When the airline industry cycle last turned down a decade ago, it did so dramatically. This time, the signs point to a softer landing, at least barring any unforeseen catastrophe.
True, the International Air Transport Association has reined back its medium-term passenger traffic forecast by just under a percentage point. It now expects annual growth to average 3.8% over the next five years.Even the previously buoyant international traffic forecast is down to 5%(see table). Nevertheless, as with the world economy as a whole, there is little fear of the outright collapse that sent the industry into a tailspin at the start of the 1990s.
It is not only airlines that have cause to remember the pain of that rollercoaster boom-to-bust cycle. The mainline airframe manufacturers saw their output halve to less than 800 aircraft, in little over four years, only to shoot back within another three. The evidence is that the 882 deliveries last year again mark the peak, with Airbus and Boeing looking likely to deliver close to 100 fewer units this year.
Milder downturn
This time around, however, analysts believe that a milder, if longer, downturn is at hand. Among them is Edmund Greenslet of ESG Aviation Services in Florida and publisher of Airline Monitor, who won plaudits for being among the few that predicted the extent of the last bust. He is betting that deliveries will indeed begin a gradual decline this year, falling below 660 units over the next five years, before making their way back to the 1,000 mark towards the end of the decade (see forecasts, right).
US consultancy Avitas also notes that carriers on both sides of the Atlantic began trimming back orders for single-aisle aircraft last year, ahead of any slowdown. Boeing plans to slim output this year and Airbus looks set to hit a peak in A320-family production within the next three years. Demand for widebodies could recover as Asian markets return, but Avitas predicts that a return to the glory days is not yet in prospect.
If the cycle is really smoothing out it is not only due to a more rational management of capacity by airlines - the manufacturers have played their part. Now more evenly matched, Airbus and Boeing appear to be settling down to life in a duopoly. In 1990, Boeing and McDonnell Douglas accounted for 85% of the commercial airliner deliveries, but now the two are under one roof, the US group's share is expected to be down to about 60% this year. Greenslet forecasts Airbus coming close to parity at 48% in 2002 and achieving the magic 50% towards the end of the decade.
Neither is the current peak in new aircraft deliveries necessarily a sign of overheating. A significant number of last year's orders was to replace retiring capacity, says Chris Seymour, an analyst at London-based Airclaims consultancy.
The jet storage figures, which were a keenly watched barometer of the last recession, are also perhaps less aggressive than they look. Certainly, the desert fleet is on the rise. Airclaims estimates a tally of over 900 stored aircraft now, compared with little over 700 a year ago. A minority are being converted to freighters or sitting idle between leases, but the majority have been pulled from flying because of airline efforts to tighten capacity and cut fuel-hungry types from the fleet as oil prices soar. But, while the numbers are similar, Seymour believes there is a key difference from the desert build-up in the last recession. Tougher noise regulations and ages of 20-25 years mean that many of the stored aircraft are never likely to return to active service.
Most of the older narrowbodies in storage - there are 170 Boeing 727s, 100 McDonnell Douglas DC-9s and 92 older versions of the Boeing 737 - fall into the Chapter II noise category and must therefore be taken out of service by 2002, unless somebody goes the bother and expense of hushkitting them. Even that could still leave them unsaleable for use in Europe. In the widebody sector, there are 89 Boeing 747s (mainly -100/ 200s) as well as 82 Lockheed TriStars in storage. The 73 McDonnell Douglas DC-10s and 63 Airbus A300s are largely fodder for freighter conversions.
Values softening
But aircraft value estimates highlight that the balance between supply and demand has started to tilt in the wrong direction, albeit modestly, with a surplus of older types in a flat market.
Airclaim's Seymour says the market has weakened across the board over the past year, with the poorest performers continuing to be widebody aircraft and especially the older-generation models, such as the DC-10 and 747-200 or -300. In his view, these models have not recovered from the Asia-Pacific crisis. For, if airlines in the region have stepped up orders and the brought forward deferrals, the rate of replacement of these models by new aircraft has also accelerated. "There is a sudden surplus of these models," says Seymour, adding that 25%of the 747-300 fleet is in storage.
The narrowbody market is also softening. Older 737s, including the -300 and -400, are being replaced by the new generation. Lessors, too, have increased their commitment to the newer 737-800s. The threat of a hushkit ban in the European Union (EU) has had "no effect" on the values of aircraft likely to be affected as the market for these aircraft in the region is "virtually zero", says Airclaims.
Morton Beyer of US analyst Morton Beyer & Agnew agrees that values have fallen, with a year-on-year discount in the range of 5-10%, although he points out that the newer Airbus models are in demand. While dismissing the alleged value impact of the EU hushkit ban as "bullshit", Beyer is convinced that the 747-200, MD-80 and A300 are under threat as the International Civil Aviation Organisation comes under pressure to take engine noise standards beyond Chapter III.
Beyer has seen some recovery in the Asia-Pacific market and is more bullish than Airclaims on the widebody market. Another possible boost for widebodies, Beyer feels, is the congestion in Europe and the tendency towards hubbing strategies in that region, which has historically had a smaller proportion of widebody aircraft than the USA.
Specifics aside, analysts tend to agree with Greenslet's prediction that a "really serious" surplus in the market is unlikely up to 2003, unless "there is a broad based" economic recession. Of course, the industry could be hit by some really bad luck. But otherwise, as long as prudence remains the hard-learned watchword of airlines and manufacturers, the beginning of this decade could turn out to be rather duller than the last.
Source: Airline Business
