The commercial aviation industry faces considerable short-term challenges. These include the global economic recession, declining passenger and cargo traffic, unpredictable fuel prices and, in part because of environmental concerns, increased regulation and taxes.
According to a report published by financial media company Bloomberg, US aircraft manufacturer Boeing collected zero net orders in the first five months of this year: Sixty-five purchase agreements were countered by an equal number of cancellations. Airbus had 11 net orders after 21 were dropped. That compares with a combined 884 agreements in the same period last year, the end of a four-year spike when airlines scrambled to buy more fuel-efficient jets amid surging oil prices.
“The background is a decline in airline traffic at least three times worse than any 12-month period, potentially compounded by an unprecedented financing crisis,” said Nick Cunningham, an analyst at UK-based Evolution Securities. “Production will have to drop sharply to avoid a drastic oversupply of airline capacity.”
European-based Airbus still plans 480 deliveries for 2009, only three fewer than 2008, a record year. Boeing plans up to 485, returning to a growth trajectory intended before a strike cut 2008 deliveries to 375. Many planes being shipped this year were financed before the credit crunch.
John Leahy, Airbus’ chief operating officer, predicts that output will not change much in 2010. Boeing has not given a forecast. The manufacturer’s plan limited production cuts, even as airline traffic tails off.
The Middle East has been the driving force for orders in recent years as carriers, including Emirates, Etihad and Qatar Airways, filled Airbus and Boeing order books in their drive for expansion at hubs in Dubai, Abu Dhabi and Doha.
At the Farnborough Air Show in the UK last year, Etihad ordered aircraft from Airbus planes valued at SR40 billion ($10.7 billion) and from Boeing worth SR33.8 billion ($9 billion). Dubai Aerospace Enterprises, the state-owned lessor, confirmed 100 Airbus jetliners valued at SR48.4 billion ($13 billion).
The rickety state of plane sales is tempting some airlines back into the market in the hope they can squeeze manufacturers for discounts.
Steven Udvar-Hazy, co-founder of Los Angeles-based International Lease Finance Corporation (ILFC), said on June 8 that he would increase orders in anticipation of greater demand from carriers to replace older models. He had planned 150 purchases over the next 10 years and may raise the figure by 30 percent in the next 12 to 18 months.
He is, however, critical of the Airbus 380, and says that he is thinking of canceling ILFC’s order of 10 of the aircraft because it costs too much to reconfigure when releasing to a new airline. ILFC is the biggest by value leasing corporation in the world and cancellation would be a serious blow to Airbus. However, some see Hazy’s comments as an attempt to renegotiate the price.
In the midst of all this, the Middle East is becoming an increasingly attractive proposition to aircraft companies in the new large commercial and business jet markets. Practical considerations are driving this. Recession or no, aircraft reach the end of their design lives and have to be replaced. Moreover, demand for air travel increases as emerging economies expand and industrialize. And of course, there is the region’s high and ample liquidity.
According to Boeing’s Current Market Outlook, a survey of the company’s expectation of world trends to 2028, the aviation industry’s long-term market outlook remains strong. It predicts that passenger air travel will grow at 4.9 percent a year and cargo at 5.4 percent a year. This is in line with the last 30 years which averaged growth of 5.3 percent in revenue passenger kilometers (RPKs) as determined by the International Civil Aviation Organization. The report suggests that, on these figures, airlines will need 29,000 new airplanes worth SR12 trillion ($3.2 trillion) and that European airlines alone will have 7,330 airplanes worth SR3 trillion ($800 billion).
Optimism is seen elsewhere. According to the business analysis organization Global Insight, over the next 20 years world GDP should grow at an annual average rate of 3.1 percent. South West Asia and China look to lead the growth tables at 6.1 percent and 7.2 percent respectively with the Middle East growing at a respectable 3.8 percent a year.
Over the past 40 years, the business jet industry has been characterized by multiple up and down cycles. From 1965 to 1995, the compound annual growth rate for industry deliveries was four percent, with most of the growth coming from its main market, the United States. Post-1995 saw the industry expanding to other regions of the world, generating much higher growth, about 12 percent on average.
The reduction in the overall number of business jet orders, coupled with massive cancellations from both traditional and fractional (co-share) jet businesses, forced manufacturers to reduce aircraft production sharply. This led inevitably to long lead times on new models for customers wishing to replace existing ones or buy a business jet for the first time.
In turn it drove to the rapid development of the preowned aircraft market, led primarily by the Middle East and currently growing at a rate of 20 percent year on year, according to ExecuJet Aviation Group, one of the world’s leading companies in aircraft management and sales. Nicholas McHaffey, its head of pre-owned sales, points to the lead times on new aircraft: 2011 for a new Learjet; first quarter 2012 for a new Challenger 605; a new Boeing Business Jet not available until 2018 and a new Global Express XRS has no delivery position until 2013. Such is the demand that two- and three-year-old pre-owned jets are currently selling for up to SR7.5 million ($2 million) more than the original purchase price.
Syahril Shariff, a consultant with the Asia Pacific Aerospace & Defense Practice of corporate advisers Frost & Sullivan said recently that many analysts and reports published in the past three months indicate that the Middle East region will experience the highest passenger traffic demands in the year 2009.
“Recent data released from IATA on March 26, 2009 shows that the Middle East was the only region that has actually increased its passenger traffic by 0.4 percent in February 2009, while other regions recorded declines from 3.8 to 13.7 percent.”