With the idle fleet at record levels, residual values on the floor and little near-term prospect of an upswing in the world economy, there are likely to be some tough choices ahead before the aircraft market regains its balance.
While all eyes are trained on the deserts of Iraq, there is another desert too which holds an ominous message for the air transport industry and that is Mojave. The hundreds of airliners glinting in the southwestern US sunshine are a very tangible reminder of the overcapacity that burdened the industry well before the military build-up in the Gulf. For airlines and aerospace manufacturers alike, its effects could still be reverberating long after the troops have returned home.
The headline figure is an astonishing total of over 2,000 airliners now sitting idle. Airclaims reckons that represents a nominal value of over $13 billion of industry assets parked up. In the wake of the last Gulf War, the industry had blanched when the total topped the 1,000 mark. Admittedly the size of the world fleet has grown too since then, climbing by around 50%. But that still leaves the surplus standing at some 12% of the fleet, compared with less than 10%last time around. It will be a long haul to get that number back to the usual running rate of around 2% in time for the next downturn.
It is true that the headlines are perhaps less alarming than they appear. Far from all of the idle aircraft are sitting in the desert. Many are between leases or resting with operators. And of those that are in long-term storage it is arguable that as many as 400 are already little more than scrap aluminium. That would take the total down to a more manageable number of around 1,400 aircraft that are waiting to fly again. Even so, that represents a hefty surplus, including at least 200 current mainline types.
Most worrying, perhaps, is that there is growing talk that relatively young Boeing 737 Classics or MD-80s which were still in production until only four years ago may find it difficult to return to service. The developing economies and new entrant airlines which might in former times have provided homes for such types are instead being tempted to skip a generation by some mouth-watering discounts on new aircraft. And there is the rub. As Airbus and Boeing continue to slug it out order by order over the next few years, there is the potential for collateral damage.
Comparisons with the aftermath of the last Gulf War suggest that production lines will need to gear down dramatically if the industry is to get back to anything like balance. In the last recession, output from what was then three mainline aircraft producers dived from a peak of some 750 deliveries in 1992 to around 380 at the depth of the trough three years later.
This time there are signs that the reduction may not be so emphatic. Certainly there has already been a reduction. After bumping along the top at around 800-900 over the previous four years, annual output came down to 673 last year and is expected to come down below 600 this year and beyond.
However, both manufacturers have constraints on how low they can go. Airbus is hamstrung by Europe's labour laws. One US analyst jibes that lay-offs could take so long that by the time they happen Airbus could find itself re-hiring. The company plans to turn out another 300 units this year, although it has said that it could go as low as 260 without the need for redundancies.
In the meantime, nearly all of the cuts have come from Boeing, sliding from over 500 aircraft to only 370 last year and on the way down towards below 300 this year. That would finally see Airbus crowned as the largest producer of airliners, having already won market share on orders and backlog. Boeing cannot afford to slip much further behind.
In the last recession, the dwindling McDonnell Douglas lines at Long Beach also helped to absorb some of the pressure. This time it is a straight fight between Airbus and Boeing. Signs of strain have already started to surface.
Residual values went into a tailspin after 11 September. The presence of a massive surplus fleet is likely to keep them that way, while the influx of cheap new aircraft can only make the situation worse. That is hardly news to encourage investment from aircraft financiers or lessors. Some even warn that if the bargain deals continue, manufacturers could find themselves in competition with leasing customers in placing aircraft.
At the same time, mainline airlines, at least those outside Asia, find themselves in no position to raise much financing on their own account and are unlikely to recover soon. The low-cost boom has provided the hope of more dynamic growth. But this too could start to look like a zero sum gain if it simply forces incumbent carriers to park yet more of their own short-haul aircraft.
In a low-growth environment, with structural change in the air and money tight, something will have to give. The choices would seem to be between scrapping large parts of the desert fleet or producing fewer new aircraft. Either choice is going to be expensive for someone.
Source: Airline Business
