In the past year, the aviation and aerospace industry profited from a strong global economy and shown itself resilient to external pressures. However recent catastrophic events such as the extended grounding of the Boeing 737 Max and the outbreak of a new coronavirus in Asia are creating a sense of nervous uncertainty amongst industry participants.
The new flu-like virus which has sickened thousands, the ongoing crisis at Boeing as well as a new potential global recession and political instability in several geographies are contributing to increased concern amongst executives, investors, clients and emoloyees, already giving the new decade an apt nickname: “the turbulent twenties”.
“2019 was the best single year for the equity markets since the financial crisis, driven largely by the surge in the US tech market, Eurozone recovery, and performance in Asia,” says Eric Reuther, managing director at CIBC Capital Markets, at the annual meeting of the Pacific Northwest Aerospace Alliance, in Lynnwood, near Seattle, on 4 February. “Right now, if we look at the data, the industry looks really healthy, there’s an incredibly strong backlog, and assets are trading at high values.”.
“But there is a sense that assets are beginning to sit on the sidelines a little longer, and a lot more questions are being asked about what the future looks like,” he adds. Over the coming months the sector should expect deal volume to slow. “There’s the political uncertainty - Brexit and issues in Latin America that cause people to pause, the question of will there be a recession, the Max issue weighs on the broader economy, there are also trade issues for sure.”
In addition, “a shock to the system, or an unpredictable event like the coronavirus, and the upcoming US presidential election - folks are finally beginning to focus on what that means,” Reuther says. Investors and clients are asking what a win by a progressive democrat in the US election, scheduled for early November, might mean for defense budgets and spending. “Clarity around what cuts might come are very important.”
The virus, which originated in China, which has sickened thousands and killed almost 500 people as of Tuesday, has led numerous airlines to cancel service to mainland China. This decline in short-term capacity will certainly affect the sector in the short term, analysts say.
The return to service of the 737 Max also continues to weigh heavily on the industry, as suppliers, investors, customers and employees eagerly await recertification of the new-generation aircraft which has been grounded for almost 11 months following two fatal crashes.
When it returns, “there is going to be a visceral reaction to the Max, and some will fear of getting onto the aircraft initially,” says Ernest Arvai, president of AirInsight Group. “It doesn’t take that many people to drop off a flight to change it from a profit to a loss. So if there’s any great change in behavior that will impact the airlines which would then impact the economics for the airplane, the value of the airplane and the price of the airplane and that opens up a can of worms.”
But with increasing wealth in regions of the world that have traditionally been underserved in terms of air travel, the industry expects steady rising demand for its services and products over the course of the next several decades. In the past, air traffic has doubled about every 15 years, and there is no reason to believe that will change, experts say. In the next 20 years, about 44,000 new aircraft worth more than $6.8 trillion will be required to enter service, driven mostly by demand in Asia.
’”As a middle class emerges, one of the first luxury goods they want to partake in is air travel,” Reuther says.