How competitive is business jet manufacturing?

Building, certifying and maintaining aircraft is hard. But how competitive is the market?

“WE FIGHT for every deal,” says the head of marketing at one manufacturer. “We see our competitors everywhere we go fighting for the same clients.”

It might seem a glamorous role, but anyone who sells new aircraft will tell you that the reality is very different. It is rare to hear an analyst call where manufacturers do not talk about how competitive the market is.

“Gulfstream has always operated in highly competitive markets,” said Jason Aiken, CFO of General Dynamics at a Barclays Industrial Conference in March. “They'll continue to do so, and I think they operate quite effectively in those highly competitive markets.”

But does the data match the anecdotal evidence? How competitive is building aircraft?

Anyone who has studied economics, knows that a perfectly competitive market would be one with a lot of firms producing identical products (with customers not preferring one brand to another). There would be no barriers to entry or exit, and every one of the many consumers would understand what they are buying.

Perfect markets are hypothetical, but business aviation is a long way away from the ideal. Designing and building a new model costs hundreds of millions, so barriers to entry are high. No two aircraft – even in the same category – are truly identical. Some buyers also appear to be slightly irrational. Although more data is available now than in the past it is still an opaque market.

“I would argue that biz aviation benefits greatly from being an imperfect market where information and transparency are scarce and purchase decisions are very emotional,” says one of the industry’s leading analysts. “Opaque is the right word.”

Buyers also do not have that many manufacturers to choose between (in most segments there are four or fewer manufacturers competing for their business).

Scoring competition

Economists and regulators use the Herfindahl–Hirschman Index (named after two economists who each came up with similar ways of measuring market concentration) to score how competitive markets are. Let’s try. To calculate the Herfindahl– Hirschman Index you work out the market share of each company and then square it (squaring was Hirschman’s idea). You then add up all of the numbers. The closer to zero the answer, the more competitive the market is. A market controlled by a single company would have a score of 10,000 points

Both the US Department of Justice (DoJ) and the Federal Trade Commission consider a score of between 1,500 points and 2,500 points to show that a market is moderately concentrated. They see scores above 2,500 points as proof of a concentrated market. When companies plan to merge, the regulators calculate how it would change the overall index. The DoJ says that a merger resulting in an increase of 200 points in a concentrated market is a warning sign that one company may be becoming too powerful (although they will consider other issues).

In 2018 the overall business jet market had a Herfindahl–Hirschman Index of 1,700, based on aircraft delivery data from the General Aviation Manufacturers Association. This is down significantly from a score of 2,279 in 2012 because new manufacturers – Cirrus, Honda and Pilatus – have successfully started selling jets. This means that the US DoJ would consider business jet manufacturing to be a moderately competitive market (so it could be one where mergers between manufacturers might be allowed).

But it is worth remembering that market share has been calculated based on aircraft deliveries not the dollar amount. A $70 million G650 costs the same as 36 Cirrus Vision Jets.

If you dig down and look at different categories (which also means that you are closer to dollar market share) aircraft categories are even more concentrated. This is because many categories are dominated by manufacturers (like Textron in the midsize) or even individual models. In the last few years, aircraft like the Cirrus Vision Jet (very light jet), the Phenom 300 (light jet) the Challenger 350 (super mid-size) and the Gulfstream G650 (ultra-long range) have dominated their respective classes

“Launching a new aircraft programme is very often a 'bet the farm' moment”

Competitive market

If you only use the Herfindahl– Hirschman Index you can argue that many business jet markets are becoming more concentrated, so are arguably less competitive. This is too simplistic.

Consumers suffer when market concentration creates barriers to entry. When the main reason you cannot enter a market is because of existing dominant players (you can probably think of tech companies where this could apply).

Although business jet manufacturers have strong brands, know-how, customer loyalty and other “moats” (that Warren Buffet looks for), these are not the biggest problem for a start-up manufacturer. The biggest challenge for anyone looking to build aircraft is the cost of meeting regulations. Honda, which has a market capitalisation greater than all of the other business jet manufacturers, found this when it entered the market.

The costs and risks involved with launching a new aircraft explain why only a few get to launch. “It is usually a mistake when people compare commercial aviation with business aviation – they are very different industries, but the one area of real commonality is the cost of developing the aircraft. Launching a new aircraft programme is very often a ‘bet the farm’ moment,” says Vick, partner at AE Industrial Partners, which specialises in aerospace investments, and CEO of business jet financier Global Jet Capital.

In January, Scott Donnelly, CEO of Textron, said that Textron Aviation has already produced an astonishing 157,000 pages of certification documents for its new Citation Longitude. Getting certification is only the start of the problem – building aircraft profitably is also hard (especially for innovative aircraft) as every aircraft has to be meet high standards. Vick estimates that launching a new aircraft typically costs $800 million but can easily go over $1.5 billion. Announcing a variant of an existing aircraft – with new engines or avionics – is, of course, cheaper.

Ironically these models often compete for sales with aircraft that the manufacturer is already building rather than with models from other manufacturers. The other thing that the Herfindahl– Hirschman scores misses, is that every new aircraft order is competing with any pre-owned aircraft that is for sale (particularly newer models) and any new programmes that have been announced. One of the big changes since 2008 is that many buyers will now consider a pre-owned aircraft (the days of people being categorised as new-aircraft or preowned aircraft buyers have gone).

Gulfstream’s G650 has been a very successful aircraft with more than 350 deliveries. But General Dynamics’s Aiken (who was CFO of Gulfstream) points out that it has been competing for sales with Bombardier’s Global 7500 for more than five years.

Dominating different classes

Vick believes that aircraft that dominate their niche – like the G650 or the Challenger 300/350 – often benefit from their competitor’s problems. “I would argue that when a manufacturer dominates it is because they earned their base and kept their promises,” says Vick, “It is not a natural occurrence but often happens when the competitors get their timing wrong.”

Vick should know. He was executive vice president at Hawker Beechcraft and also held senior leadership roles at Gulfstream, Bombardier Aerospace and British Aerospace.

He highlights how the Challenger 350 benefited from the delayed delivery of the Hawker 4000 (a genuinely innovative aircraft), even though it was launched first. “The certification problems with the Hawker 4000 – 10 years versus four years with the Challenger – really set the Hawker 4000 back.”

Vick stresses it is not just about being first. “Cirrus watched the market play out in front of them and then came in with the Vision Jet after already establishing their credibility as a manufacturer,” says Vick. “Buyers knew they could deliver.”

The risks involved with certification is why only a few companies can build jet aircraft. “The level of risk for an allnew entrant to execute and manufacture aircraft, to build a complex supplier network and support the aircraft – and most importantly execute on all of this perfectly is immense,” says Vick.

Ignore economists

So, to summarise, economic models have let us down again. A concentrated market can still be a very competitive one. The same is true with commercial aircraft. Airbus and Boeing compete hard, even though the single-aisle aircraft market had a Herfindahl– Hirschman Index of 5,008 in 2018.

To see if OEMs agreed, we showed the Herfindahl–Hirschman scores to one CEO of a business-jet manufacturer. He did not hold back. “If you genuinely think that selling aircraft is not competitive, then I want to know what you have been drinking or smoking,” said the CEO who asked to remain anonymous (for obvious reasons).

He is right. Whatever economists say, selling new aircraft is still a very cutthroat market. If you are a buyer who does not think this, please email me. I can introduce you to a few people who would love to talk with you.