. “Add into the mix the historical devaluation of business jets as an asset class—especially after their just-prior strength—and the combination of factors has disrupted demand. Many buyers do not have the equity in their pre-owned aircraft to feel good about stepping up to a new one.”

So many factors have fed into market uncertainties that it continues to make forecasting difficult, echoed Handfield. “You’ve got so many changing factors. Sometimes it's politics; sometimes it’s the economy. Look at the price of oil. The price of oil went up to $100 a barrel, and more than that… creating lots of demand from international markets,” he said. “It was all fun for guys in international markets. But then in 2014-2015 the price of oil crashed to $29 a barrel. Nobody saw that.”

He pointed to the influx of used aircraft coming to countries like Russia and Brazil, as well as from the Middle East. “In 2010, nobody was predicting this would be so tough because of the changing environment.”

Hennig noted that forecasters have changed some of their approaches to predicting the future, looking much more closely at external factors—such as oil pricing—than they did decades ago. Also, regional factors weigh more heavily now. “It’s gotten much more complicated than corporate profits and GDP growth,” he said. 

Despite these uncertainties, Foley would argue that forecasting might be easier now given that aircraft deliveries have remained flat most of this decade, with a standard deviation of 25. “One could safely assume 2017 will fall somewhere in that band,” he said, and added, “Waiting for a ‘recovery’ is a misnomer. The market was unsustainably high in 2008. To think we need to recover to that is simply unrealistic. It’s curious that the industry continuously asks ‘What’s holding the market back?’ when maybe the question to ask is ‘What’s holding the market up?’”

But Vincent also points out that “this is a young industry that has been growing steadily by almost every measure since the 1950s.” He projected, “We have much, much more growth ahead of us.”

To wit, JetNet forecast a $223 billion business jet market through 2026. Teal is coming in at $239 billion for traditional business jets (not including bizliners or regional jet conversions) through 2026, and in its most recent forecast Honeywell is projecting $249 billion in sales through 2027.

Teal, too, is beginning to return delivery forecasts to numbers similar to those of a decade ago—seeing potential for 11,434 shipments over the next decade. But others are remaining conservative in light of the changed environment. JetNet predicted 8,436 deliveries through 2026, and Honeywell is even more conservative at 8,300 through 2027.