Although Airbus and Boeing came off a record year for orders in 2011 and Boeing is expected to have a record year this year as nearly 1,000 commitments for the 737 MAX are converted to orders, there are plenty of worrisome signs across commercial aviation and throughout the world that this year and next could be worse than appears on the surface.Airlines and leasing companies are reporting decent earnings. But there not only is plenty of visible evidence that all is not well, behind the scenes there are plenty of concerns.
The visible signs of emerging trouble:
- Aviation in India is an unmitigated disaster, with Kingfisher, Air India and Jet Airways all experiencing difficulties. Kingfisher is on the verge of collapse and Air India is operating only through the largess of the government. Jet is struggling.
- Carriers in Asia and Australia are struggling. AirAsiaX found that its low-fare, long haul service is unsustainable in European markets. It used Europe’s ETS scheme as an excuse to withdraw, but economics of low-yield service from Asia to Europe as problematic even in the best of circumstances. The fuel pricing environment today hardly falls within that characterization. Australia has seen recent air carrier failures and the financial results from several Asian airlines are poor.
- Europe has seen the collapse of several airlines.
- Ryanair and easyJet, which have depended on aircraft sales of middle-aged aircraft to boost income, now find the market for these aircraft dried up with financing unavailable to potential buyers.
- Fuel prices passed the $100bbl mark again, on the way to $105bbl and even higher. The Middle East’s geopolitical situation appears to be getting worse, particularly with the rhetoric of the US presidential campaign heating up. Some Republican candidates are openly advocating military action against Iran and Israel is threatening to unilaterally bomb Iran’s nuclear facilities. President Obama is trying to walk a fine line between sanctions and being forced into military action. The situation in Syria remains volatile and the situations in Egypt and Libya remain unstable.
- Some lessors are finding increasing numbers of aircraft between leases or soft lease rates. Boeing 757 lease rates are coming under severe pressure as United Airlines prepares to place a major order next month for a replacement. United’s management, dominated by the Continental group following the merger of the two carriers, wants to dump the older, Pratt & Whitney-powered 757s operated by legacy United (Continental’s newer 757s are Rolls-powered). This means leases rates being demanded by United from lessors to keep the airplanes for a few more years are reported to be as low as $90,000 per month.
AirInsight is viewing the next 18 months with growing caution as these and other factors build in frequency across the globe. Cargo traffic remains a leading indicator for passenger airlines, and this was softening in the last few months of 2011. Although we fully expect airplane orders to continue to be strong, we also believe the OEMs will face growing skyline management issues.