:: August 2016 Letter ::
As promised, August’s letter follows last month’s letter, about this summer’s terrifying collapse of world civilization. The world is turning away from globalism, market economy, and liberal democracy, as evidenced by Brexit, the Turkey crackdown, bad behavior by governments in Russia, China, the Mideast, Hungary, Poland, and the Philippines, the Trump candidacy, and the rest of a long and depressing list. As in my last letter, all I can do is figure out how this will affect the aircraft industry. This month, I’ll consider the civil market, the dark cloud around the military market’s silver lining. We’ll see medium and long term effects.
But first, there’s the short-term. This is a mixed story. On the positive side, the doomsayers appear to be proven wrong, at least temporarily. Stock markets haven’t collapsed. Nor have economies or air travel demand. Recent IATA airline traffic numbers are good, even for cargo.
On the negative side, this summer was an inflection point for the jetliner industry. We’ve just had a twelve year super cycle. Airbus and Boeing guidance, until recently anyway, indicates that they expect a 17-year super cycle. For some time now, there’s been a disconnect between our prosperous aviation industry and the rest of the world, which, again, is busily falling apart.
While jetliner book-to-bill ratios stayed well above 1-1, we could ignore the horror in the world. But international yields are under pressure and load factors are falling, and now so is demand. In August Aviation Week reported that Boeing now expects 535 orders this year, compared with its January expectation of 745. Industry-wide book-to-bill this year will be around just 0.7.
The problem is all in the twin aisle market, reflecting international market weakness. Through August, Boeing sold just 38 twin aisle jets this year. And consider the twin aisle market’s recent wild ride. Output increased at a 10.6% CAGR in 2004-2015, with a remarkable 15.7% CAGR in 2010-2015. OEM guidance now indicates a flat year for twin aisle deliveries. We’re expecting that segment to stay flat, thanks largely to global macroeconomic and political developments.
It’s also clear that the international market will see more volatility. Remember when Turkish Airlines was a huge growth story, and Istanbul was going to be a Dubai-like global hub? That was so 2014. Since Brexit, IAG/British Airways has slashed its growth projections, with others following. Lessors might find themselves remarketing aircraft more often than they’d like.
In the medium term, if the drift towards authoritarianism and away from free trade continues, we’ll see more home-grown national aircraft built for domestic customers (who will forced to take them at gunpoint). Tinpot dictators hoping to “make their country great again,” techno-nationalist bureaucrats, and flag-waving mobs all love a jet with a national flag on the tail. The Turkish Regional Jet (TRJ) program will likely benefit from Erdogan’s power grab. China and Russia will double down on national planes. Even Indonesia, decades after that horrible IPTN thing fell apart, is returning to the national aircraft game. Even Canada, with a good government and open borders, has been breaking every trade taboo in the book with the CSeries program. It will likely soon have the distinction of being the only Western aircraft that’s majority owned by government agencies. Et tu, Canada?
As national jets proliferate like off-brand merchandise at the Dollar Store, we’ll see more value destruction, as airlines are pressured to buy local and free trade is impeded. As my friend Keith Hayward wrote in a recent article on the Hawker Siddeley Trident, “The ‘tailoring’ of British airliner designs to the narrow interests of a nationalised airline under pressure to ‘buy British’ was a commercially deadly combination.” Just after he wrote this, at Farnborough, the Istanbul Chamber of Commerce signed a Letter of Intent to buy 10 TRJ328s. If the Washington DC city government starts buying jets, it’s time to finally move to the ‘burbs.
As comic relief here, Britten-Norman, builders of the legendary Islander/Defender series (about 2-4 of them per year, anyway) backed Brexit, a position that certainly makes them unique in the Western aerospace world. Ironically, they contract out Islander fuselages to Romania, and are owned by foreigners, but the company isn’t overburdened with self-awareness. Enjoy: www.britten-norman.com/press-releases/1093-uk-aircraft-manufacturer-supports-brexit/
The forces opposing open societies resemble the proverbial dog chasing the car…they want something, but they might not know what to do if they catch it. In other words, we don’t know what a future of managed trade and government economic interference will bring. This brings up my long-term concern: unless society retains the post-war Western consensus of globalization and trade, civil aircraft demand will suffer. Trump is no fan of free trade, and has implied that he’d even revisit NAFTA. Clinton has abandoned her long support of the Trans-Pacific Partnership. Barack Obama may be the last pro-trade US president for many years. Ominously, in September the WTO reported that world trade growth was falling to just 1.7% this year, the slowest pace since the 2008 financial crisis. The forecast in April was 2.8%.
Jet demand could also fall in line with tourism and travel. A new climate of anti-immigrant sentiment, growing terrorism fears and ethnocentrism, diminished foreign investment, and fewer global trade links is bad news for an industry that’s all about bringing people together. Plummeting hotel occupancy rates in Paris this summer may be a harbinger of things to come.
Despite its flaws (growing inequality etc.), the post-war order ushered in an incredible age of aviation market growth. For years, market analysts would meet and forecast annual growth at 4.9%, 5%, or 5.1%, with few expectations of anything worse. After all, it had been that way since the jet age began. If political and economic trends continue, in 2035 we might remember 2016 as the year growth downshifted. We might come to regard 4% as the New Normal. Or even the New Aspirational.
August Aircraft updates include the F-22, C-130, AW139/189, H125/130, Citation Series, and the World Rotorcraft Overview. Please note: we’re a bit late with these due to a new publication system; my apologies for that. And I hope you had a great month.
Yours, ‘Til The Gathering Darkness Rings The Doorbell,
© Richard Aboulafia 1997-2006, All rights reserved.