The commercial-aviation industry is on a 13-year upward trajectory that’s brought thousands of jobs to the Pacific Northwest, but at a conference of major airplane buyers this week there’s some worry that it may soon turn back toward Earth.
PHOENIX — The commercial-aviation industry is on a 13-year upward trajectory that’s brought thousands of jobs to the Pacific Northwest, but at a conference of major airplane buyers this week some attendees worried that it may soon turn back toward earth.
The chief executives of the world’s leading jet-leasing companies — key suppliers of planes to the airlines — on Tuesday offered their reassurances that the boom continues.
With high demand for airplanes and ample financing available, they insisted the aviation business can weather whatever downturn or economic disruption the world may throw its way, whether it’s airlines collapsing, chaos in the Middle East or economic weakness in Europe.
“Virtually all the fundamentals were very strong in 2014 going into ’15,” said Steven Udvar-Hazy, chief executive of Air Lease Corp. and a recognized industry guru. “All the stars are sort of aligned, in spite of all the instability and geopolitical challenges we face.”
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Both Airbus and Boeing representatives at the conference also dismissed the notion that years of record orders have inflated a bubble that may one day pop. They pointed to their swollen order books — each has firm orders for around 6,000 airplanes still to deliver.
But in an interview at the conference, longtime aviation analyst Adam Pilarski of the consulting firm Avitas said “The potential for the bubble bursting is much bigger than we’ve had in a long time.”
Pilarski predicted some of Boeing’s order backlog will melt away so that it will eventually have to cut production.
He is skeptical of Boeing’s announced plan to accelerate production of its single-aisle 737 jets to 52 per month by 2018 and maybe more beyond that.
“They are not doing it yet. They are talking about it,” Pilarski said. “I think before they are honestly committed, the bubble may burst.”
Aengus Kelly, chief executive of AerCap, the world’s largest aircraft lessor, doesn’t see a bubble, but he agrees that Boeing’s proposed ramp-up may never reach the advertised heights.
“What actually happens in reality could be very different,” Kelly said. “If the market is there for the 60 (airplanes a month) they’ll certainly produce it. If it’s not, they won’t.”
The 1,700 people attending the annual U.S. conference of the International Society of Transport Aircraft Trading (ISTAT) in Phoenix are the airline executives and aircraft lessors who buy, sell and lease jets, and the bankers who finance such multibillion-dollar deals.
The conference has swelled as many new investors have moved into financing airplanes.
Jeff Knittel, chief executive of airplane lessor CIT, said “The financial markets have again awoken to aviation,” which can deliver returns of 6 or 7 percent to investors.
As a result, “Lots of clients are walking in the door to Airbus and Boeing who want to sign contracts,” Knittel said in an interview.
While all of aviation must be prepared for unexpected negative events, Knittel said he hasn’t seen much “over-aggressive risk taking” and isn’t worried about a “big precipitous drop” in the market.
But Pilarski fears a pileup of negative events. He cites falling oil prices as a factor that can trigger geopolitical instability, such as the tension in the Middle East and Russia.
Adding to that, he’s concerned about over-ordering of jets in recent years, deflation in Europe and slowing growth in China — making conditions ripe for a potential downturn in aviation, he said.
If it comes, he believes the newest crop of inexperienced aviation investors may panic and offload their airplanes.
“Bubbles are irrational developments. They go up irrationally and they go down irrationally,” said Pilarski. “If things turn down, you don’t want to be the last guy standing with stuff you can’t sell.”
Speaking on the sidelines, others shared Pilarski’s outlook.
A senior banker who has worked for decades on financing of airplanes looked around at the huge crowd at Sunday night’s reception and said it reminded him of a heady conference he attended in the last days of the dot-com boom.
Then, said the banker, who didn’t want to be named for fear of alienating his clients, new investors clamored for a piece of the high-tech sector’s action just a year before it crashed.
Yet Boeing and Airbus remained determinedly buoyant at ISTAT.
“Bubble, what bubble?” said Randy Tinseth, Boeing vice president of marketing, in his Monday presentation. “Everything tells us demand is strong in the market, and as a result we are going up in (production) rate.”
John Leahy, head of sales at Airbus, echoed that.
“Are we in a bubble? I don’t really think so,” said Leahy, citing his overflowing order book. “It does appear there is more than enough overbooking to cover rates above 50 (single-aisle jets per month), perhaps above 60.”
Toby Bright, former head of sales at Boeing and now chief marketing officer at airplane lessor Jackson Square Aviation, said he doesn’t agree with Boeing executives who insist the current boom is different from those of the past.
They argue there won’t be a significant downturn because today’s airline customer base is so diverse and globally distributed. Bright said he believes the business is still cyclical and will turn down again sometime.
Still, he said, “I wouldn’t even start to say this is the top of the cycle.”
Nico Buchholz, head of fleet planning for Germany’s Lufthansa airline group, said the industry’s big airplane lessors are at a peak in their business, and that conditions can only deteriorate from there.
The lessors have enjoyed low interest rates that enabled them to buy next-generation, fuel-efficient airplanes in early delivery slots. But interest rates are expected to begin to rise this year.
And the low price of oil threatens to lower the monthly rates lessors can charge for new jets, because fuel savings from these more-efficient planes aren’t as valuable as before.
Yet Buchholz, like Bright, insisted that old hands in the aviation business can navigate such difficulties.
No one has a more prominent view of the aviation market than AerCap’s Kelly. His firm owns 1,250 airplanes and has almost 400 more on order. It buys, sells or leases a plane somewhere in the world every day.
Kelly said AerCap has $7.6 billion it can tap, so it could fund all its capital spending and debt obligations “even if the capital markets were to shut down completely for 18 months.”
He’s equally bullish about the fortunes of Airbus and Boeing. “We haven’t observed a slowdown in demand for the new aircraft types.”
He conceded there are many airlines with large jet orders that may never be realized, but argued that this need not overly worry Airbus and Boeing.
“But the one certainty is that the demand for the machines will be there because the market (for air travel) will grow.”
Don’t worry about individual airlines, he said. If one collapsed and Boeing came to him with some surplus 737s, he would jump at the chance.
“We’d buy them,” Kelly said.
Still, one detail revealed at ISTAT suggests the world of Boeing’s airline customers is more fragile than it appears.
John Luth, chief executive of airline-management consulting firm Seabury Group, told the conference how he served as an adviser to help turn around distressed British holiday travel carrier Monarch Airlines in July 2014.
“Monarch had less than eight weeks of cash in late July,” Luth recalled.
AerCap was Monarch’s biggest creditor, and so Kelly was deeply involved in the effort to save the airline, a turnaround that involved cutting labor costs by 40 percent and shedding more than $1 billion in liabilities.
Yet earlier that month, at the Farnborough Air Show in London, Boeing executives had sat alongside Monarch’s management at a news conference where they announced the carrier’s commitment to buy 30 of the new 737 MAX aircraft.
No one in the audience knew at the time that Monarch was hanging by a thread. Luckily for Boeing and AerCap, the turnaround worked.