Although it raised its estimate for earnings last year to $18 billion from an earlier estimate of $16 billion, the forecast of an even steeper than expected fall in airline profitability makes a gloomy backdrop for the 49th Paris air show at Le Bourget airfield this week.
The carriers are being squeezed between high oil prices — expected to average $110 per barrel this year, against $96 in 2010 — and an overly rapid expansion of capacity relative to demand. Global airline capacity this year is slated to rise by 5.8 percent, while demand is expected to expand by only 4.7 percent.
“But with a dismal 0.7 percent margin, there is little buffer left against further shocks,” I.A.T.A.’s director general, Giovanni Bisignani, said at the annual meeting, referring to the $4 billion profit on projected revenue of $598 billion.
In the U.S. market in particular, unemployment data and consumer sentiment indicators suggest that a bigger buffer might be welcome.
Positioning themselves for a slackening market, JetBlue and AirTran airways, focused on budget-sensitive personal travel, have already announced promotional low-fare programs for the September post-holiday season, offers not usually made until late July or early August, according to Helane Becker, airline analyst at the investment bank Dahlman Rose.
Yet even as airlines face the prospect of excess capacity, Airbus and Boeing say they are increasing production of their A320 and 737 airliners to meet an expected wave of new orders. Boeing is also stepping up production of its wide-bodied 777.
Even taking into account strong growth in emerging markets and the attraction for the carriers of fuel-efficient offerings such as the A320 New Engine Option or Bombardier’s C Series — which has just notched up its 100th order — are the manufacturers at risk of getting out of sync with the economic cycle?
Michael J. Richter, co-head of aerospace business at the investment bank Lazard in Los Angeles, says he takes a relatively optimistic view of the outlook for the manufacturers.
“The aerospace industry is in a better position than last year at the time of Farnborough,” Mr. Richter said, referring to the British air show that alternates annually with Le Bourget. “Paris this year should be a vibrant deal-making environment.”
Mergers and acquisitions business has been fairly active this year and is likely to continue, reflecting a greater availability of financing, he said. “While the aerospace industry remains vulnerable to economic cycles, there are numerous hot spots globally at present.”
While “ultimately, consumer demand drives air traffic,” Mr. Richter said, “Asia-Pacific retains bright prospects, although the Japanese earthquake/tsunami/nuclear meltdown has naturally caused problems and disruptions. Private equity has re-emerged in the aerospace industry to finance strategic acquisitions, while buyers already in aerospace are executing fill-in purchases to cover gaps in their structures or product lines.”
Lazard’s forecasts show commercial aircraft production rising this year over 2010 and rising again in 2012, then holding steady into 2013.
James F. Albaugh, chief executive of Boeing’s commercial airplane unit, said his company would raise the production rate of the 737 model to 35 aircraft per month from 31.5 early next year, to 38 in the second quarter of 2013 and finally to 42 in the first half of 2014, to service a backlog of 2,100 orders.
Together with increases of the much larger 777 family, Boeing is raising its overall aircraft output rate by 40 percent in the next three years. Airbus similarly announced in May it was stepping up production of its A320 family.
Looking ahead over the next 20 years, Mr. Albaugh forecast global demand for 33,500 new commercial aircraft, worth nearly $4 trillion, of which $1.7 trillion worth would be in the 100- to 200-passenger 737/A320 size range.
“Now is the time for us to commit to a new program,” Mr. Albaugh said. “We are leaning toward the New Small Airplane, to be in service by 2019 or 2020 with 20 percent better fuel efficiency than today’s 737.”
Alternatively, the current model 737 could be re-engined. A decision between the two options should come this year.
Article source: http://feeds.nytimes.com/click.phdo?i=9b0738ff8f6a418d1991b1c7604303cf
Speak Your Mind
You must be logged in to post a comment.