Farnborough Aircraft Orders: Expect Little, Hope for More

As the Farnborough Airshow readies to open its gates to trade visitors, signs for aircraft manufacturers are not good.

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Unlike last year’s sister show in Paris, aircraft orders are not expected to reach similar record levels.

Indeed, based on a review of airline modernization, expansion plans and market sentiment, confirmed orders and options should not exceed 600 aircraft.

With the exception of Turkish Airlines, where a decision is imminent on its choice of either the A380 or B747-800 jet, we should also expect that a big share of orders will come from aircraft lessors. In Paris, their share was 15 percent, but this year it could easily reach 50 percent.

So why shouldn’t we expect airlines to take center stage at this year’s event?

First of all, both Airbus, a unit of EADS and Boeing announced their plans for revamped versions of their respective narrowbody-jet programs, the B737 and A320, in 2011.

Both were well received and a flurry of orders over the past 20 months inflated their order books to unprecedented levels. Nothing as exciting this year, though Boeing may still win additional orders for their B737 MAX.

Furthermore, the main reason why these aircraft have been so successful is because of their acclaimed fuel efficiencies. With fuel pricesover $100-110/barrel and with analyst projections of further long-term upward movements, 10 percent -15 percent fuel efficiencies do indeed amount to large cost savings. Nonetheless, fuel today stands at just under $90/barrel, supply is plentiful and there is a cautious calm on fuel price trends within financial and industry circles.

Adding to the above, in 2011, airlines had a decent chance of securing early delivery slots, if they were quick to place their orders, following the announcements on updated narrrowbody models, the A320neo and B737 MAX. With the narrowbody aircraft backlog standing at over 6,000 units, and with production rates stable at 70-75 a month, airlines would need to wait 5-6 years to see their first deliveries if orders were placed today.

Finally, we have to look at the state of the historic large aircraft buyers. Gulf carriers are always prime candidates when it comes to large aircraft orders, for example. However they already have orders pending, which will almost double their existing fleet size.

As such, it is difficult to justify additional orders for the time being. Asian carriers could make a comeback at this year’s event. We have already seen big orders from the likes of Air Asia, IndiGo, Cebu Pacific and Lion Air. All four are low cost carriers, competing in a sector and in geographic markets that will certainly see unprecedented expansion over the coming years.

But as with the Gulf carriers, they have already made orders that will facilitate high growth for the best part of the decade. Indeed, other low-cost carriers may make a move, but being so late in the order game will definitely affect the timing of their expansion.

So if we are to guess where orders will come from, it will have to be from the leasing community and possibly from Chinese full-service carriers, which have not had major impact on these shows in the past.

With the first delivery of the C919, China’s rival to the B737 and A320 aircraft programs, most likely delayed to 2018, Western manufacturers are well positioned to secure additional orders from Chinese customers.

To summarize, expectations for this year’s Farnborough Air Show are low, but hope is still alive.