Premium #216 – Industry Cycles and Order Bubbles

The significant downturn in aircraft orders over the last two years, punctuated by Airbus meager net of 10 net orders in the first quarter of 2016, appears to be a significant leading indicator of future economic conditions.  This has caused some concern that an increase in narrow-body production rates may be inappropriate at this point in time, even with the record backlog, as risk exists that a number of  orders currently on the books might be cancelled or deferred.

Airbus expects its order volume to be 35% lower in 2016 than 2015, and must ramp up quickly if it is to meet its goal of 700 by selling 690 aircraft in the last three quarters of the year.  At 76 aircraft per month, that’s an aggressive goal, but one they’ve beaten before.  Often it is best to put things in an historical perspective.

The following chart shows orders for Boeing and Airbus

since 1989.  While ups and downs are clearly notable, the overall direction is upward, as the tops and bottoms of each cycle are higher   than their predecessors.  As a result, what would be a down year today would have been a great year a decade or two ago, given industry growth.  The more recent cycles, beginning in 2005, have a much higher amplitude than prior cycles.