TWO YEARS ago at the Dubai Air Show, things were looking rosy for planemakers. The four big Gulf carriers alone, Emirates, Etihad, FlyDubai and Qatar Airlines, bought planes worth more than $170 billion, at list prices, from Boeing and Airbus, the world's two biggest planemakers, in one day. Two years later, at the most recent Dubai show, in November 2015, things looked more worrying for them. There was only one big airline order of note, by Vietjet of Vietnam, for Airbus planes worth $3.6 billion. As a result, some investors are worried that the aviation cycle may have started to take a sharp downwards turn, and that it will hit Airbus and Boeing's future profits. Although Boeing and Airbus recently revealed record production figures, for 2015 new orders net of cancellations fell by almost half at Boeing and a third at Airbus compared with the previous year. But most analysts do not think that the demand for new planes will fall as much as in previous cycles, even if there is a global economic slowdown. Why not?
In part, it is because airlines and leasing companies are buying planes for slightly different reasons. Before 2008, around 70% of demand for new planes was from airlines and leasing companies planning to add capacity, with the replacement of their older jets accounting for just 30%. But since then, demand from customers seeking to replace old planes has risen to more than half of deliveries. That makes the state of the economy less of a factor. The airlines are busy swapping old jets for new ones because the planemakers have brought out more fuel-efficient versions of the Boeing 737 and Airbus A320, their short-haul models; and introduced new long-haul models, the Boeing 787 Dreamliner and Airbus A350, which are also more economical than older equivalents. Although the slump in oil prices means that jet fuel is a lot cheaper than it used to be, most airline executives do not think this will last, and are trying to use the windfall profits from cheaper fuel to upgrade their fleet while they can afford to do so. Competition from rivals introducing newer and more comfortable planes is also propping up demand from airlines keen to keep up with the latest trends.
Another reason why the aircraft market has become less cyclical—and now less likely to crash—is the advent of no-frills airlines. Because they are prepared to vary prices to ride out the ups and downs of demand for flights, their demand for planes is smoother. The rise of budget carriers in emerging markets is also helping. Budget airlines account for around 60% of seat capacity in India and South-East Asia; in Europe, the figure is around 40%, according to CAPA, an aviation-consulting firm.
But even if the two big planemakers do enjoy more predictable demand than in the past, it may become more volatile on a year-to-year basis. Much of the order backlog comes from relatively new airlines in the emerging world. Some of these carriers will inevitably retreat, and sometimes fail, due to rising competition from more efficient upstarts. Although this may mean more cancelled orders in the future, analysts and executives currently expect the upstarts to fill the gaps in the order books. It is only if this stops happening—and there is no sign of it yet—that investors in Airbus and Boeing should start worrying.
The Economist
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