Outlook For 2009
GUEST COLUMN By Saj Ahmad; Aerospace Analyst, FleetBuzz Editorial.com
Airbus releases its final year end tally for 2008 later this week and many eyes will be on how many orders were canceled.
Boeing already reported its figures last week, marred largely by the decline in deliveries due to the strike by IAM members lasting almost two months.
The big question on many analysts lips is how bad 2009 will be.
There isn’t a simple answer to that, and in any “guess-timation”, the propensity to get it wrong is all too high. During the order boom of 2005 through to 2007, a decline in orders was all but inevitable – on the face of it, Boeing’s 662 orders captured during 2008 is nothing to be scoffed at.
Critically, of the 3,700+ jets on its books, the bulk of them are for the 737 family. Airbus too, with a similar backlog has the A320 family comprising the majority of its order book.
Oil too played its part in 2008, causing the likes of Skybus to fold, along with the likes of Maxjet, EOS and Silverjet amongst the most notable casualties of the highest oil prices ever seen. The 737 and A320 backlogs both sport airline customers with a dubious, if not outright junk credit rating. In a climate where financing some of these long lead deliveries is challenging because of the wider economic collapse and freefall of various financial institutions on both sides of the Atlantic, the risk to these two models in inherently clear.
Widebodies too, have seen their fair share of woes too, and that’s not least because of a massive decline in premium traffic, witnessed by the double-digit drop seen by British Airways. Thai Airways and Cathay Pacific are carriers seeking to defer A330 and 747-400ERF deliveries as they battle the downturn. IATA’s summing up of the cataclysmic environment for airlines shows the fragility of the entire system.
While most analysts agree cancellations will occur, it is these higher volume production rates of the 737 and A320 that will suffer first and foremost if deferrals lead to cancellations as airlines fold. Uniquely, where 2008 was synonymous for bankruptcies because of high fuel costs, 2009 will see airline collapses due to insufficient traffic, despite a fall off in fuel/oil costs. Prices are tumbling across the board, yet the premium market is suffering the biggest slump in almost a quarter of a century.
That doesn’t bode well for airlines with vast sums of money ready for future capital expenditure, nor does it solve their problem of how to generate revenue from falling yields. System capacity cutbacks have failed thus far to shore up demand and the knock on effect from the previous few years of boom-time ordering means deferrals will be the first step on the path to contractual termination, if they survive the traffic fallout.
At risk, well, you could argue that around 30-40% of the firm backlogs for the 737 and A320 are primed for long term deferral. An equal number of those jets will be terminated over the next 5 or more years. Its completely unfeasible to coalesce the dive in traffic with demand while capacity cutbacks and fleet renewals are painfully slow.
While large jets take longer to build, the risk they have is equally stark – Airbus plans to increase A330 production has fallen flat on its face. Boeing’s saving grace was the IAM strike, however, both will wait with baited breath as to which customers seek deferrals of these high value airplanes (777, 787, 747-8I/F, A380, A330 & A350XWB).
Going full circle, the delays to the 787 too seem like a “manna-from-heaven” God-sent saving grace too, given that the need to expedite fleet replacement of long haul jets is slowed by yield erosion and traffic numbers falling.
That said, this is the first time where pricing and demand are both falling and the bottom of the cycle seems as distant as ever.
While the cockpit may alert the pilot to “Pull Up”, no such mantra exists in the intertwined aerospace/airline industries. The first sign we get of a recovery?
You’ll know when air fares go up, driven not by oil price, but because there wont be enough airplanes to accommodate all the traffic.
There’s a long wait for that, so enjoy your time in that airport lounge!
Saj Ahmad
Aerospace Analyst, FleetBuzz Editorial.com
