In spite of the recent deep global recession, the slow economic recovery in North America, the doldrums in Europe and the relative slowing of Asian economies, the global aviation industry continues to thrive.
The long term stability and resiliency of this industry is stronger than any equity financial market we know.
The global aviation industry continues to growth at a 5% annual rate since 1980. The bumps over the past 33 years have not been minor: Four economic recessions, two financial crises, 9-11, a series of Gulf wars and oil frights, to mention the main ones.
According to Boeing’s 2012 Current Market Outlook (CMO) air world travel growth during 2012-2031 will continue to average an annual rate of 5%.
But this growth will vary among the various global markets. Exhibit #1, sourced from CMO, shows the 2011 RPK’s (Revenue Passenger Kilometers), and the expected added traffic for 2012-2031.
Notice how Asia leads the way. Powered by China, air travel is expected to triple in Asia Paci´#56256;´#56511; c in the next 20 years at a near 7% rate annual growth. Other markets like the Middle East and Latin America are not far behind. Growth within North America is expected to remain at a modest 2.2% in the outlook period.
Four major trends can be identified underlying this healthy growth in the global aviation industry: Increased manufacturing output of aircraft, higher investment in developing new products, more strategic alliances and mergers to serve the Asian market and a movement of the manufacturing footprint to the U.S. and Mexico to serve the American Continent market.
With some excerpts from Boeing’s CMO, Aviation Week ShowNEWS at Farnborough and AIN Publications Farnborough Airshow News, let’s look at some examples of these major global trends.
Boeing Commercial Airplanes CMO is projecting a $4.5 trillion market for 34,000 new airplanes, for delivery 2012-31, which will double the global fleet from 20,000 units in 2011 to 40,000 by 2031, considering that about 6,000 aircraft will be retained fleet.
Boeing´s annual CMO forecast has seen a shift toward larger aircraft with a steady decline in perceived future demand for regional jets (fewer than 90 seats) and volatile market for large jetliners (747’s or bigger).
According to Boeing, most of the market value of the projected US$4.5 trillion demand for 2012-2031 will concentrate on single-aisle and double aisle units, as illustrated in Exhibit #2.
Said marketing vice president for Boeing Randy Tinseth: “It is broader, deeper and more diverse than we´ve ever seen it. Air travel had continued to grow-with demand having been met by increased frequencies and more nonstop flights-and Boeing expects that rate to be sustained throughout the next 20 years.”
Embraer’s own forecast suggests a projected need for 6,795 new aircraft in the 30- to 120-seat capacity segment over the next 20 year in this single-aisle market segment, valued at $315 billion. Embraer agrees with Boeing in that the market would reflect a 5-percent annual increase in world demand for air transport in terms of RPK’s. According to the Brazilian manufacturer, the center of gravity of the market will move to Asia and, to some extent to Latin America.
As reported by Aviation Week magazine: Bombardier Aerospace expects turboprops to account for a larger part of the regional aircraft market in the next 20 years. The manufacturer´s latest 20-year forecast assumes the share of turboprop deliveries during the period will rise to 48% from the current 45%, says Mairead Lavery, VP strategy, business development and structured finance.
According to Bombardier’s outlook for private aircraft use, North America will continue to lead the world in business jet deliveries with 9,500 aircraft, followed by Europe with 3,920. China will become the third largest market for business jet deliveries, with 2,420 deliveries from 2012 to 2031. Key growth markets foreseen by the 20-year forecast include Brazil, India, Russia and the Commonwealth of Independent States (CIS), Indonesia, Mexico, South Korea and Turkey for a total global demand of 24,000 units in the business aviation segment. The above was reported in AIN Publications.
The nature of the global aviation industry is perhaps best illustrated by comments from GE Aviation President and CEO David Joyce, who is responsible for ramping up the production of the GEnx engine for use in Boeing’s 787’s and 747’s from already record levels and at the same time preparing for manufacturing engines for smaller aircraft for both Boeing and Airbus.
In the recent Farnborough Airshow event, he told Aviation Week Show News: “We expect “very good” growth in revenues through 2020, from today´s $19.5 billion. But that´s the longer-term view.” He professes to be “cautiously optimistic” about trends through 2013, waiting to see whether global economies recover or retreat again. “The next two years will be the bellwether for industry for the next few years after. This is a very longcycle industry. You make your biggest bets when the industry is going down so that you´re where you need to be when it´s going up.”
FLOCK OF NEW PRODUCTS
Just as GE, everybody else in the industry is following suit in terms of new product development. Paced by the OEM’s, the global aviation industry is undergoing a feast of breakthroughs and technology not seen before in the sector.
New materials, engines, designs, avionics and general innovations are enabling OEM’s to compete with revolutionary products that are encouraging replacement of old fleets and competition in the marketplace.
According to a Boeing’s advertisement: The 737 Max Advantage: 8% Lower Cost. The 737 MAX will have the lowest operating costs of any single-aisle airplane. The 737 MAX will deliver the big savings in fuel that airlines are asking for, using 19% less fuel per seat than the competitor´s airplane available today.
99.7% dispatch reliability. Flying 100 Next-Generation 737s, rather than its competitor, will help an airline avoid delaying over 65,000 passengers a year.
As reported by AIN Publications, the intake of titanium by the global aviation industry is predicted to rise dramatically over this decade with the production of next-generation commercial jets made of advanced construction materials gearing up.
Today, this industry consumes 40 percents of the world´s titanium supply.
According to an independent analysis, demand for titanium in commercial aviation will increase 42,000 metric tons in 2011 to more than 49,000 tons this year and then rise to 72,000 tons in 2016.
A recent breakthrough in winning a contract to supply Boeing with complex machined titanium and aluminum parts and assemblies for the horizontal stabilizer of the new 787-9 Dream-liner wide-body in the prime example of how a company like GKN Aerospace´s is keeping its backlog buoyant.
Pratt ´amp; Whitney, a $13 billion company should almost double in size, to $24 billion in revenues, by 2020, “based on programs we´ve won and on aircraft delivered, not what we might win”, said President David Hess to Aviation Week Show News recently.
“We´re seeing double-digit growth in all three engine sectors- military, commercial and Pratt ´amp; Whitney Canada, as well as aftermarket. The company´s resurgence can be attributed to an aggressive posture both in attitude and technology as well as the culmination of long-term engine development that spans more than a decade.”
Bombardier´s aviation interests has focused on the Canadian company´s most ambitious projects, namely its Cseries jetliner and Global 7000 and 8000 ultra-long-range business jets.
With two such high-cost programs under way involving big-ticket airplanes, an OEM could be expected to ease up elsewhere, particularly if involved in the light jet business, a market segment that crashed four years ago and remains depressingly down. However, Bombardier actually appears to be investing more in Learjet than at any time since it acquired the line from its bankrupt owner in 1990.
THE ASIAN CONNECTION
The exponential growth of the industry in Asia, particularly in China has launched, as expected, a series of strategic alliances, mergers and acquisitions through which Asian companies and investors are gaining positions the global aviation manufacturing and its supply chain and technology.
Hawker Beechcraft recently announced that China-based Superior Aviation Beijing Co. has signed an exclusivity agreement to buy the whole U.S. aircraft manufacturer, minus its defense business. Hawker Beechcraft filed for U.S. Chapter 11 reorganization in May and just last week outlined a framework to exit this protection by year-end. Part of this plan included a potential sale, which is now the likely outcome.
The above was reported by AIN Publications at the Farnborough AirShow.
Signatures at the end of March formally launched GE Aviation Systems’ global avionics joint venture with AVIC of China. Its first program: to design, develop and supply the core computing system, avionics, flight deck displays, on board maintenance systems and flight data recorders for Comac´s C919 airliner. “We have to deliver equipment. for the first flight while building capability in ´ndash;country at the same time”, said GE Aviations Systems CEO and president Lorraine Bolsinger as reported by Aviation Week ShowNews.
Bombardier is also forming close links with Chinese manufacturer Comac, which is developing its C919 narrow- body airliner. The two companies want to achieve a common cockpit design for the C919 and Cseries and plan to cooperate in others areas. There have been suggestions that China might look at buying Bombardier Aerospace outright!
In another sign of China’s rising importance in the global aviation industry, Cessna Aircraft Co. said it would develop a plan to build business jets with the state-owned Aviation Industry Corp. of China.
According to the Los Angeles Times, the announcement paves the way for Cessna of Wichita, Kan., to become the first U.S. aircraft maker to manufacture business jets in China, the fastest-growing market for the multimilliondollar planes.
“We believe China represents a significant opportunity for growth,” said Scott Donnelly, chief executive of Cessna’s parent company, U.S
conglomerate Textron Inc. Plans for the joint venture, which includes a partnership with the city of Chengdu in western Sichuan province, call for setting up a manufacturing base to build existing Cessna aircraft models.
In the next phase, the company would help develop China’s first business jet to be sold abroad
This is just a handful of recent examples of how China continues to gain power in the sector. This should not come as a surprise since according to many economic analysts, China will be the dominant world economy sometime soon after 2030.
SOFT LANDINGS IN NORTH AMERICA
For now, the U.S. and Canada continue to represent the largest market and manufacturing hub of the global aviation industry. And with the incorporation of Mexico in the aerospace supply chain, NAFTALAND is also attracting an important share of investments.
One of the most recent announcements that surprised the industry was that Airbus plans to start building a new A320-family, US$600 MM assembly plant in Mobile, Alabama, scheduled for completion in 2015. Airbus estimates the plant will produce between 40 and 50 A319s, A320s and A321s annually.
Aviation Week ShowNews published that plans call for the first aircraft to roll off the new production line in 2016. “The time is right for Airbus to expand in America”, said Airbus president and CEO Fabrice Bregier. “The U.S. is the largest single-aisle aircraft market in the world-with a projected need for 4,600 aircraft over the next 20 years-and this assembly line brings us closer to our customers.”
The Belgian supply chain integrator and component maker Asco plans to spend USD100 million over the next four years to open a new facility in Stillwater, Oklahoma. The company that assembles super-strong metallic aircraft components, life devices and mechanical assemblies were the possibility of collaborating on surface treatment research at Oklahoma State University and financial incentives
“The U.S. was a natural choice, as it allows the company to trade in the same currency as our clients, ” adds Boas.
Embraer and Zodiac Aerospace have set up a joint venture to manufacture cabin interior parts in Mexico for Embraer 170/190 airliners. “We are proud to establish this venture to manufacture new state-of-the-art products that will be co- development by Embraer and Zodiac, and will maintain the excellent experience passengers have flying Embraer airplanes”, comments Embraer COO Artur Coutinho. “The establishment of an interiors facility in Mexico represents one more important step in Embraer´s Process of global manufacturing”.
Exhibit #3 from Boeings MCO compares the global aircraft leading manufacturers in 1977 and today
While Boeing is still the market leader, notice that 4 of the top 6 in 1977 no longer produce airplanes. And interestingly enough, Boeing’s main competitors are relatively new players from outside the U.S.
As an example of the unorthodox dynamics of the global aviation industry, consider the following two notes published by ShowNews recently at Farnborough:
News that Bombardier is bringing work on the CSeries fuselage back to Montreal from China is nothing out of the ordinary, says Robert Dewar, Bombardier vice president and general manager for the Cseries program. Despite the change in production in bringing the fuselage work back to Canada, the air-framer is on track to begin assembly of the first Cseries this quarter, and the first flight is expected by the end of the year.
As Boeing moves out, Airbus, which just marked its 10th anniversary in Wichita, plans to enhance operations there because of the area´s deep talent pool, particularly engineers. “We continue to get a demand for more work from the parent company. And we continue to employ more engineers at Wichita”, said Barry Eccleston, president and CEO, Airbus Americas.