The airline business is booming – but inevitably slump follows boom. When will the downturn come, and how deep will it be? And what will the effect be on the supply chain.
Historically, commercial air transport aircraft deliveries go in cycles, with peaks and troughs usually within a 10 year timeframe. Recent peaks in deliveries occurred in 1991 and 1999, but were followed by serious slumps.
The 1991-96 peak-to-trough drop was 47%; between 1999 and 2003 it was 35%. We are now again reaching historically high levels of deliveries, and many forecasters are predicting another downturn after 2010.
This raises two important questions. Firstly what is the likelihood of a downturn occurring post-2010? Secondly, if there is a downturn, what will the impact be on suppliers?
I remain optimistic that there will not be a recession. The airlines that are currently acquiring aircraft are more financially stable than during the previous peaks. The low-cost carriers that have driven narrowbody orders are generally very profitable. And the Middle Eastern and Asian carriers that have driven wide body purchases are frequently backed by governments, and are also very profitable.
The world economy is more globalised now and less prone to the economic recessions that have often driven previous declines in aircraft orders. However, even a small recession could have a significant impact on business-class travel which, in turn will have a major impact on airline profitability, particularly for the legacy carriers - the traditional full-service US airlines and European national carriers.
The long term growth requirements in the new markets of China, India and Russia mean there will be a continuous demand for new aircraft, provided the infrastructure can keep up. However, the legacy carriers will need to undergo significant fleet renewal if they are to remain competitive. In particular the US carriers, which are now emerging from Chapter 11 bankruptcy protection, will have to place significant orders for delivery in the 2012 timeframe and beyond.
Clearly there are still causes for concern such as terrorist activities, fuel prices, environmental surcharges and restrictions. Trade imbalances and protectionism could leading to economic recession. Asian economic and passenger growth might not keep up with the large capacity increases.
However, on balance, I would err on the side of cautious optimism. The caveat to all of this is how both Boeing and Airbus manage the introduction of the next generation of narrow bodies to replace the Boeing 737 and Airbus A320 families.
Older generation
If they mismanage this, then there could be a period of several years of airlines not ordering the older generation aircraft while awaiting the newer models. This would drive a significant reduction in aircraft deliveries in the 2010 to 2014 timeframe, depending on the exact timing of these new aircraft introductions.
If there is a downturn, the impact on suppliers will vary significantly and will be determined by several factors, notably exposure to the aftermarket. Suppliers that derive a significant portion of their revenues from airline spares, repairs or overhaul of their own engineered, proprietary products will be impacted less as these revenues, which are frequently higher margin, are decoupled from aircraft deliveries.
Those that are tied to specific growth programmes – for example, suppliers with a high level of content on the 787 and A380 will enjoy growth in revenues from these programmes after 2010, irrespective of a downturn.
While typically associated with new platforms, those firms that have positioned themselves in the new technologies market, particularly composite materials, will be more protected from a downturn. This is due to composites being increasingly used to replace metal parts on existing airframe and engine platforms.
Lastly those who have exposure to other markets both within the aerospace sector and in other industries are also better positioned to survive any downturn.
Reduced deliveries of specific aircraft will have the least impact on revenues and profits of firms which display these charactersistics and will be most able to resist the usual calls from airframe and engine manufacturers to reduce prices that most typically accompany any downturn in aircraft deliveries.
Conversely, the companies I believe most at risk from any downturn are likely to be suppliers with non proprietary products that have limited aftermarket revenues and with a high degree of exposure to the narrow body aircraft and their associated engines.
In summary, I am cautiously optimistic there will be less of a downturn than many forecasters are predicting. And if there is a downturn, the impact on each supplier will be different de[pending on each company’s circumstances.
Source: Flight Daily News
