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Asia, Middle East, not only pacing recovery but could lead in single-aisle next gen aircraft

17-Sep-2010
Boeing CEO, W James McNerney Jr
Boeing CEO, W James McNerney Jr

As Asia and the Middle East pace the global airline recovery, the US and European recoveries will be much slower with a very low gradient to their upward trajectory, according to panelists at the Airline Passenger Experience Association conference in Long Beach. In addition, these regions could lead the development of next generation narrowbody aircraft from Airbus and Boeing.

“These downturns are nature’s way of dealing with industry growth,” said Inneva Managing Partner Ian Harrison. “We regularly have these downturns whether it be 9-11, oil, banking and it helps us stem outsized growth.”

The experiences of the four regions helped explain the rosy picture painted on the recovery during Farnborough.

“We have seen throughout the last recession that airframers have remained quite bullish,” said Airbus Head of Aircraft Interiors, Bob Lange. “Sure if you look at the short term there is a lot of pain but we have always said the recovery will be sooner rather than later and both Boeing and Airbus have been accused of being too optimistic. If you look at the trends, what we said has largely come to pass. The question is what is next and the different paces of recovery in the different regions shows us that this recovery is not generic with everyone recovering at the same pace. We now know that is not necessarily so. As the Western markets continue their recovery, the other regions who are more robust have a tremendous potential to grow.”

Boeing's Managing Director of Market Analysis, Jim Billing, agreed. “If you step back and look at where we’ve come since the Spring of 2009, you will see we reached the bottom then,” he said. “Our reading is that statements of continuing economic problems are overrated. We hit bottom in 2009 and the beginning of 2010 but the recovery in the West is on a gentle trajectory. There will be no double dip but a shallow recovery that will take us back to a growth trend. But during that, Asia growth rates are strong as you see in China where it is double digits. So those economies will bring the rest along.”

Lucintel CEO, Sanjay Mazumbar, also weighed in saying that the need for new aircraft is what is driving better times. “The question is what will replace current narrowbodies,” he said, adding that so far there is nothing and suggesting that other regions may set the pace for the next generation of aircraft.

“The main drivers are China and India. Their buying power is there and traffic and fleet are increasing so we, too, are very optimistic about the future.”

Regent Aerospace’s CEO, Tim Garner, added that the growth seen in Asia and the Middle East is more planned out and thought out than what has been seen in the past in the US. “The US is much more reactive than planned,” he said. “In the interiors MRO, we are busy selling new product and rehabilitating interiors and we’ll be doing that for a couple of years which gives the OEMs time to catch up.”

 

Preparing for the Upturn

The conversation during the 'Preparing for the Upturn' session turned to new narrowbody competition. Both Boeing and Airbus reiterated their contention that they expect their duopoly end. Boeing's Billion believes the future is big enough to sustain additional competition. “We predict the market for single aisles to be 20,000 units," he said. "Some 850 are delivered annually and that is in the range of 90 to 200 seats.”

Lange concurred. “We have been built on competition,” he said. “So it would be arrogant for us to suggest that there won’t be other competitors for a vibrant and growing market. How and when we don’t know but what we are seeing is the chemistry at the start of the process rather than the specific form of what we will see at the end game.”

Mazumbar added that his company is seeing that the technology transfer is happening faster than training can keep up for engineers. “The world is changing,” he said. “In the next 10 years there will be more competition, first in the regional jet market and then in the mainline market.”

 

Impending labour shortage

As for the coming pilot shortage, both said they are working diligently in developing markets to ensure that crews are trained. “What we are seeing that with the rapid development of these international markets the shortage will not just be of pilots but in airport infrastructure, maintenance and engineers,” said Billing. “So we work with our customers to develop initiatives so those segments don’t lag and stymie growth.”

Earlier this week, Boeing released its forecast that the aviation industry will require 466,650 pilots and 596,500 maintenance personnel over the next 20 years to accommodate the strong demand for new and replacement aircraft. Part of the company’s crew assessment forecast, Boeing said airlines will need an average of 23,300 new pilots and 30,000 new maintenance personnel per year from 2010 to 2029.

The crew assessment forecast is based on Boeing's Current Market Outlook. "When you add up all the numbers, you quickly understand the issues facing this industry," said Roei Ganzarski, chief customer officer, Boeing Training & Flight Services. "Our challenge is adapting our training to engage the future generation of people who will fly and maintain the more than 30,000 airplanes that will be delivered by 2029."

As the panelists suggested, Boeing said the largest need will be in the Asia-Pacific region which, alone, will require 180,600 pilots and 220,000, maintenance technicians. China will experience the greatest need for pilots and maintenance personnel, 70,600 and 96,400, respectively.

North America will need 97,350 pilots and 137,000 maintenance workers; Europe will need 94,800 pilots and 122,000 maintenance personnel; Africa will need 13,200 pilots and 15,000 maintenance personnel; the Middle East will need 32,700 pilots and 44,500 maintenance personnel; Latin America will need 37,000 pilots and 44,000 maintenance personnel; and the CIS will need 11,000 pilots and 14,000 maintenance personnel.

"To accommodate this growing demand, it will be vital to match training with the learning styles of students to come," Ganzarski said. During the recent Asia Pacific Aviation Training Symposium in Kuala Lumpur, Ganzarski called for changes to current training methodologies. "As an industry, we need to adapt to the learning styles of tomorrow's technologically savvy pilots and mechanics, and ensuring that training is globally accessible, adaptable to individual needs and competency-based."

Business jets, said Mazumbar, will take the longest to recover. However, he cited the fact they are luxury items whereas most business executives would say, far from being a luxury item, they are a solid business tool.

 

Leasing companies re-enter the frame

Billing also noted that, given the state of the economy, leasing companies are becoming more conservative in their purchasing. In addition, capital markets have loosened because they consider aircraft a good investment.

“The leasing market never really evaporated,” said Billing. “In 2009 were were sure we’d have to support purchases and we budgeted nearly US1 billion to that effort but we didn’t have to use it all. Financing is seeing an improved outlook and, in 2011, it will be better still. They are also going back to the more traditional way of evaluating credit risks.”

Lange suggested that there is much less speculation to their purchases as there was in the past. “When they were building their orders there was a mixture of speculation to secure delivery slots but there is less of that now and there is more sale/leaseback on new aircraft at delivery. Four to five years ago, lessors realized their plates were quite full on orders so they turned to the sale/leaseback activity.”

Lange also said that the jury was still out on re-engining vs next generation aircraft. “The study of re-engining is never the same for any two airframes,” he said. “The way we look at it on re-engining the A320 family is that additional opportunities for an improved aircraft will be coming must later so we are leaning now in the direction of re-engining.” This contradicted press reports that Boeing was leaning more toward re-engining while Airbus was leaning toward a new airframe.

“We haven’t reached that decision and it is is a very difficult call for Airbus,” Lange continued. “We are doing a lot of consulting with our customers and lessors as well as the financial communities to make sure we are not changing the aircraft so much that it is notably different from the aircraft we are still building.”

Billing concurred adding it is working closely with the engine suppliers. “But it is ultimately up to the customers to decide what is best going forward,” he concluded. “The 737 does the job it was built to do and the size of our order book points to a good fit for the marketplace they are now in. We haven’t made up our mind either on re-engining and we continue to deliver 31 aircraft per month, moving that up to 35 in the not too distant future.”

Concerns from the audience indicated they were worried about aircraft being pulled out of the dessert, which, coupled with the production increase, could cause another round of over capacity in the market. However, Billing indicated that Boeing was put a lot of thought into that aspect of increasing capacity versus new aircraft. “We track the growth rate, not just of traffic or the forecast but allowing for new business models,” he said. “If you follow what we and the airlines are saying, the goal is to keep the supply and demand in balance. The fact that we made it through the recession without reducing production is a credit to the airlines who are keeping capacity in check.”

Both the audience and panelists indicated they are buying into the suggestion from airlines that we are in a brave new financial world for the airline industry. “We are less likely to see the large, tremendous growth in the future as we’ve had in the past,” said Billing, citing the continuing theme expressed during quarterly result conference calls as well as by airline action. “You never saw any new generation aircraft parked. It was the older, single-aisle and you probably won’t be seeing them come back.”

He also suggested that pulling those aircraft out of the market by new entrants, as has been seen in the past, would probably not happen. Lange indicated Airbus’s decision to increase capacity for the A320 to 40 by 2012 was a testament to where the industry was headed. “We had planned to do it in 2010 but we never cancelled it, just delayed it for a couple of years,” he said, adding that is taking into account all the parked aircraft. “I think it all comes down to better forecasting tools.”

Billing added that as Boeing tracks the low-cost carrier segment, the number of airlines always seems to be going up. “That is not true of the US,” he said. “There are a lot of airlines developing around the world. In the US and Europe legacies accounted for 72% of the market in 1990 and now it is around 58% today. Twenty years from now it will likely be 45%. The developing economies are sparking larger growth so you are going to get start ups in the US and Europe but more of the activity will be in the developing world.”

Concerns were also expressed by the audience about the impact of the so-called Mega Carrier -- the Delta/Northwests, United/Continental and BA/Iberia in addition to all the various carriers operated by Lufthansa. “Their biggest challenge is financing,” said Mazumbar. “The majority of orders are coming fro Asia-Pacific, China and India and a lot of that purchasing is coming from state governments where credit is easily accessible. Their biggest challenge is developing better forecasting tools to enable them to respond to the market quickly.”

Lange cautioned that behind any merger/acquisition activity is generating value for the shareholder and that these mega companies will change things. “One of the challenges is how to deploy aircraft between the various entities such as Air France and KLM, for example, where they have distinct cabins and distinct fittings. I think you’ll see as a consequence of consolidation a real need for greater flexibility of the aircraft platform to enable movement between one entity and another and purchasing for an entire region as airlines are structured independently according to region.”

Regent Aerospace’s Garner interjected that is still remains unclear as to whether these mega carriers are leading or chasing the JetBlues and Ryanairs. “The key is being reactive and reacting to market changes quickly,” he said. “As they get bigger, I don’t see them reacting faster.”


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