Premium #111 – Business Cycles and Bubbles

Airbus and Boeing dismiss the talk of a bubble in orders.  Even some airline CEOs dismiss this talk.  Yet, the talk about a bubble persists.  In April 2013, Reuters mentioned this.   In October 2013 Avitas’ Adam Pilarski also spoke a bubble.  Recently at the PNAA conference in Seattle it came up again.

One might expect that the airlines don’t perceive that a bubble is in their future, but instead they see an opportunity to acquire newer and more fuel efficient planes for replacement and growth.  It would be irrational for airlines to order these new aircraft if they perceived a bubble forming.  This is especially true in in Asia, where the demand for air travel appears to be expanding, and their thirst for growth has yet to be quenched.  Yet, the same question comes up again under a slightly different guise – will the industry move quickly to over capacity, particularly with the average seating capacity of aircraft increasing as airlines ignore the smallest models from Airbus

and Boeing.

Let’s take a look at the big picture to get more of a sense of what could be going on.  The following chart orders for aircraft from 1958, from when the jet age began through this year. It’s what we call looking at the very long run, a necessary analytic step to determine cyclical behavior.  When analyzing the chart it becomes quite apparent that certain patterns are evident in both series – orders have similar peaks and valleys to the business cycle, with a small lag in time.   From the year 2000 on, it is quite evident that the global business cycle and the US cycle also exhibit common swings, with aircraft orders following a similar pattern, particularly for single aisle aircraft.