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Fair Skies Ahead for Aircraft Manufacturers

It’s fair skies ahead for the makers of commercial jetliners.

While other industries remain mired in red ink amid the global recession, Boeing and Airbus, the two largest aircraft manufacturers, are entering a period of unprecedented growth.

Airplane Takeoff
Airplane Takeoff

Chicago-based Boeing and Airbus, based in France, both plan to deliver between 5 percent and 10 percent more planes each year for the next several years to meet demand from emerging market carriers and more established airlines that are looking to replace older planes with newer fuel-efficient models.

For its part, Boeing announced plans in September to produce 10 787 Dreamlinersairplanes a month through 2013.

The company also states in its long-term market outlook that it expects to grow 6 percent in 2011, and maintain its growth rate “at or above the historical trend through the middle of the decade.” The industry’s historical growth rate is about 5 percent per year.

“Boeing’s long-range forecast for 2011 anticipates delivery of 33,500 new airplanes over the next 20 years, valued at more than $4 trillion, with single-aisle airplanes claiming the lion’s share (70 percent) of deliveries over the next 20 years,” it states.

Airbus is equally optimistic.

The company’s global market forecast projects air traffic worldwide will more than double between 2011 and 2030, with the world’s overall inventory of passenger aircraft more than doubling along with it to 31,500 from 15,000 today.

During that period, Airbus anticipates the need for more than 26,900 passenger airliners with seating capacities of 100 seats and above,along with over 900 new factory-built freighter aircraft.

Though lofty, aerospace and defense analyst Jason Gursky with Citigroup in San Francisco says the aircraft manufacturing duopoly is well positioned to meet its output goals.

“The production rate these companies are proposing is well supported by their backlog of orders, which is 7 years at this point,” he says. “The only thing that could derail this story is slower economic growth, which would impact air traffic growth, or if oil prices fall through the floor and the need to replace older planes goes down.”

Even then, however, Gursky believes demand from the emerging markets is so strong that Boeing and Airbus would likely be able to hold the line on their current production rate rather than decreasing output.

“Really high oil prices creates greater incentive for airlines to more quickly retire old planes that are less efficient,” he says. “If oil prices which are now above $80 a barrel dropped down to the $50 or $60 range, that would not be good for aircraft demand.”

Fuelis the single largest operating expense for airlines.

Both Boeing and Airbus launched new fuel-efficient narrow-bodied planes this year – the 737MAX and the A320neo.

“The manufacturers will have based their product decision on customer demand for these more efficient aircraft,” writes Robert Stallard, an analyst with RBC Capital Markets, in his most recent industry outlook. “Marketing numbers suggest about a 15 percent efficiency gain, which is very material to airlines.”

Beyond the need for fuel efficiency, however, many airlines are placing orders for new planes (which take 5 years or more to deliver) to maintain customer service and to replace older planes that are past their prime.

Passenger loads, which refer to the percentage of seats that get sold per flight, have risen to more than 80 percent from 60 percent in the 1980s.

“Until recently, the airlines had been intentionally constraining growth of their fleet and purposefully flying planes fuller,” says Gursky. “But customers start getting ticked off and don’t want to be on planes that are always full so the carriers are starting to add more seats.”

There is one other potential wrench in the works as well.

“Execution is something that weighs on investors’ minds most,” says Gursky. “We’re bracing for commercial airplane production rates the world has never seen and investors are cautious, but hopeful that the industrial supply chain can keep up.”

That includes companies that make engine parts, fasteners and seats, to name a few.

“They’ve never been tested at these levels for either wide- or narrow-body planes,” says Gursky.

Who's Buying?

In the U.S., United Continental, , Delta, and Southwest Airlineshave each indicated plans to purchase more narrow-bodied planes.

American Airlines, in fact, ordered a record 460 single-aisle planes this summer in a deal worth more than $38 billion – 200 of which are the Boeing 737 aircraft and 260 are the Airbus A320.

Delta also announced this summer it would expand its fleet with an order of 100 fuel-efficient Boeing 737-900s jets, in addition to the 60 737-800s and 18 Dreamliner planes it already ordered from Boeing.

But the vast majority of orders are coming from outside the U.S. – primarily the Middle East and Asia where air traffic is growing at an astonishing clip.

Indeed, only two European airlines, Lufthansaand SAS, have placed a total of 60 firm orders for the popular A32neo since its debut.

“The role of emerging markets cannot be understated in this market,” writes Stallard in his latest outlook report. “In China and India, millions of people are flying for the first time.”

RBC estimates that orders from Asia represent about 25 percent of Boeing’s backlog, and roughly 40 percent of Airbus’.

In July, Malaysian airline AirAsia placed an order for 200 A320neos, the largest commercial aviation order in history, while India’s IndiGo ordered 150, and GoAir ordered 72.

“The Middle East has also been a major purchaser as airlines like Qatar [Airways], Etihad [Airways] and Emirates seek to become major aviation hubs and focus on premium traffic,” notes Stallard.

Indeed, the orders are clearly there. But it’s how these buyers are going to pay for it all that concerns aviation analyst Richard Aboulafia, with Teal Group in Fairfax, VA, an aerospace and defense consulting firm.

Airlines once bankrolled their own fleets, he notes, but these days it’s largely third party commercial lenders, like CIT, General Electric Capital, and Royal Bank of Scotland, that provide the financing – or purchase the planes outright and lease them to the carriers.

“I’m not talking about the sky falling for the industry, but these ramp up plans, which sound great, don’t make much sense when you consider there are a lot of financial players buying on speculation,” says Aboulafia. “Some of these financiers might find it’s tougher to place their current and future jets or tougher to raise the cash they need.”

Over the next few years, he notes, fuel prices will have to remain above $80 a barrel and passenger traffic will have to hold at an historic highs to maintain demand.

“Who knows? Maybe we’ll have that dream environment,” says Aboulafia.