Ascend analysis plays down order bubble fears

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Widespread industry concerns over an impending order bubble is unwarranted, according to an Industry Insight paper released today by Flightglobal’s consultancy arm Ascend.

“Order bubble? What order bubble? As the market dynamics stand today, our analysis casts doubt on those who predict the aircraft market is over-ordered,” says Rob Morris, head of consultancy at Ascend.

“The ‘order bubble’ is a perceived market imbalance in which the supply of aircraft – fuelled by the production of new airframes and available older models – exceeds the global demand, forcing down aircraft values and lease rates,” says Morris.

The analysis, using data from Flightglobal Ascend's Fleets database, draws on several data points to back up its conclusion.

Firstly, despite its size this backlog differs from those in the past in a key feature: the delivery horizon.

“Only 40% of the end-2013 backlog is scheduled to be delivered in the three years through to 2016, and 60% over the five years through 2018. This is far lower than the three-year delivery level of 75%, and five-year level of 90%, evident back in 1991,” says Morris. “This significantly-longer delivery horizon is a mitigant to the risk of a developing order bubble.”

Secondly, for more than a decade the annual delivery volume of new aircraft has been largely stable, typically representing about 6-7% of the in-service fleet.

“Flightglobal’s Fleet Forecast predicts the delivery of more than 16,500 new passenger jets over the next 10 years,” says Morris. “But in each of these years the annual volume, as a proportion of the global fleet, is expected to remain within the recent historic 6-7% band.”

Thirdly, the industry is seeing a stronger replacement trend than in has in the past.

“Ascend estimates that around 48% of all deliveries over the last five years have been used to replace aircraft withdrawn to storage or part-out,” says Morris. “This trend, if continued over the next decade, would indicate demand for some 7,100 new aircraft simply to replace older models.

“The most recent annual replacement level has been higher than the long-term historical average of around 43% since 1990 – suggesting that aircraft are being retired at a reduced age in the most recent demand down-cycle – although the trend is, once more, moving downwards towards the long-term average.”

“This could indicate that, rather than flexing up and down with the production rates of the airframers, the supply-side cycle is shifting towards movements up and down in the average economic life of the aircraft,” says Morris.

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