Booming Industry Airbus Fears Bumpy Landing

The order books of aircraft manufacturers are full. But some experts are still warning of a bubble that could burst soon.
The order books are full but will the good times last?

 

The figures are difficult to digest. For the first time in its history the aircraft manufacturer Airbus has orders in its books for more than €1 trillion ($1.1. trillion). Airbus boss Tom Enders  said at a London press conference that it will take nine years to process the orders. And in order to shorten the waiting time a little, the company wants to ratchet up its production capacity from 650 jets this year to 720 in the year 2019.

The boom above the clouds seems to know no limits. But is it sustainable? Some 11,000 km south-east of London, at the Singapore Airshow in mid February, the mood was downbeat. Because for the first time in a long while, orders were in decline. There were meager deals for just 12 Boeing 737s, or one for six Airbus A350s.

The huge fall in the price of oil is partly to blame. And it is unlikely to change greatly in the near future, given the fact that Iran is getting back into the oil business. The cheap fuel means many airlines are letting their old, less fuel-efficient machines fly longer. The machines are often already paid for and written off for tax purposes, and the low operating costs mean they are earning money, even if fuel consumption is higher.

“We are seeing the first clients postpone delivery of aircraft already ordered due to the low oil price,“ said Bertrand Grabowski, board member at the DVB Bank.

Asian airlines are some of the biggest purchasers of Boeing and Airbus. Air Asia, for example, has ordered more than 300 machines from Airbus.

Mr. Grabowski is one of the old hands in this business. His employer, the DVB Bank specializes in aircraft financing and it’s his job to watch closely, not just the industry, but the whole environment and operating conditions for the industry. And there are a number of reasons not to trust the recent book. One of the main ones is that some airlines go overboard when they order new machines.

Mr. Grabowski said that more aircraft had been ordered than were needed by the airlines. “The reasons for that were favorable package prices and the hope they could sell on the superfluous machines.” But, he said, that would not be easy – “at least not at the price they probably have in mind.”

In the industry, the example of Lion Air is a case in point. The Indonesian airline said it would buy nearly 450 aircraft but, despite the airline’s current aggressive growth policy, it is only likely to need about half that number.

Asian airlines are some of the biggest purchasers of Boeing and Airbus. Air Asia, for example, has ordered more than 300 machines from Airbus. But nobody knows how the economy will develop in Asia and China, in particular in the coming years. The example of China shows that a boom can end quickly, and, above all, unexpectedly.

The industry is following developments but still claims to be quite relaxed. Airbus sales chief, John Leahy, says his main priority is figuring out how to process all the orders in time. “Some say we are in the middle of a bubble. But the fact is, the only thing bothering me is whether we can actually deliver the aircraft which our clients have ordered," he said. “We think that in view of the general mood in the market, we would be going to the absolute limit by increasing production to more than 40 units per month and keeping it there.”

Airbus's main rival Boeing, on the other hand, recently announced it was reducing production rates of all aircraft types. This is only supposed to be a temporary measure, and nobody at Boeing is talking about a crisis, either.

Both Airbus and Boeing are particularly optimistic about medium-range aircraft.

At the moment Airbus is planning to produce 60 aircraft of the type A320, starting in 2019. Boeing wants to increase the production rate for the 737 by 2018 from currently 42 to 52 machines. Manufacturers counter criticism of these enormous production figures, for example, with the importance of the U.S. market. There the big airlines frequently fly the world with old fleets, and the pressure to modernize is high.

Experts like Mr. Grabowski do not dispute this. But at the same time he doubts whether this pressure will be enough to keep high production running at full capacity. Airline managers like to look for bargains on the used market, warned Mr. Grabowski: “Airbus and Boeing can certainly expect orders from North America. But perhaps they won’t receive the big orders they are currently expecting.”

 

Jens Koenen leads Handelsblatt's coverage of the aviation and space industry. To contact the author: [email protected]