Aircraft markets have been heavily depressed over the past couple of years. Those waiting for an upturn in new orders should not hold their breath, warns Chris Tarry of CTAIRA.
When they finally arrived, the new order figures from Airbus and Boeing did not look so bad for the first half of this year. With a net total of 284 new orders between them - thanks in large part to JetBlue, Ryanair and some new Asian business - the two manufacturers did somewhat better than might have been expected. But looking further ahead it is hard to envisage that a recovery in new orders or the aircraft market in general may be at hand.
With most, if not all, the new entrant airlines having already exploited the opportunities presented by a buyers' market, demand would need to come from somewhere else. And, in the near term, there are few other places to look. More likely are further delivery deferrals and possibly even cancellations.
Latest figures suggest that there are still around 1,700 mainline jet aircraft inactive and on the market. That means that the industry is currently operating with a surplus of around 12% of the world fleet. However, even a cursory examination of the pool of available aircraft suggests that many are unlikely to be wanted back in the fleet. As the majors continue to phase out older types and the traditional customers for second-hand equipment find that they can now afford to buy new, the industry's ability to re-absorb ageing parked aircraft will continue to diminish. Of the narrowbody aircraft available, 70% or so appear unlikely to return to mainline service.
So are there grounds for optimism over a near-term recovery in new aircraft ordering? Not exactly. Of course taking up the slack in the system through re-absorbing old aircraft is a normal step in the recovery process but as in many other respects, it is indeed "different this time".
The unemployment of any asset, human or aluminium, can be described as having a number of states.
Frictional - assets in the system which are temporarily idle, such as aircraft between leases. Cyclical - related to economic cycles and/or external events. Structural - when a market or technology shift makes a particular type of asset redundant. Hidden - where assets are nominally in full employment but where utilisation is low.The reality is that the number of aircraft on the ground due to the present crises is relatively small and they tend to be the newer aircraft. While it is true that the events of the last two years have brought forward the grounding of older equipment, particularly in the US market, the net change in fleet size has been negligible.
Most of the available aircraft rather fall into the structurally unemployed category. Latest figures from IATA members show that their jet fleet fell by just 29 aircraft between year-end 2000 and 2002. The reason is that new aircraft have simply replaced old. The Boeing 727 fleet has been reduced by half, for example.
Figures from the US market give a similar picture. Although the Air Transport Association (ATA) is claiming that 13% of the entire fleet is still grounded, the actual size of the operational fleet has changed by nowhere near as much. Between 2000 and 2002, the mainline fleet shrank by just 229 aircraft, representing a fall of less than 5%.
The industry has to make money before it can order again and although the headlines for the latest US quarter show improvement, this owes much to the $2.3 billion of government assistance. At the same time, according to Airclaims, the US airlines still had outstanding options for more than 800 Boeing 737s by the end of March. The announcement from Continental Airlines perhaps sets the tone for the near and medium term with the deferral of at least 36 aircraft from 2005-7 to beyond 2008. One of the reasons cited was the need to make a return on the existing fleet.
So when is a sustainable recovery in order levels possible? The obvious answer is when the industry again begins to make real money. However, even then there is likely to be a lag. In the past, the pick up in orders has occurred in the second year in which profits were reported. In the last downturn after the Gulf War and the recession of the early 1990s, net orders began to pick up in 1994. However, in 1993 cancellations peaked as a percentage of gross orders - a sort of darkest hour before the dawn.
On current expectations then, any sustained recovery in orders is unlikely to be evident much before 2006. A great unknown however is the extent to which the US government will continue to support its industry and whether this will enable the near-term conversion of outstanding options. If others follow the approach of Continental, then the answer is a reasonably clear cut negative. We are perhaps about to enter the phase of deferral and delay, and even some of the new entrant airlines may not be immune.
More than ever, the need is to place aircraft into profitable service and from a financial perspective, the industry remains in a process of adjustment to the new conditions. It needs a clearer view of the future before placing new orders and converting options.
Source: Airline Business
