Kevin O'Toole/LONDON
Recession is barely over, yet many are already beginning to dust off the bunting ready to welcome back another boom in aircraft markets. Whether the reality of the coming year lives up to this early optimism remains to be seen.
There are certainly signs that investors are again starting to flow back to a market they all but deserted three years ago, buoyed by the promise of healthier airline profits and rising aircraft values.
Among the committed optimists in the leasing industry, there is even talk of a pending shortage of aircraft as the cycle of supply and demand comes full circle some time in 1996.
On the experience of past economic cycles, the industry is about due for an upturn and most of the traditional indicators appear to bode well for recovery.
Passenger-traffic growth appears to have settled down to a steady upward path after an erratic recovery from the collapse in 1991. Early 1994 figures from the International Civil Aviation Organisation suggest that world traffic climbed by 5% and, better still, that capacity growth lagged comfortably.
Most forecasters now seem to agree that the outlook over the next decade is for annual growth of at least 5% overall, with international services continuing to outperform the market.
Getting capacity under control has also helped, to improve the look of airline finances. Despite some notable exceptions, the industry is already close to break even and should be back in the black this year, barring any disasters.
Output of new aircraft is also running at a more manageable level, thanks to dramatic production-rate cuts by the manufacturers. Since the peak in 1991, when jet-airliner production climbed above 800 aircraft, output has dwindled to fewer than 500 in 1994 and is expected to stay there for at least another two or three years. New orders remain scarce and have been all but offset by the wave of cancellations.
SUPPLY AND DEMAND
A good sign that supply and demand are gradually easing back into balance comes from a gradual whittling away of the numbers of parked aircraft awaiting a return to the market.
The number of stored jet-airliners more than doubled in 1991 as the industry went into free-fall and that figure continued to climb. By the start of 1994, the figure stood at almost 1,100 aircraft, according to Airclaims, the UK-based consultancy.
The encouragement comes from what has happened since then. Over the last year, the number has edged down steadily, to little above 900.
Even at this level, the volume of idle aircraft is huge - in all, it represents more than 7% of the entire Western-built jet-powered fleet. As Airclaims points out, however, at least one-third of the idle aircraft are over 25 years old and many have been languishing in the desert since the recession began, with no real hope of returning to active service.
Of the remaining fleet, only the 300 or so Stage 3 aircraft and the more modern Stage 2 types are genuinely expected to return to the skies.
Despite an overall fall in storage levels, the outlook is far from uniform across the types. The number of older wide-bodies sitting in the desert, such as the McDonnell Douglas DC-10 and Airbus A300, has continued to grow.
Depending on which of the complex and, occasionally, mysterious measures are used, the market value for such wide-bodies has fallen by between one-third and one-half over the past two years.
The whole market for used wide-bodies, is expected to stay under pressure, as a steady supply of new aircraft continues to enter the market.
At the same time, the market for cheaper and more versatile narrow-bodies has been showing signs of life. Movement among old favourites such as the Boeing 727 and McDonnell Douglas DC-9 types have accounted for the bulk of the reduction in the desert fleet over the past year, benefiting from what appears to be the first hints at stability throughout the narrow-body sector.
"The market for modern narrow-bodies is improving quite fast and it will begin to show in sales figures and lease rates over the next 18 months, but perhaps not in the next six months," says Jack Cunningham, chief executive at UK aircraft-trading group Fortis Aviation.
He sees potential for 15-20% in lease rates for newer Stage 3 narrow-bodies, but concedes that such a rise will still leave the rates at 10-15% below those of the boom in the late 1980s.
Cunningham also damps some of the enthusiasm surrounding the older narrow-bodies, warning that prices are still at rock-bottom, even if the aircraft are easier to shift. "People are getting quite excited, but all we're seeing is that the deals are taking place more easily. They're still at depressed prices," he says.
Although the evidence from secondhand markets may not be conclusive, as the Avitas consultancy comments, signs that "...order is beginning to return to the market" is welcome enough after the roller-coaster ride of the past three years.
PREDICTING THE PEAK
Despite the still-fragile state of the market, the US leasing community has already begun to talk up the prospects of reaching another industry peak over the next three to four years.
Any further growth in demand will lead to a capacity shortfall and a steep increase in leasing rates, argues Glenn Hickerson, of GATX Air. "There's going to be a scarcity again," he says, pointing to the lack of new-aircraft orders now pencilled in for 1996 and beyond. Lease rates for a typical narrow-body aircraft could rise fivefold, he believes.
Hickerson is not alone in his optimism. John Pluegner, vice-president at International Lease Financing, agrees that the better indicators coming through at the end of 1994 may prove to be a turning point on the way to a "real renaissance" in aircraft demand.
"If you believe in ten-year cycles in this industry, then that would tend to indicate that the peak should be in 1988/9," he says. "I think we're going to see the whole demand equation turning around again as we approach the peak. It will move from a buyer's to a seller's market."
Pluegner admits that the market is not there yet. So far, lease-rate increases have been patchy and done little more than pass on the cost of interest-rate rises.
Investors also appear to have scented an upturn. Best of all, the Japanese lenders have re-appeared. Before the market collapse in 1991, Japan's banks had underwritten over half of aircraft financing. Their unceremonious departure left an undoubted hole.
Their recent re-entry has been just as dramatic. Reports suggest that billions of dollars in Japanese tax-backed financing has been channeled into the market over the past year.
Aggressive competition has ensued, at least for the better airline credits, driving down lending margins - a fact not entirely welcomed by Western banking rivals.
"The Japanese banks are coming back in a big way, but only for the right type of credit. Margins are as fine as ever they were," says Ed Hanson, who manages the treasury at GPA. The Irish leasing group has more cause than most to remember when banks took a very different attitude to airliner financing.
The competition is still highly selective, with queues only forming for the best credit notes. Cash should eventually filter down to other airlines if the competition stays as strong, but no-one is yet forecasting a return to the funding free-for-all of the late 1980s.
The same rules seem to apply for stock-market investors. While markets have begun to regain a little more confidence in the airline industry now that it is crawling back into profits, the enthusiasm is firmly focused on the perennial profit-makers.
The recovery is still an unsteady and nervous affair. A year ago, Northwest Airlines sprang back from its near-fatal debt problems with a highly successful share flotation, helping to fuel speculation of renewed Wall Street interest in the airline sector. Since then, US equity markets have blown hot and cold, with each new indicator.
Europe has shown a little more interest, pepped up by the prospect of privatisations. Lufthansa's share flotation was a success and others could follow. Share issues by KLM and, more recently, Finnair, have also been well received. The Finnish carrier found its offering twice oversubscribed. Again the emphasis has been on quality rather than quantity.
WARNING VOICES
Although all of these auguries may be favourable, signs of an upturn remain tentative. Even the most ardent optimists concede that it would only take the collapse of one of the US airline majors to destroy the good work so far. Cancellations by Continental Airlines have been enough to provoke further production cuts by Boeing.
Some within the industry, still have lingering doubts as to whether the industry will experience a sustained surge in aircraft demand .
"This time the cycle could be different," warns Chris Tarry, leading aerospace analyst with UK securities house Kleinwort Benson. He points out that the present lack of new-aircraft ordering could be a sign of fundamental and long-term change in the airline market, rather than a short-term expedient which will result in a future burst of orders. "It begs the question of whether there will be an ordering upturn at all in this cycle," he says.
Unlike in previous recessions, the airline industry has not been swept back to profitability on a wave of economic expansion. Instead, carriers have been forced to face up to a radical review of their cost bases - in some cases for the first time.
Having started to win the cost battle, Tarry argues that they will have little appetite to indulge in a new bout of capacity expansion. Rather the emphasis may be on pushing up utilisation, productivity and efficiency, with existing aircraft and personnel.
If the result is to round off the next market peak into a more gradual undulation, then the industry may find little to complain about. Missing the boom could be a price worth paying for avoiding the bust to follow.
Source: Flight International
