Tuesday, September 23, 2014

Boom in Jetliners May Be Stalling: Industry Observers Fear That Demand for New Planes Has Peaked

The Wall Street Journal
By Robert Wall

Sept. 23, 2014 12:19 p.m. ET


 

ISTANBUL—A period of record demand for Airbus Group NV and Boeing Co. jetliners may be nearing an end amid concerns in the aviation industry that the market has run out of growth.

"We are at the top of the market" with aircraft lease rates and available financing as high as they may go, said Philip Scruggs, president and chief commercial officer for AerCap Holdings, one of the world's largest lessors of jetliners. The market could remain at that level for another year or more though it is at risk to external shocks, he said at the ISTAT Europe conference here.

Peter Barrett, Chief Executive of plane lessor SMBC Aviation, said the market hasn't peaked—yet—though it may in six to 24 months.

Airbus and Boeing Co. have bulging order books that stretch out for years, banks are providing ample liquidity to finance planes and airlines are making money. For an industry used to boom-and-bust cycles, there is a growing sense the situation can't last.

"We should be concerned," Christian McCormick, global head of aviation finance at Natixis.  Outside events could hurt an industry that has seen a large inflow of money, and airlines and leasing companies placing orders that may be duplicative, he said.

Mr. Scruggs said political turmoil in the Middle East and tensions between Russia and the west could disrupt prospects.

A turning point also may come if central banks that have kept interest rates low to spur economic growth reverse policies. Low rates have triggered an influx of money into the market to finance planes as investors seek returns for renting out aircraft that surpass other investments.

"The fact we've enjoyed the low-interest-rate environment has been a tremendous boost for all of us," Steven Udvar-Házy, chief executive of Air Lease Corp., said at the event. If interest rates change rapidly "then we have to put on our seat belts," he said.

Investors have already become spooked by the high number of order cancellations at Airbus. The European plane maker has suffered 279 cancellations in the first eight months of the year. Airbus officials have said the situation is an aberration resulting from airlines ending deals for current A320 jets that will be replaced by orders for the upgraded A320neo jet due for delivery from next year.

Airbus is urging caution about production rate increases on the single-aisle said. John Leahy, the chief operating officer for customers at Airbus who is typically bullish on market prospects, said the company will weigh carefully whether to boost output to 50 or more A320s a month. The company builds 42 of the jets each month and will increase this to 46 in two years.

Mr. Leahy voiced concern as Boeing executives suggest the U.S. plane maker may raise output to more than 50 narrow-bodies. He charged his rival in the large commercial jetliner duopoly of moving prematurely before orders are booked. Boeing rejects the charge.

An industry expert said outside investors are putting money into the market for aircraft and engines at prices that are inflated.

While airlines are making money, profit margins are razor thin. Carriers will only make $5.42 profit per passenger, or a 2.4% after-tax profit margin, said Andrew Matters, senior economist at the International Air Transport Association. Without ancillary revenue for the likes of checked bags or onboard food, airlines would be returning a "significant loss," he said.

For now, nobody is ready to back off on growth plans based on anecdotal indicators the aerospace industry is headed for a downturn.

"We see a market that is good and getting better," said Randy Tinseth, vice president for marking at Boeing Commercial Airplanes. Lease rates are moving up, a sign of strong demand, and prices for secondhand airplanes also are strengthening, he said.

Even Mr. Leahy said Airbus has the orders to boost output of single-aisle jets. The plane make is studying production rates of 50 single-aisle jets a month and has asked suppliers to look at even higher output.

- Source:   http://online.wsj.com

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