The wide-body jet is not the only thing flying high-so is the market for commercial jets. But is there a bubble forming?
Boeing Corp. made a splash this week with the delivery of its first 787 Dreamliner to All Nippon Airways, a moment eight years in the making. Delay after delay plagued the development of the all-composite, twin-aisle jet. Although the delivery of the first aircraft in the program represents an important milestone, now the hard work begins, says Richard Aboulafia, vice president of analysis at the Teal Group (Fairfax, VA). “They’re trying to get to production up and running and start making money instead of losing money on each one they build,” he says. “We’re talking enormous challenges that kind of put [Monday] into the middle of a shadow.”
Meanwhile, Airbus has completed the wing lower cover for its competing product, the A350 XWB. If all goes well, the wide-body should enter service in 2013. The two companies have been trading off bragging rights as market leader since 2004. Aboulafia predicts that 787 revenues will buoy Boeing to a market share of 60%. Meanwhile, the company plans to increase its output of both 777s and 767s. The latter seems somewhat perplexing, given that the 767 is almost identical in size to the 787, which offers significant advantages in fuel economy, but the 767 maintains important non-passenger market share in the cargo segment and as refueling planes for the U.S. Air Force.
Boeing's increases are only one element of the bright future predicted for the commercial jetliner industry. Over the next decade, airlines worldwide should purchase 11,358 jetliners with an aggregate value of $857.4 billion, says Aboulafia. In particular, the market should see growth through 2013, dropping slightly in 2014/2015 before beginning to climb again in 2016. His view corroborates the rosy picture from the 20-year market forecast recently released by Airbus.
Improbably, the commercial-jet sector actually logged growth during the 2008/2009 recession, in part buoyed by new purchases driven by skyrocketing fuel costs. Emerging markets, particularly India and China, constitute a significant portion of the market this time around. There are other, more nuanced, forces at work, though. More and more government money is getting involved in jetliner finance, as well as private-sector financing. “We've gone from the model where airlines finance their own jets to a model where more and more third parties are investing in jets and the financing of them,” Aboulafia notes. “That’s a good and bad thing. In the last 10 years it has created a speculative bubble that we’ve all been concerned about.”
Given that some of those third parties are banks busily financing aircraft with price tags of several hundred million dollars apiece, it's a valid concern. There's a joke in the industry that if an airline makes money, it orders aircraft and if the airline continues making money, it actually takes delivery. At present, it's unclear whether the current economic uncertainty will materialize as second downturn, but if it does, and it exposes the industry to a more typical softening in air travel market, we could be witnessing the bursting of a bubble that might make housing foreclosures look like small change.
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