High Level Summary of Commercial Aviation’s Current Situation
Industry Update
February, 2008 >>
In many respects, commercial aviation enjoyed an exceptional year in 2007 with traffic growing worldwide at 7.4%. The region of maximum growth was the Gulf at +18%, followed by Africa and Latin America at +8%, Asia/Pacific at +7.3%, and Europe and North America at around +5.5%.
During 2006 and 2007, some 4,700 airplanes were ordered from Boeing and Airbus which represents a 30% increase on the size of the current fleet. Both manufacturers considered that aircraft ordered achieved a peak in 2007, and they are expecting to have substantially less orders in 2008 and subsequent years.
Despite this exceptional traffic growth, profit was inadequate. The worldwide net profit for international airlines was $5.5 billion, which represents only 1% of revenues
The cost of fuel and continued pressure on yields contributed to the disappointing profit results.
For 2008, IATA forecasts traffic growth to return to a more normal 5%, with net profit coming down to $5 billion. One should remember that historically, the long term growth of traffic worldwide averages 4.5 to 5% per annum.
Both Airbus and Boeing have produced another 20-year forecast which project that the fleet of airplanes of more than 100 seats will grow from 13,500 in 2006 to 28,500 by 2026. As expected, the growth in the number of airplanes by types varies between manufacturers, the main difference being that Boeing forecasts a need for 960 Very Large Airplanes, while Airbus projects 1,700 of those. Boeing forecasts a need for 17,600 single aisle aircraft, and Airbus projects 16,500.
For regional airplanes of 80-110 seats, the current 10-year forecast projects 1800 units. The demand for 50-seat regional jets is expected to virtually disappear, and to greatly diminish for jets in the 70-80 seat range.
The recent deterioration in the economic situation in the U.S. has introduced some uncertainty. The main visible immediate impact is a significant reduction estimated at 40% in the start of new homes, which will increase unemployment and reduce personal consumption including air travel.
This seems to have prompted the more traditional (legacy) U.S. airlines to re-examine the need to downsize their operation and gain efficiencies by mergers. At the present moment, Delta and Northwest are said to be actively engaged in merger discussions, and it would appear that United Airlines and Continental are also beginning to examine whether they could merge. Should that be accomplished, some fleet consolidation would result and that would trickle down as well to the associate regional feeder airlines.
Should consolidation significantly improve the financial strength of the legacy carriers, it would facilitate and hopefully accelerate their fleet renewal. It should be remembered that those carriers have the oldest fleets of any of the major international airlines.
Whether the ongoing economic slowdown in the U.S. will be of relatively short duration or will further deteriorate into a fully fledged recession is still unclear at this time.
Equally unclear is whether this U.S. economic situation will have a significant impact elsewhere in the world. Thus far, despite the fact that Canada sends more than 85% of its exports to the U.S., the impact has not been significant.
Given the huge volume of its exports of consumer goods to North America, China could be the most exposed to a U.S. recession. Other regions of Asia such as the Indian Sub-continent, as well as Russia, and Latin America may not be affected significantly – but it is still too early to draw definitive conclusions.
On the regional aircraft scene, SAS is now replacing its Dash 8 Q400 with the CRJ 700/900 as a result of confidence in the Q400 having been shaken by the recent nose- landing-gear-related accidents. This is somewhat unfortunate for the Dash 8 Q400, which had been selling relatively well, given that turboprops are more fuel-efficient. There is, however, continued customer resistance to turboprops as they still have an image of being older technology by comparison to jets.
Bombardier is trying hard to convince customers that their CRJ 900 NextGen provides a significant increase in customer appeal, and although cosmetic changes have improved the cabin, they may still find it very difficult to compete against Embraer.
Embraer’s wider-body cabin has gained much customer acceptance, particularly the model 195, and the current ratio of sales between Bombardier and Embraer is likely to continue to favor Embraer by 3 to1.
Bombardier has been authorized by its Board of Directors to offer its long-awaited 110-130 seat ‘C Series’ with Pratt & Whitney engines, which should provide the fuel consumption improvement required to make the ‘C Series’ a competitive airplane. First delivery would be in 2013.
To be a winner, the ‘C Series’ must achieve at least 12-15% improvement in operating cost over existing comparable size airplanes from Airbus, Boeing and Embraer.
The new Sukhoi regional jet has yet to fly, but if it meets expectations it could also become a significant competitor in the regional jet arena.
Airbus finally managed a good start with the A380 operation early performance with Singapore Airlines. Airbus has made good use of the production delay by cleaning up the types of problems usually associated with the start of operation of a new airplane type. Singapore reports only one technical problem in three months of operation, which for any new aircraft is an excellent performance. Unfortunately, the production rate will remain very slow for at least another year, as the cabling will continue to be produced manually. However, the A380 operation at this time looks good and I believe it will meet expectations in time as the production accelerates. But unless manufacturing costs of that airplane are significantly reduced, it is doubtful that a break-even point can be reached before 550 to 600 aircraft are sold.
Airbus is most fortunate that the A320 series continues to enjoy great popularity and as such generates a good part of their revenue sources today and for some time to come. A program is underway to further improve the efficiency of the A320 series, in particular to improve the fuel consumption by 1% initially and eventually by as much as 4-5%. This will further boost that airplane’s popularity for some time to come. Airbus will not likely be in a position to develop a successor to the A320 much before the year 2020.
The A340 family has clearly been outclassed by the Boeing 777 family, both the B777-200ER and 300ER, which basically leaves Airbus with the A330 family as its main contender in the medium size twin airplane market.
With the A350 XWB still 4-5 years away, Airbus is today most vulnerable in the large twin market. As the A350 family comes on line, it will then be in a position to compete much more effectively and likely displace some of the B777s, particularly the earlier generation. However, Airbus will then again be vulnerable in the smaller twin market as they will have no answer to the B787 series.
Although the B-787 program is likely to be as much as one year late, Boeing has managed to avoid the bad publicity which Airbus faced on the A380. The delay did not affect sales, with close to 700 B787s already sold despite the fact that the airplane has yet to fly.
Assuming the airplane is successfully launched, Boeing will have achieved a very dominant position in the smaller twin market, virtually holding a monopoly in that niche.
Boeing will be in a better position than Airbus to launch a successor to the B737 series should they wish to do so, as early as the 2016-2017 timeframe.
The new technology engines and composite experience should enable these new replacements to the B737s and the A320 airplanes to achieve at least 20% improvement in operation cost. Of this, reduction in fuel consumption is expected to be a major contributor.
The continuing weakness of the US dollar coupled with the rapid growth in the wealth of corporations and of individuals in Russia, India, China and Latin America will continue to fuel demand for private and corporate jets. In addition to Bombardier, Embraer, Gulfstream, Dassault, etc. – are gearing up to meet this demand. The rapid growth of this market segment represents an important opportunity for the avionics and IFE suppliers. However, they will also contribute to increasing the congestion in air traffic control capacity as well as airports.
Environmental pressures on aviation will continue to increase the demand for more efficient engines and continue to accelerate the search for less polluting types of fuel, some of which are being tested at this moment.
The recent signing of an air bilateral agreement between Europe, Canada and the U.S. could provide an additional boost to the traffic growth over the North Atlantic and will encourage additional liberalization of air markets around the world along the lines of this significant breakthrough in air bilaterals.
Should the world economy not deteriorate as a result of the current U.S. problem and the market takes advantage of this increased freedom, traffic growth could be sustained over the next timeframe at a higher level than is currently forecast.
In conclusion, despite some economic concerns raised by the situation in North America, some of which has spread to Europe, at least to the banking sector, I believe that one should remain reasonably optimistic on the prospects for the growth of commercial aviation over the next timeframe. The areas of healthy growth are likely to remain the Gulf, China, Southeast Asia – particularly India – and Latin America. It is entirely possible that the strength of their economies may this time largely cushion them from the current U.S. economic problems.
