Global Aviaton Improves and Reshapes

After a long wait, Boeing’s 787 Dreamliner touched ground at the 2010 Farnborough Airshow signaling a major boost to the troubled program’s credibility and to the battered global aviation industry. The opportunity for the industry crowd gathered in the U.K. to view the 787 should boost belief that the state-of-the-art jet is just months away from entering commercial service and that the industry itself is at the threshold of recovery.

The outlook for the global aeronautics industry is generally positive beyond a slightly bumpy take off during the second decade of the twentieth first century.

Once the current recession recedes, strong demand and growth from the Asian, Middle East and Latin American markets will propel the industry to new heights, as shown in Exhibit #1.

But some niches, such as business aviation and fractional ownership of business jets might need to restructure their offerings to cope with new market perspectives.

BOEING FORECASTS 30,900 NEW AIRLINER MARKET

According to a report by Farnborough Airshow News of AIN, in its latest 20 year market forecast, Boeing projects a near-term increase in airline traffic growth, with global economies expected to regain lost ground in the next two or three years as they recover from the stronger than expected worldwide recession. The report says that according to Boeing Commercial Airplanes marketing vice president Randy Tinseth: “Having grown steadily at around 5 percent per year for the past 30 years, international scheduled passenger traffic is seen as increasing annually at a higher 5.3 percent during the 2009 to 2029 timeframe”.

At the recent presentation of Boeing’s market outlook, Tinseth said that a 0.4 percent-point increase in projected long-term annual-growth rates to 2009’s lower traffic base following recession is a correction to the 5.3% 2010 outlook. The new Boeing current-market outlook expects strong demand for new and replacement aircraft to stimulate growth.

A team of six dedicated Boeing market analysts expects a $3.6 trillion market for new commercial airplanes over the next 20 years as world markets mend, reflecting improving, yet still unstable demand conditions.

Boeing’s forecast predicts airline requirements for 30,900 new-build commercial airplanes, including 740 freighters, by 2029. Predicting that airlines will focus on more flights, using more efficient rather than significantly larger airplanes. In a subtle blow to Airbus’ 380, Boeing analysts see a relatively smaller market for 720 models of 747 size, or larger”.It is a $220 billion market largely for replacement of existing airplanes, not additional growth, with 45 percent of demand from Asia and 23 percent from the Middle East”.

Boeing also foresees a 20-year demand for 7,100 twin-aisle and 21,160 single-aisle aircraft, valued at $1.63 trillion and $1.68 trillion respectively, and 1,920 regional jets worth $60 billion.

Tinseth explained: “The market is doing much better than last year, but there are still challenges. Airline revenue and yields are up, but fuel prices remain volatile. Demand will be driven by economic growth from regions with diverse airplane needs, with the single-aisle sector dominating due to the proliferation of lowcost carriers, emerging markets such as India, China and Southeast Asia, and continuing instability of fuel prices. This narrow body segment will continue to grow as older fleets are retired”.

As expected, Asia Pacific shows the most robust market gains, with China leading the way”.About one third of all airline traffic touches that region, where continued strong growth is expected to mean that, by 2029, Almost 43 percent of all traffic will be to, from or within the region. Asia-Pacific carriers will be the largest buyers of twin-aisle airplanes, representing about 40 percent of such demand”, remarked Tinseth, as reported by Farnborough Airshow News.

Tinseth is quoted: “The fast-growing Middle East region is also very strong, as airlines benefit from geography, demographics, airplane performance and well coordinated growth and investment plans. North America and Europe will see substantial demand for aircraft to replace ageing, less-efficient jets. Global demand will become more balanced following robust growth in emerging markets with dynamic populations and increasing incomes”.

In a related report by Aviation Week magazine, Tinseth said: “We’re seeing a rebound in both passenger and cargo traffic. Boeing now expects cargo to return to record 2007 levels in 2011, whereas last year Boeing said it would take until 2013. Passengers are purchasing premium tickets again, too”.

“Clearly first-and business-class travel is coming back and it’s coming back very strong. We’re starting to see airlines returning to profitability before we expected it. We’re starting to see airlines around the world prepare for the up-cycle. We expect strong profitability next year”.

But some doubts abound”.We fully expect fuel prices to be high and volatile going forward,” Tinseth says, explaining that volatility is the bigger problem. Boeing expects the price of a barrel of oil to reach $90 in a couple of years, above which point “alternative fuel sources come in and help drive oil prices down”.

“The Middle East carriers are a bit of an anomaly,” Tinseth said, “with their model of one-stop service from anywhere to anywhere”.

“Carriers like Emirates, Etihad and Qatar focus on their captive area, and if you think about it, their captive area is just about the whole world”.

“They’ve pulled a lot of traffic” – some 16% of the Asia- Europe routes, likely rising to 22% — despite the need for a stop in Abu Dhabi, Dubai or Doha”.They’re growing with the market and they’re also growing their market share,” Tinseth said, as reported by Aviation Week.

Please see Exhibit #2 showing a summary of Boeing’s forecast.

THE CEO’S SPEAK

Louis Gallois, 65 years old and CEO of EADS, the European aerospace and defense giant and Airbus holding corporation, said in a recent interview with Aviation Week & Space Technology magazine: “We have been less sensitive than in previous periods to economic crisis. Certainly because we entered this crisis with a huge backlog, but Airbus has remarkably managed its backlog with the famous “Watchtower,” and also because our markets are more diversified. Europe and the U.S. together represent fewer than 30% of the Airbus backlog and leasing companies a bit less than that, around 20%. The rest of the world has the lion’s share. And the rest of the world market is much more resilient than Europe and the U.S. This marks the first time we have this situation”.

Jim McNerney, Boeing’s Chairman, President and CEO told AW&ST: “The rebound in demand for commercial aircraft is dependent on the economy and the economy is tough to call. The evidence so far is of a solid recovery in both cargo and passengers, so we are certainly more optimistic than we’ve been over the last couple of years. I think the proverbial double-dip [back into recession] would impair our business, but historically the chances of that are not high. The financial crisis in Europe is more likely to lead to a muted, slow recovery than be a catalyst for a double-dip.

So the economy is the big wild card”.

“We’re past the trough”. David Joyce, President and CEO of GE Aviation told Flight Daily News”.Here in Aviation, we’re feeling in the second half of this year an uptick. We’re cautiously optimistic on a recovery as we’re seeing traffic coming back and usage of our equipment is rising. We’re seeing that in our [maintenance, repair and overhaul] network and in our spares”.

Rather than attributing the upswing completely to the natural the tendency of the market to rebound on its own, Joyce gives credit to the industry itself”.I think that we’ve managed this cycle as an industry pretty well. If you take a look at [commercial aircraft] production and deliveries over the past three years, you don’t see a big decline,” he added”.Air-craft and iPods didn’t take a hit”.

Joyce said: “It’s a clear indication of the learning that occurred after 9/11. I’m a real proponent that this industry did a very professional job of managing itself”.

AIRBUS EXAMINES STRATEGY AS NEW MARKETS EMERGE

By “disengaging” delivery rates from trends in order backlogs, Airbus should be able to operate with greater stability. Markets in more than 50 emerging economies will lead growth in passenger traffic that will drive demand for new aircraft, said the European manufacturer, according to a report of AIN’s Farnborough Airshow News.

Analysis of deliveries versus order backlog shows Airbus with a 1:5 ratio in the 15 year period 1990-2004, which gave it about five years’ work in hand at any given time. For Boeing, the relationship was 1:3.3, albeit with somewhat less stability, according to John Leahy, Airbus’ customer chief officer.

Now, the past five years have seen more moderate delivery trends. Although airlines remained keen to order large numbers of aircraft in a prolonged shopping binge, the two manufacturers acknowledge a practice of “over booking” that accommodates prospective cancellations or deferred deliveries.

Accordingly, Leahy concluded, “The current cycle will be flat. Solid sales backlog sustains production through the downturn”.

Airbus and Boeing have backlogs still close to historic highs, despite the dramatic fall in new net orders that has followed the credit crunch.

Analysis of Flightglobal’s leading ACAS fleet database shows that while the massive ramp-up in orders nay have collapsed over the past two years, by the end of June the two manufacturers still held a combined backlog of 6,555 aircraft (4,165 narrow-bodies and 2,390 wide-bodies).

That is down a relatively modest 10% from the peak of two years ago, when numbers hit 7,299, but it still more than twice the volume at the height of the last boom a decade ago.

DEMAND FOR EXPERIENCED PILOTS RISES

Flight Daily News reported that: “Boeing forecasts a global need for 448,000 new airline pilots to enter the industry over the next 20 years, and more than half a million new maintenance engineers. Recession, what recession? But many carriers are not carrying out pilot and engineer suply planning”.

“Long-term forecast demand for airline pilots and mechanics is significantly higher than it was before the global economic recession, say new figures from Boeing’s Training and Flight Services division. The company estimates that the average annual airline pilot demand for the next 20 years will be for 22,500 new pilots and 28,000 new mechanics to replace those retiring, and to cope with growth in the global airline fleet”.

“North America heads the league in terms of the number of pilots it will need in the next two decades, at 112,000 (forecast by Alteon in 2008 at 98,000) and Europe follows at 97,000. Other regional predicted requirements are China 61,000, South East Asia and Indonesia 34,000, Latin America 32,000, North East Asia 19,000, the Middle East 23,000 and Oceania 13,000”, reported Flight Daily news as shown in Exhibit # 3.

Boeing’s projection of the totals for the next 20 years brings home the sheer size of the task: 448,000 pilots and more than a half a million mechanics. This raises the question as to whether the training infrastructure to meet demand can be created in time following the slump in airline investment.

BUSINESS AVIATION IS IN TROUBLE

“The sour economy, however”, reported Farnborough Airshow News,” is many tentacled and continues to ensnare business aviation by bloating the inventory of used aircraft and stifling demand for new ones. Since the recession took hold in the latter half of 2008, business aviation has lost some 30,000 jobs at OEMs, flight departments and the service industry that supports them. Most disturbing, this damage has been inflicted on a $150 billion industry employing, 1.2 million people with the active approval of the U.S. government”.

Please see Exhibits #4 and #5illustrating the inventory of used jets and the prices of some popular pre-owned models, respectively. Notice the bargains in the marketplace for elite jets.

AW&ST reported: “Certainly, these are tough times for fractional operators. In its May forecast, Honeywell said the value of new ownership shares has continued to deteriorate in 2010, after slumping 52% in 2009. New jet deliveries to fractional operators were off more than 80% in 2009 and will remain low for the next few years as excess capacity is worked off and share values rebound, Honeywell forecasts. There were no new fractional jet deliveries in the first quarter”.

“Market leader Net jets had a particularly tough time, posting staggering losses and canceling billions of dollars worth of new jets. Net Jets took no new aircraft deliveries last year and does not plan any this year”, according to AW&ST.