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:: July 2000 Newsletter ::

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Dear Fellow Bemused Press Release Readers,

The civil aircraft business could not be better. Production lines are going full speed, backlogs are fat, investor confidence is slowly but surely returning to the industry, and everyone is praising the longevity and durability of this boom cycle. Best of all, the orders are still rolling in, with headlines like ďFarnborough Sales Bonanza Shows Industry Confidence,Ē and press releases touting huge new deals.

Well, I hate to throw cold water on these proceedings, but, then again, thatís my job. Sure, times are good, and they are a lot longer-lasting than seen in the past. And yes, the Asian crisis has engineered a counter-cyclical effect, with the prospect of further growth in that part of the world just as (or if) the Western economies turn down. But Iím a bit worried about these so-called orders.

Very simply, there are very few orders from people who actually fly planes. Take the Farnborough orders, for instance. If you remove the A3XX pseudo-orders, youíre left with an admittedly impressive $27 billion in big jetliner deals, give or take a few billion. But look a little closer. Something like 80% of this was for GECAS, ILFC, CIT, SALE, and other alphabet soup organizations that lease aircraft. And this was on top of recent lessor ordersóthese comprised about one-third of this yearís pre-Farnborough sales.

Itís not just jetliners. The fractional ownership folks now have an unverifiable (but no doubt large) percentage of many business jet programs. Raytheonís Horizon, for example, has a 150-plane order book; over half of these are for Travel Air or Executive Jet. The latter company has ordered 90 Gulfstreams, with deliveries stretching through 2008.

Fractional operators do a great job of growing the business jet market. But what about the jetliner guys? If they are placing proxy orders for airlines that donít want to commit themselves to big capital spending programs, thatís fine. If they think the market will grow faster than airline ordering plans allow for, thatís risky, but okay too. But what if they see a great opportunity? Their orders put them in a good place in the event that the market needs the aircraft. If it works out, great. And if the market turns down, the lessors can defer or even cancel the planes, at no real cost. The manufacturers go along with this, sacrificing long-term stability for short-term market share gain (or parity). The manufacturers also get to issue some good-news press releases.

So whatís the bottom line? Thereís risk here. In both the business jet and jetliner segments, market power is being concentrated on the side of the buyer, at the expense of the seller. This will hurt margins, and long-term security, at the seller. And donít regard all of these orders as being firmer than Jell-O.

And this trend will spread further still. The new regional jets, hobbled by less-than-promising pilot union negotiations, are being rescued by GECAS. Showing that it loves all of its children, GECAS has picked up 150 orders for the new Bombardier, Fairchild Dornier, and Embraer jets. Of course, the GECAS orders certainly beat the alternative of a non-order orderóalso at Farnborough, Alliance Aircraft, a paper airplane manufacturer, scored a mammoth order from Global Airlines, a paper airline. The regional market has already been hobbled by dismal margins and too much manufacturer exposure to lease and finance risk. Will it get even worse?

Anyway, times are still good, and Iím merely provoking some debate. Back to my day job. This supplement includes Regional and Helicopter market overview updates, the latter updated yet again to reflect the news that the Turks have gone with the AH-1Z and that the Agusta-Westland merger has finally been consummated. There are numerous bizjet updates, plus a 747 update with the latest on new model proposals from Boeing.

Next month, Iíll update the BAE 146/RJ/RJX, AH-1, F-117, A318/319/320/321, and numerous others. Call with requests. And I hope your summer is as humidity-free as possible.

Yours, Ďtil Teal Starts A Fractional Consulting Business,

Richard Aboulafia
 

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