Global Economics

When Will Aviation Bounce Back?


Boeing has barely budged its 20-year forecast for aircraft sales. But with airlines expected to lose $9 billion this year, new orders are a long way off

It sounds like something of a pipedream. Randy Tinseth, marketing manager at Boeing (BA) forecasts that despite the plethora of current problems: "We will see our industry grow," he says at the end of the telephone conference call. Aviation remains "a highly valued and integral part of the social and economic fabric of the world," he says.

And, when one looks 20 years down the line, the situation indeed doesn't sound all that dismal—at least not when looking at the annual Boeing forecasts for the next two decades. The company said on Thursday that around 29,000 new airplanes will be needed by 2028. Prior to this year's prognostication, Boeing had forecast new orders of 29,400. The company put the value of the ordered machines at $3.2 trillion, in line with last year's figure.

But right now the economic situation of the sector is gloomy. As of Monday 2,000 company representatives from across the globe will gather in Le Bourget for the traditional aviation trade fair. Under normal circumstances, the event would have a celebratory atmosphere, with the trade fair marking its 100 year anniversary and Airbus (EAD.PA) celebrating its 40th birthday. But in the light of current problems, the mood will be far from upbeat.

Indeed, the aviation industry is in the throes of its darkest crisis yet. "The earth is trembling, our industry is shattered," explained the head of the International Air Transport Association (IATA), Giovanni Bisignani, speaking at the organization's annual meeting. His group, which represents 230 airlines, expects the industry to suffer an overall loss of $9 billion in 2009. As recently as March, Bisignani had spoken of a $4.7 billion loss. "Some 100,000 jobs are in danger if the economy doesn't improve," warned IATA's head economist Brian Pearce. "Our industry is fighting for survival," Bisignani said. "I don't see any reason for optimism right now."

And even when the picture improves, there is still uncertainty about the longer-term consequences of the crisis. According to IATA it took the sector three years to recover from the impact of the Sept. 11, 2001 terror attacks. Back then sales fell by 7 percent. Now they are down 15 percent.

Superjumbo-Sized Problems

The slump in passengers and freight suffered by airlines is hitting manufacturers hard. Airbus, in particular, is under pressure, with its prestige A380 superjumbos suffering from the crisis. There is concern that the difficulties will be long term.

Steven Udvar-Hazy who heads International Lease Finance Corp (ILFC) has already considered canceling its order of 10 planes. The airlines have changed their attitudes on the Airbus A380, said Hazy. Many of them now feel that using such large aircraft is too financially risky.

It is a hard knock for Airbus. The ILFC is the most important single customer for both the Europeans and Boeing. Plus, Hazy is regarded as something of a branch guru. Several A380 customers have already said they want to delay the delivery dates of new planes. At the beginning of May, Airbus, once again, cut the number of A380 planes it plans to make this year, to 14, four fewer than originally planned.

Even worse, Airbus is also beset with problems with its A400M military transport aircraft. The program is already three years behind schedule. But German Chancellor Angela Merkel and French President Nicolas Sarkozy now want to extend the deadline, which would give Airbus another six months to hammer out new contract conditions with its customers.

But managers at its US rival Boeing also have little reason for optimism at the moment. In the first quarter, its profits slumped 50 percent to $610 million, prompting the company to shrink its profit forecast for the year as a whole. Instead of earnings of $5.35 per share, it now expects between $4.70 and $5.

The company also announced that next year it plans to build five rather than an originally envisioned seven 777 aircraft. A planned increase in production of the 747-8 and the 767 planes is also being postponed.

Credit Running Dry

Boeing and Airbus' order books are still full, meaning that production seems secure in coming years. But with credit markets running dry, hard hit airlines may now find it hard to finance their planned purchases, experts warn.

The ILFC is also in a scrape. It remains profitable—but the leasing business is dependent on access to capital. And the company belongs to the ailing insurance giant AIG. The rating of ILFC has been continually lowered, in step with the rating for its parent company, which in the meantime has been nationalized. Therefore credit is ever more difficult to get hold of. Indeed, a complete collapse of ILFC is a distinct possibility. The sector is hoping that the sale of ILFC will soon go ahead, as announced by AIG. Hazy recently spoke of an imminent agreement with a consortium of finance investors.

As such, it is hardly a surprise that Airbus has only locked up a 10th of its planned orders for this year. And Boeing at the beginning of May had no new orders for the year following a rash of cancellations. Some 25 orders have been cancelled for the new Boeing long-distance jet 787 Dreamliner alone.

When speaking of company's hope bearer, the Dreamliner aircraft, marketing manager Tinseth says that more than 800 of them have been ordered and that the plane should help airlines turn a profit in new markets. Meanwhile, Boeing is making "great steps forward" in preparing for the aircraft's debut fligght, which after much delay, should take place at the end of June.

The aviation business is a cyclical business, Tinseth says, by way of comfort. In the long term the market will stabilize. On average, annual passenger figures are predicted to rise by 4.9 percent until 2028, he explained. While in the freight business an increase of 5.4 percent is forecast. But on the crux issue of when the turning point will come, Tinseth remains silent.

Provided by Spiegel Online—Read the latest from Europe's largest newsmagazine

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