Commercial Aircraft Market Overview

The commercial aircraft market has, like most industries, undergone a turbulent decade. Market conditions had rebounded from the post 9/11 downturn and indeed the mid-2000s saw massive growth in many world regions. Similar to all economic cycles, no particular curve lasts forever, but few could have anticipated the effect the downturn of 2008 had on global spending.

While there were a number of airline bankruptcies in 2008 and 2009, there were far less than many observers predicted. Ignoring government support and bankruptcy protection, most airlines avoided bankruptcy by consolidation, mergers, network optimisation and aggressive cost-cutting. One of the most notable results of this was widespread parking of older, less fuel-efficient and higher operating cost aircraft.

Values and lease rates were affected across all types with order cancellations and deferrals rising, a trend that continued into 2010. Key examples of restructuring that have taken place in the past few years include Japan Air Lines, most of the US major airlines and Air India.

As of 2011, the US market looks like it will consist of just five major airline entities for the foreseeable future: American Airlines, Delta/Northwest, United/Continental, US Airways, Southwest/AirTran and jetBlue. The situation is pretty similar in Europe: BA and Iberia are now operating under the one banner, as are Air France and KLM, and Lufthansa is looking at expansion. Ryanair and Easyjet dominate the low-cost sector.

The Middle East, and to a lesser extent, Latin America, were the only major regions to have sustained growth during the downturn. The former shows no signs of slowing despite local political and economic issues. The Chinese market is resuming aggressive growth as is India, with new operators being launched regularly. However, caution still remains among industry stakeholders and the export credit agencies (ECAs) have had to slightly loosen their grip on aircraft financing.

Recent International Air Transport Association (IATA) reports stated that there was a mid-2011 slump in global traffic, primarily due to a slowdown in premium travel following reduced trading confidence. Importantly, while load factors remain steady year-on year, yields are dropping in the face of rising operating costs and increased competition, particularly in Europe and North American sectors.

The last few years have also shown us that the industry remains distinctly vulnerable to global natural disasters and socio-political factors, as illustrated by the tsunami and earthquake in Japan, the Icelandic volcanic ash cloud and the north African political issues. The Libyan-crisis had a huge effect on oil prices and reduced passenger demand, while the natural disasters in Japan seriously impacted passenger demand in the region and has slowed annual growth considerably.

Order Levels for New Aircraft

Aggressive ordering has returned to the industry, boosted by the launch of the A320neo and subsequently, the Boeing 737MAX. The A320neo has dominated order books, with over 1000 orders and commitments received at the time of writing. Boeing has responded in kind by offering the 737MAX – the exact makeup of which has yet to be confirmed. Despite caution in the market place about the effect these aircraft would have on the residual values of existing aircraft, Boeing and Airbus continue to enjoy healthy backlogs for the 737NG and A320 respectively. The current backlog sits at over 4300 aircraft.

The 100-250 seat market is also dominated by new technology due to enter that segment with offerings from Bombardier (C-Series), Mitsubishi Heavy Industries (MRJ), Comac (C919), Sukhoi (Superjet) and Irkut (MS-21) in development. Order levels have been inconsistent, but Boeing and Airbus have certainly taken notice of the threat these new entrants offer, particularly in the 100-150 seat segment.

In terms of the wide-body market, the 777 and A330 continue to see very impressive order levels. Indeed, according to Boeing, the 777 has recently surpassed 100 orders for 2011 and its profile has been boosted by the success of the 777F variant. The A330 has seen a slight flattening in order levels but is very well set to stave off any value pressure and reduced demand when the 787 enters revenue service, as is the case with the 777 and the incumbent A350. In the large aircraft market, the A380 is very much finding favour with operators and passengers alike. Even the financial community is warming to the type as an investment asset although some apprehension remains in terms of remarketing. Nonetheless, Airbus expects to break even on the programmes as early as next year. The 747-8 programme has been plagued by problems but the freighter has sold well and service entry is due next month, along with 787.

Widespread Parking of Older Aircraft

The picture for some older aircraft types remains less rosy. As mentioned earlier, widespread parking of ageing types was perhaps the most enduring legacy of the recent economic downturn. Huge swatches of 737 Classic and DC-9/MD-80 aircraft were grounded during capacity cuts, most notably in North America. Similar trends occurred in Europe and the Pacific Rim, albeit at a smaller scale. The majority of these aircraft did not find new operators.

One notable side-effect of the mass parking of aircraft was the increased numbers of spare parts on the market place. The manufacturers, part-out specialists and engine lessors did their best to keep a grip on spare engine availability but values of older engines and indeed some newer ones were impacted. At present, over 15% of 737 Classic fleet is in storage, while a staggering 37% of the DC-9/MD-80 fleet is in storage. It is worth noting that some of these aircraft, while listed in IBA and industry databases as in storage, may have engines, landing gears and other components removed, particularly if they are leased or part of pooling arrangements.
MRO industry

The maintenance, repair, and overhaul (MRO) industry is in a state of flux at present. Older and more maintenance-intensive aircraft are being stored or retired in favour of new less maintenance-intensive models. The A320 and 737NG replacing older 737s and MD-80s is a case in point, as is the 787 as a replacement for older Airbus and Boeing twinjets. This negative trend is being counteracted by an anticipated increase in engine MRO activity – estimated at 35% of all MRO revenue in 2010.

The MRO industry is not immune to the trends seen among airlines, whereby consolidation, mergers and acquisitions (M&As) have taken place. A key element of aircraft maintenance expenditure is labour and with huge variances in labour rates across the globe, operators are happy to move heavy checks away from domestic bases and take advantage of low labour rates in regions such as South America, parts of the Pacific Rim and Eeastern Europe. Large MRO entities, such as ST Aero and Lufthansa Technik, have minimised their risk exposure by acquiring MROs in other countries. Also, increasing numbers of MROs are diversifying into engine, line and component support markets.

The engine market is an interesting case in point, and while supply is exceeding demand for many tradable types, the sector has remained fairly robust during the downturn. The crowded nature of the aircraft leasing and financing sector, particularly in respect of A320s and 737NGs, has meant that more entities are looking at engine assets. This has also been a lucrative area for the part-out specialists, who have been able to retire or control numbers of engines on the market in order to keep values stable.

As is the case with their host aircraft, good condition older engines such as the CFM56-3 series and early-build CF6-80s are difficult to locate on the market and therefore will attract a premium and find easier placement versus engines in below half-life condition. The most tradable and attractive assets, therefore somewhat immune from part-out, are the Trent Rolls-Royce Trent family, GE’s GE90, CF34-8E and 10E engines, IAE’s V2500-A5 and CFM’s CFM56-5B and -7B.

Conclusion

With Airbus and Boeing firm orders for 2011 now well exceeding 1,000 aircraft, the appetite for new orders has clearly returned and continuously volatile fuel pricing should indicate that further retirements and part-outs are likely for older aircraft types. MROs continue to face a challenging environment and increased competition will lead to aggressive pricing and more complete service offerings. The A320neo and the Boeing 737MAX will continue to dominate industry discussion and ordering for some time to come. However, cautious optimism is still likely among most operators and industry stakeholders.

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