The major players who buy airplanes painted a gloomy picture for sales of big jets over the next few years, with global airlines facing a glut in capacity and lower fares. The outlook is worrying for Boeing's 777 in particular.
SAN DIEGO, Calif. — The major players who buy airplanes painted a gloomy picture this past week for sales of big jets over the next few years, with global airlines facing a glut in capacity and pressure to lower fares.
Steve Rimmer, chief executive of Issaquah-based airplane lessor Altavair, who manages more than 30 leased twin-aisle jets, half of them 777s, said the availability of used airplanes coming off lease adds to a growing glut of large aircraft after multiple years of massive orders for new widebody jets.
“There’s a fire burning in the widebody market,” Rimmer said.
It’s bad timing for Boeing, which desperately needs to sell more new 777s and is also trying to drum up sales for the upcoming 777X.
Boeing’s star widebody jet, the 777-300ER, was first delivered in 2004. With many of those sold on typical 12-year leases, the first round of 12- and 13-year-old used jets are just now coming off lease and onto the market, Rimmer said.
In the record sales years of 2012 and 2013, Airbus and Boeing together won more than 2,800 net airplane orders. Last year, total sales were half that.
At the annual conference of the International Society of Transport Aircraft Trading (ISTAT) in San Diego — a gathering of aviation financiers along with executives of airplane lessors and major airlines — Airbus sales chief John Leahy projected that total sales this year for both manufacturers will be down another 30 percent to less than 1,000 jets.
Bertrand Grabowski, a former aviation banker who now consults for airplane-finance companies in the United States, Europe and the Middle East, said “too many aircraft have been ordered to be delivered at the same time.”
He sees a glut of widebody jets serving the Middle East and Europe, with airlines competing against one another for the same passenger traffic.
Even Emirates, the giant Dubai-based carrier that is the world’s biggest customer for both Boeing 777s and Airbus A380 superjumbo jets, isn’t immune. Although it has successfully squeezed the big European, Asian and Australian legacy carriers for years, it is lowering fares and seeing its profit crimped.
Grabowski said Emirates now faces fierce competition from Turkish Airlines as well as the other big Gulf carriers, Qatar Airlines and Etihad of Abu Dhabi.
He’s also worried that too many single-aisle jets have been ordered in Southeast Asia. Both Boeing customer Lion Air and Airbus customer AirAsia may not take all the airplanes they have on order — more than 400 each.
Grabowski said the last few years have been perfect for the aviation business, with growing passenger traffic, low fuel prices and cheap capital, but he senses the good times cannot last much longer.
He’s advising investors to wait six months in anticipation of a fall in jet pricing that he foresees bringing major losses for some in the industry.
“We are at the end of something,” Grabowski said.
In a keynote presentation at ISTAT, revered aviation economist Adam Pilarski of the consulting firm Avitas expressed similar worry.
With the current unpredictable political situation in the U.S. and Europe creating a “changing and scary” world, along with the prospect of rising interest rates and the airplane-capacity glut, Pilarski said “there’s a much higher probability of the bubble bursting.”
On a positive note, world air traffic continues to grow unabated. In January, the International Air Transport Association reported global passenger traffic rose 9.6 percent in January compared with a year earlier, the strongest increase in more than five years.
Aengus Kelly, chief executive of AerCap, the world’s largest lessor, pointed out at ISTAT that every year in Asia, another “100 million people are getting on a plane for the first time.”
He said the inexorable rise of middle classes with money to travel in emerging economies such as China and India mean that the long-term future of the aviation business is assured.
It’s the near term that’s troubling.
Bob Genise, who ran multiple airplane lessors in his career — including a major Gulf leasing company that ordered hundreds of new jets — now heads AerGen, a Bellevue- based lessor specializing in midlife used jets. He said savvy airplane lessors who are careful with the deals they make can still make money even in today’s tight market.
But it’s going to be tougher in this environment for Airbus and Boeing to sell their shiny lines of new-technology airplanes — the A320neo, A330neo, A350, 737 MAX, 787-10, and 777X — which are all very expensive.
“I’m happy to be out of the new-airplane business right now,” Genise said.
The most immediate impact for Boeing is on the 777. The jet maker has already announced it will reduce deliveries of the current 777s from 100 a year last year to just over 40 in 2018.
But how soon after the 777X comes on line in 2020 will Boeing ramp that production line in Everett back up again?
The agreement announced last month by Singapore Airlines to buy 20 Boeing 777Xs was the first order for the jet in 20 months.
John Plueger, chief executive of Air Lease Corp. (ALC), a major industry player, said “the 777X sales pace would not indicate an ability to keep the same (100-jet) production rate anytime in the next several years.”
The danger is not just a lack of new orders but the loss of existing orders.
United Airlines has told Airbus it may not want its existing order for 35 large A350-1000s. American Airlines is also assessing its widebody capacity. Qatar Airlines said this week it won’t take up the options it has to buy three more A380s from Airbus.
In an interview at ISTAT, Steven Udvar-Hazy, chairman of ALC and widely regarded as a leading market maker in the industry, noted that 235 of just over 300 orders for Boeing’s 777X are from the three major Gulf carriers, 150 of them from Emirates alone.
Those carriers “need to perform,” Udvar-Hazy said. “If they reduce their involvement on 777X, it would have a profound effect on the airplane.”