Aerospace & Defense

Commercial Airline industry to face headwinds before recovery

According to IATA, any potential recovery, particularly in the passenger airlines segment, faces severe headwinds from consumer indebtedness and high business inventories, indicating revenue weakness persisting well into 2010. Recently, the head of Boeing's commercial airplanes division, Scott Carson, hinted that growth might return to the industry by mid-2010, but not without a question mark over the scope and shape of the recovery. Major challenges would come in the form of a recovery in crude prices, continued slackness in travel demand and of course the drying up of the sources of finance.

With fuel prices on the rise, airlines’ attempt to reduce internal costs is likely to hit a roadblock. This, industry associations predict, may result in the airlines incurring significant net losses to the tune of $9 billion in 2009, before staging any recovery sometime next year.

On the demand front, recent announcements by major carriers on capacity reduction is indicative of a substantial drop in travel demand due to recession. In fact, industry experts suggest further reduction in the number of seats available for sale to bolster fares and compensate for rising oil prices and weak demand. It is therefore predicted that fourth-quarter capacity would be cut by around 12%-15% over the last year, as the cut in the number of seats over the last 12 months has not matched the decline in demand.

To top it all, the sources of finance (tapped to lease or procure aircraft) has long been dried up due to the disruptions in the global financial markets. All the key sources of finance (debt markets, investment banks and aircraft leasing companies) are facing financial strain.

The good part is that aircraft manufacturers in the U.S. are showing willingness to make adjustments – by reducing capacities, keeping tight control on costs and spending, and reassessing their staffing needs. Boeing, while expecting recovery in the long run, has cut its global outlook for aircraft demand, now estimating 29,000 new plane orders in the next 20 years, against 29,400 estimated a year ago. Airbus is set to cut back its output of single-aisle airplanes to 34 from 36 after shelving plans to raise production to 40. The company has also frozen plans to increase the A330/A340 production line from 8.5 units to 10 per month. The business jet market has seen reduced travel volumes and higher inventories of used aircraft. Cessna, Embraer and Hawker have announced large downward adjustments in production. More and more carriers are seeking to defer or cancel deliveries of previously ordered aircraft. During the first five months of 2009, Airbus received only 11 net new orders, net of cancellations, while Boeing recorded zero net new orders until April. That said, Boeing’s announcement of a delay in the first test flight of its 787 Dreamliner (due to a structural flaw and not supply-chain or labor problems) may not go well with prospective clients. Customers who had placed Dreamliner orders were disappointed and experts wondered if cancellations might follow. Such a turn of events could take a toll on the company, already hit by the global slowdown.

A rare bright spot amid all round gloom is the buoyancy of Maintenance, Repair and Overhaul (MRO) operators, a sub-sector of the A&D industry. These players are expected to receive a boost from the current trend of low acquisition of new aircraft globally. Extended usage of old aircraft provides for steady revenue stream for these players, in the form of replacement or repair work for damaged components, avionics, engines, etc. of aircraft, rotorcraft or land vehicles.

"It feels to me as if we may have reached a bottom both in terms of air freight but perhaps even more importantly in terms of global air traffic," Boeing Commercial Airplanes President and Chief Executive Officer, Scott Carson said.

"It is safe to say that the aviation community is still (in) some shock," Airbus Chief Executive Tom Enders told a briefing ahead of the Paris air show.

The world's No. 2 planemaker, Boeing, announced that it would delay the first test flight of its 787 Dreamliner due to a structural flaw and not from supply-chain or labor problems. Customers with Dreamliner orders were disappointed by the latest delay. And experts wondered if cancellations might follow. Such a turn of events could take a toll on the company, which already has suffered in the global slowdown.