How will the financial problems in the US impact airline orderbooks? asks Chris Tarry
What a difference a month makes. In this column last month I highlighted a growing divergence between those expecting European carriers to continue their relatively strong performance and those with a more negative outlook. Since then the well-documented problems in the US financial sector are now starting to reverberate across global financial markets. This gives a new perspective on the challenges for the underlying economy in the US and elsewhere, and reinforces the concerns held by those who take a more pessimistic view of life beyond the current financial year.
It is clear from comments made by the US Treasury Secretary that the current crisis of confidence in the credit markets is expected to last longer than any of the financial shocks of the last two decades. There are not likely to be any quick fixes.
So what is the likely impact on this industry? Already there is anecdotal evidence of higher costs associated with financing aircraft, and some of the less committed participants could exit the market. While the initial focus was on the potential issues for airlines and the timing of peak profits in the current cycle, it is clearly important to examine the effects in other parts of the system. The consequences and possible challenges for the manufacturers, as well as the opportunities for those who have held back from placing aircraft orders in the recent order frenzy, should be a particular point of focus.
Although history is not always a guide to the future, it will usually provide some benchmarks. The strength of the order upswing from 2002/03 resulted in some observers reaching in 2006 what appears to be a misplaced conclusion that we are in some type of super-cycle, and that things may be different this time.
Certainly there is no reason to assume that the cyclical effect of the world's economies has been removed. Furthermore, the 2001-04 period benefited from a new source of ordering as demand for aircraft from low-cost carriers accelerated. A year ago the US airline industry was expected to be the source of significant orders for new aircraft in the 150-seat segment, in order to sustain the upswing. Not only has this not occurred, but it is also increasingly unlikely given the change in the US economic background.
However, the absence of new orders may be only one part of the potential problem for manufacturers. More pressing might be a need to re-market deliveries currently destined for European low-cost operators, which may provide good value and near-term delivery for those needing capacity. A recent piece of research by Numis Securities highlights the fact that some 223 short-haul aircraft are expected to be delivered to European airlines in 2008, with a further 189 in 2009 and 118 in 2010. At least some of these deliveries will be dependent on the ability of airlines and lessors to place seven- to eight-year-old aircraft currently in service with, say, easyJet and Ryanair, with new operators.
On current expectations we are still perhaps three years away from the peak of the delivery cycle, which suggests an inevitable mismatch of the cycles as airline industry profits are expected to peak in 2008. Unless steps are taken, there could be over-delivery for 2008-2010, putting further downward pressure on yields and profits, and resulting in a decline in margins.
At present it is reasonable to prepare for at least a more challenging environment. Adjusting orderbooks is neither instant nor costless, and the smart money is still on over-delivery, adding to excess capacity. However, optimism rather than realism may mean that we are some two or three years away from meaningful cancellations and a widening gap between net and gross orders. Furthermore, in the 150-seat segment the post-downturn recovery will depend largely on the timing of the new generation aircraft.
Source: Airline Business