Arguably ILFC's CEO, Steven Udvar-Hazy, has a reason to talk down likely aircraft production by Airbus and Boeing in 2009. ILFC is the largest aircraft leasing company and is currently for sale, with the next round of bids due later this month. Any reduction in supply will be good for the leasing company, especially as aircraft values continue to fall. Fewer aircraft should help keep prices high.
But the ILFC CEO is also one of the best informed and most experienced specialists in this market and in a position to have a pretty good idea of which way is up. As head of a leasing business which is reputedly worth around USD8 billion, he also has a certain degree of power to move the market.
So, when Mr Udvar-Hazy reportedly suggested last week that the two major manufacturers would scale back production by 30-35% in the next 18 months, as cancellations percolate through the industry, he must be taken seriously.
Many of the exuberant airlines (and some leasing companies) excitedly buying aircraft near the top of the market over the past two years are now regretting their profligacy.
Cancellations will inevitably accelerate in this environment. Last month, both Airbus and Boeing reported that cancellations outnumbered new orders, probably for the first time ever (the good news was that there were at least some new orders). And the dividing line between what is a cancellation or a deferral will become very blurred as time passes.
In Jan-09 there were 12 Airbus cancellations, all of the single aisle family of A318, -319 and -320s, looking somewhat better than Boeing's 31 renegs, all of them on B787s, the Dreamliner which is still to fly. Boeing at the same time had 18 orders, all for B737s, of which 13 were from Ryanair and the other 5 from Southwest. Airbus meanwhile had four orders for A321s, all from Turkish Airlines.
Airlines which ordered the B787 have probably got an easier out, as Boeing has not delivered on its schedule for production. As a result, in many cases substantial delay-related penalties can be payable by the manufacturer - so cancellation fees will be reduced or may even be entirely waived, if the purchaser now has a change of mind. There may therefore be more to come as credit committees continue to make life difficult for anyone wishing to make capital investments.
Aircraft cancellations are nothing new. Even last year for example, when things were still holding up, 131 Airbus orders were cancelled, over half of which were for A319s. In good times, a cancellation can be replaced by orders for other types. But in good times there is a larger balance on the other side of the order ledger. That is not the case at present.
ILFC itself has a substantial order book in addition to around USD50 billion worth of aircraft which it currently has placed with operators under lease. More than half of its orders are for B787s, and Mr Udvar-Hazy has expressed his frustration with the aircraft's delays on more than one occasion.
ILFC orders with major manufacturers at 6-Feb-09
Total on Order
Meanwhile, even as the leasing company is being sold (as part of the US government-driven liquidation of units of AIG, the massive insurer and conglomerate which was bailed out by the Bush administration), Udvar-Hazy is talking about buying.
Showing a clearly counter-cyclical attitude, he prefers to buy when others are selling - and especially in a year when he predicts that cancellations will outnumber orders for Boeing and Airbus "by far".
But in future he may not be calling the shots in the same way as he has in the past. Several sovereign wealth funds are reportedly (also counter-cyclically) in the running to buy ILFC and their risk management profiles may not match Mr Udvar-Hazy's. The aircraft market is slowing almost as fast as the economy overall and values are unlikely to rise in the next 12 months. Buying now is undoubtedly a risk, as we enter a possibly lengthy negative period of unknown intensity.
Meanwhile whether Airbus and Boeing will act cyclically and actually scale back production of their various types is unclear.
Each of them had considerable delivery backlogs as they entered 2009 and in theory at least they would have no shortage of orders to fill if existing schedules were maintained. They will be reluctant to reduce skilled workforces (and Boeing recently went through a painful strike over salary levels - and off-shoring of production), or to forego the revenue from sales, unless they have to.
Whatever happens, aircraft values are likely to continue to fall, with increasingly serious implications for most existing airlines and lessors - and manufacturers.
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