Aviation-industry guru Richard Aboulafia, who turned 50 on Friday, insists it’s not a midlife crisis that’s turned him pessimistic about the direction the currently soaring aircraft industry is headed.
However, in his August newsletter to clients he admits to a “feeling of existential dread” as he draws parallels between the eventual downhill slope of his life and what’s ahead for the airplane business.
“For the past ten years we’ve enjoyed a remarkable and unprecedented market expansion. … Remarkably, the best growth years actually came after 2007, despite the world economic disaster,” Aboulafia writes. “The problem with everything being great is that almost everything … can only get worse.”
The longtime Teal Group aviation analyst forecasts that the market for large jetliners, after growing at a stunning average annual rate of 9.7 percent in the past decade, will slump to less than 1 percent annually over the next 10 years.
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And he sees a real threat of a dip in production at Boeing’s Renton assembly plant in 2015 and 2016.
That threat will rise, he writes, if the government succeeds in blocking the merger between American Airlines and US Airways.
American has unfilled orders for 90 of Boeing’s narrowbody, the 737NG — orders that are needed to keep Renton production going at the current high rates until the new 737 MAX comes online, starting in 2017.
“Kill this merger, and many of these orders would likely vanish,” Aboulafia writes. “The odds of a 2015/2016 production downturn would increase.”
The same threat would hit Airbus, which has more than 100 orders from both American and US Airways for its current generation A320.
In an interview, Aboulafia calls the government’s attempt to block the merger as “extremely stupid and poorly thought out.” But given the aggressive stance of the Department of Justice, he rates the deal’s survival chances as no better than 50-50.
“The only rational response to the merger not going ahead is for the two carriers to retrench and shrink rather than to grow,” Aboulafia says.
If the plan falls through to transform American from a bankrupt money-loser into the biggest airline in the world and a safe haven for investment, banks will back out of financing its future jet purchases, he says.
In that case, many of its 737NG orders could melt away, perhaps along with many of its 737 MAX orders.
The latter can be replaced with orders from other airlines, but the 737NG orders are a crucial bridge to MAX production.
Losing them would leave hard-to-fill holes in the manufacturing schedule mid-decade.
Aboulafia says a downturn in narrowbody production would be partly offset by the planned ramp-up in production of the bigger widebody jets, assembled in Everett and in North Charleston, S.C.
On balance that would lead to a “relatively minor market dip” in 2015 and 2016.
Aboulafia’s current Teal Group forecast predicts 131 fewer Boeing jets built in 2017 than in 2015, with the dollar value of Boeing production dropping 11 percent in that period.
Boeing spokesman Marc Birtel said he wouldn’t speculate on the potential impact of a blocked merger.
Beyond that specific issue, Aboulafia’s newsletter, in his typical freewheeling and engaging style, points to long-term negative trends that threaten a broader industry pullback.
The past decade’s uninterrupted boom in the aviation business, even as the rest of the economy suffered a worldwide downturn, resulted from some special circumstances, he argues:.
• Historically low interest rates made it cheap for airlines to borrow money and buy jets.
• Oil prices in a Goldilocks range from $80 to $110 per barrel proved a sweet spot for Boeing and Airbus: Not so high that airlines bleed money, raise fares and drop passengers, yet not so low that they lose the incentive to replace aging gas guzzlers.
• Growth in emerging markets, especially China and India.
• Airline consolidation in the U.S. and Europe created mega-carriers much better positioned to grow.
Aboulafia cites an average annual growth rate of 9.7 percent in the large jetliner market in the past decade.
But in Eeyore fashion, he then ticks off how all of these “aberrant” conditions “are starting to worsen.”
Clearly interest rates have nowhere to go but up and already are rising. That will make jets more expensive.
Oil prices are touching the top of Aboulafia’s cited sweet spot, and turmoil in the Middle East means higher prices seem likely. That could hurt airline profits and slow the broader economic growth that boosts air traffic.
The emerging markets of Brazil, Russia, India and China are all in trouble, Aboulafia writes. “China, the big driver, is hoping for a soft landing. India, the second growth leader, is coping with slumping numbers and a collapsing rupee.”
Finally, the blocking of the American Airlines merger suggests industry consolidation may be coming to an end, certainly here in the U.S.
For the moment, Aboulafia concludes, the airplane market that feeds Boeing and Airbus is “starting to plateau.”
It’s not a bubble that will burst, he insists, but don’t expect the gangbusters aviation growth that has led the industrial economy for a decade.
Make way instead for very modest growth, less than 1 percent a year, with intermittent downturns in production, the first coming up soon.
At 50, Aboulafia counts himself “one of the happier and luckiest people you’ll meet.”
But he adds: “I didn’t say I was an optimist.”
Dominic Gates: 206-464-2963 or firstname.lastname@example.org
Pumpkin-spice cult grabs pricey mugs
The Starbucks merchandise team scored big last week when the company sold 600 crystal-bedecked mugs at $150 a pop in less than two hours.
“It was the merchandise team’s brilliant idea, knowing we have big fanatics out there,” said Peter Dukes, the chain’s director of espresso brand management.
Starbucks used email Tuesday to let some of its best customers know about the mugs, which are embellished with Swarovski crystals. One hundred minutes later, they were gone.
The mugs celebrate the 10th anniversary of Starbucks’ popular pumpkin-spice lattes, which are sold from early September until early January.
Known affectionately as PSL, the lattes are the brainchild of Dukes and others whose job is to develop new drink flavors.
Their research for pumpkin-spice latte included setting up a Thanksgiving-style celebration one spring, then sampling bites of pumpkin pie with espresso poured over them.
Another contender that season was cinnamon-spice latte, which ultimately became cinnamon-dulce latte and is offered year-round “because it’s a little more seasonally agnostic,” Dukes said.
Pumpkin-spice latte officially launches Sept. 3, but customers can get stores to start selling them early by saying “PSL 10” to baristas. After one customer does that, the lattes are available to future customers.
Starbucks’ other flavor this fall is salted-caramel mocha.
It’s in its third year, so just seven more before it can be celebrated with a decadent, non-microwaveable mug.
Melissa Allison: 206-464-3312 or email@example.com
Comments? Rami Grunbaum: 206-464-8541 or firstname.lastname@example.org.