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Aircraft manufacturers embrace the consumer society's values of built-in obsolescence

Anyone with the very modern dependence on mobile phones, tablets, laptops and other consumer electronics products will know how difficult it is to resist buying the latest version every few years. Not only does the most up to date gadget appear to have more functionality, but it is often the only serious alternative when the older version reaches the seemingly deliberately programmed end of its useful life.

Manufacturers of commercial jet aircraft appear to have developed some of this approach to persuading airlines to order new aeroplanes. The industry remains cyclical, and the pattern of orders cannot escape the ebb and flow of airline profitability.

However, Airbus and Boeing (and, to a lesser extent, Bombardier and Embraer) are using the coincidence of a looming glut of retirement age aircraft and a large number of new technology aircraft programmes to provide a buffer between themselves and any possible demand volatility.

Commercial jet deliveries have been rising, but remain below historical peaks as a percentage of total fleet

The number of commercial jet aircraft delivered has risen in every year bar one of the past 12 years (falling only in 2010). The number increased by 80% from 2004 to 2016.

However, the number of deliveries as a percentage of the year end fleet total has remained relatively low by historical standards when compared with peak years. It increased from 4.9% in 2004 to 5.9% in 2016, but deliveries have risen as high as 8% of the fleet in past cycles.

Commercial jet aircraft deliveries: 1970 to 2016

Deliveries lag the orders cycle

In the final three decades of the 20th century aircraft deliveries followed the cycle of orders but with a one or two year delay, and at a lower rate. The delay was the result of manufacturing lead times and the lower rate of deliveries, compared with orders reflecting manufacturing capacity limits, and led to a rising order backlog.

Orders still drive deliveries, as is self-evident, but the high backlog has led to a smoothing of the deliveries cycle when expressed as a percentage of the fleet.

Commercial jet aircraft orders and deliveries as a percentage of year end fleet: 1970 to 2016

Airline profitability is the main driver of aircraft orders

The factors that drive the orders cycle are complex, but the most important driver is airline profitability. As a percentage of the fleet, aircraft orders are typically highest when airline operating profit margins are at their peak (or just after the margin peak). Orders are typically at their lowest levels a year or two after airline margins are at the bottom of their cycle.

This suggests that manufacturers can expect the highest level of deliveries (i.e. completed sales) a year or two after the peak of the airline profit cycle.

The airline profit cycle is broadly driven by world GDP growth, but factors such as the supply/demand balance and oil prices also affect margins. The smoother pattern of aircraft deliveries this century illustrates improved capacity discipline in the airline industry.

Moreover, demand (defined by RPK growth) has continued at higher rates for a given level of GDP growth than in previous cycles. Traffic growth has received support from the expansion of faster growing emerging markets and the price simulation effect of LCCs.

World airline industry operating margin and commercial jet aircraft orders as a percentage of year end fleet: 1970 to 2016

Nevertheless, the longer term outlook for manufacturers' deliveries remains linked to airline profitability, and this has reached new historic peak levels. Macroeconomic and geopolitical risks could lead to a downturn, or at least an easing back of the cycle.

The manufacturers will take some comfort from two other factors that should support the outlook for aircraft orders for some years into the future – one the result of historical good fortune, and the other a more deliberate strategic action.

The number of aircraft reaching 25 years will rise

The first of these factors is that the number of commercial jet aircraft that will reach 25 years old is set to rise to a peak in 2026. According to data from Airline Monitor there will be 523 aircraft reaching 25 years old in 2017, but this will rise to 1,127 aircraft in 2026.

It will then fall modestly to 878 in 2029, before rising again to reach 1,628 in 2041 (note that these figures assume no retirements of aircraft before reaching 25 years old).

Number of all commercial jet aircraft reaching 25 years old: 2017-2041

There is no law of science that rules that aircraft must be retired at 25 years old, but this remains a rule of thumb.

At the end of 2016, 38% of the aircraft that had been delivered in 1991 (25 years earlier) had been retired. For aircraft delivered in 1989 (28 years old), 50% had been retired by the end of 2016.

Number of commercial jet aircraft delivered and still in service at end 2016, by year of delivery

There is some evidence to suggest that retirement ages are coming down, although this is likely to be influenced by oil prices. The 2026 peak of 25 year old aircraft will be a 2021 peak of 20 year old aircraft.

Whatever the precise age at which aircraft will be retired, there is set to be an increase in age-driven retirements in the coming decade. Manufacturing lead times, and the large backlog – which makes it difficult to secure delivery positions within normal lead times – mean that airlines will need to place orders for replacement aircraft in the next few years.

Airbus and Boeing both have a large number of new aircraft programmes

The second factor that is likely to support the outlook for aircraft orders (and, therefore, deliveries) is the number of new aircraft programmes in recent years.

Both Airbus and Boeing have significant programmes covering both single aisle and twin aisle markets.

Airbus and Boeing new narrowbody aircraft programmes

Airbus has the A320neo programme, the A330 neo programme and the A350 programme.

The first A320 neo deliveries were made in 2016, with the A321neo entering service in 2017 and the A319neo expected in 2018.

The A330neo programme comprises the A330-900, expected to enter service in 2018 and the A330-800, expected in 2019.

The A350 originally had three variants, the first of which, the A350-900, entered service in 2014, while the A350-1000 is due in 2017. The A350-800 has been cancelled, and Airbus is seeking to switch the only eight orders received (from Asiana) into other widebody aircraft types.

Airbus and Boeing widebody aircraft product range

Boeing has the 737 MAX, the 787 and the 777x programmes.

Under the 737 MAX programme, the first delivery of the 737-8 was made to Malindo Air in May-2017, and the 737-9 is due to enter service in 2018. The 737-7 and the 737-8-200 are due in 2019. Boeing is looking to add a larger MAX-10 variant in 2020.

Boeing's 787 already has the 787-8 (in service since 2011) and the 787-9 (since 2014) and will add the 787-10 programme (expected to enter service in 2018).

Boeing's popular 777 is being extended with the 777X programme, consisting of two variants, with entry into service in 2020 for the 777-9 and probably 2022 for the 777-8.

Boeing commercial aircraft programmes

 

New programmes help to stimulate aircraft demand

New aircraft programmes have often had a stimulating impact on orders in the commercial jet market. This is illustrated in the chart below, which shows the cycle of aircraft orders as a percentage of year end fleet from 1970 to 2016, and the years in which the first orders were received for selected new aircraft programmes by Airbus and Boeing.

This measure reached double figures seven times in the decade from 2005, including two successive years of new highs at 14% in 2013 and 2014. This compares with only four years when orders as a percentage of fleet reached double figures in the three and a half decades prior to 2005.

Aircraft orders as a percentage of the year end fleet and first orders for selected major aircraft programmes: 1970-2016

In addition to the large number of new aircraft programmes recently developed and currently in development by Airbus and Boeing, there are also new programmes from the leading regional jet manufacturers – for example, the Bombardier C Series, the Embraer E2 and the Comac C919.

Interest in these new aircraft was certainly raised when oil prices were over USD120, and lower fuel prices may modestly have reduced the intensity of interest. However, airlines typically take a long term view when making aircraft purchase decisions, and none would rule out oil prices rising once more.

Airframers have created obsolescence

There may well be a greater level of capacity and capital discipline in the airline industry than in the past, but new aircraft programmes should help to maintain demand for aircraft orders. Moreover, the coinciding of new programmes with an increase in the number of aircraft reaching retirement age may not be a coincidence.

The high backlog and limits to manufacturing production capacity, while rising, should continue to provide a buffer between demand for aircraft and the risk of sudden excess supply. Aircraft producers cannot wholly insulate themselves from an airline downturn, but these factors also serve as a buffer between them and any slump in demand.

Ironically, each successive generation of new aircraft is better equipped than the previous one to live beyond the traditional 25 year economic lifespan. This means that airframers have to find other ways to nudge airlines to replace their ageing equipment.

It may be more subtle, and the time frames are certainly much longer than in the consumer electronics sector, but aircraft manufacturers have also developed some of the skills to stimulate demand for their products through built-in obsolescence.

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