In the last few years, aircraft OEMs have built up record backlogs, particularly for re-engined narrow-body aircraft. With record order levels over the last few years, the big OEMs are planning production increases to meet the strong demand.
But if we take a look at the long-term industry trends, we now appear to be in the beginning of a cyclical correction, and the next down cycle is already here. The only question is how deep the correction will be, and how long it will last. Our view is that 2016 and 2017 will not be stellar years for aircraft orders, as the high demand for new technology narrow-body aircraft has been to a great degree satisfied.
The following chart shows orders and deliveries from 2000-2015, which we have estimated by proportionally extending the first seven months through year end. Given the trend, even this estimate may be high, as Paris or Farnborough air show orders are typically the peak in any given year.
What we can clearly see is that the drop in orders in 2015 is following patterns for similar recessionary periods in the industry. The good news for the supply chain is that backlog is quite strong, and deliveries should continue unabated. The bad news is that OEMs that have been talking about increasing capacity to 55-60 narrow-body aircraft per month may be gearing up for a market demand that may not be as robust as forecast.
Another way to look at the data is to examine the ratio of orders to deliveries. This chart effectively illustrates the future outlook for the industry, as a ratio over one indicates that backlog is building, while a ratio below one means backlogs are shrinking.
The data indicate that we are close to eating into backlog in 2015, and if past is prologue, 2016 will likely be a down year for the industry. The question is whether it will expand into 2017 or beyond.
There are several underlying factors that could influence the outcome. In China, flight delays are occurring because the infrastructure is constrained. While China has a massive infrastructure improvement program underway for airports and ATC, these changes will not occur overnight. Will this result in a slowdown in the world’s fastest growing market?
Economic conditions remain somewhat stagnant globally, with the West enduring slower than historic GDP growth rates, and the emerging economies seeing their growth slow as well. It appears we are headed for an economic correction. To what degree will this impact the industry? It is difficult to tell.
But historically, when we’ve seen drops to the 1.0 range in book to build ratios, the next year tends to go further south. We’re not expecting a strong 2016 for the industry, and that the record backlogs will begin to shrink further in 2016.