Market Outlook: What will become of all the aircraft?

By Chris Tarry

The 150-seat aircraft market is at risk from the evaporation of customer need and an inability to access financing, and I expect this to affect 1,600 to 1,800 aircraft. While this is an issue of concern, the outlook for deliveries in the immediate term is of more interest.

In the near-term the rate of production is not flexible. The immediate need when a customer withdraws is to find another one, but given the current outlook this is clearly going to be more challenging. For the manufacturers there are a number of issues, all of which are related to financing. The principle issue is the extent to which manufacturers finance a customer to take a delivery, and where there is no immediate customer in sight the question becomes, do they finance the completion of the aircraft on the production line or not? The most likely outcome is that the assembly of the aircraft is completed and it is added to stock in the form of a whitetail.

Changing the production rate of an aircraft programme is neither rapid nor costless. It is a significant event and while so far the view of the manufacturers is that deliveries in 2009 will be similar to last year, they have stated that there are contingency plans.

Given that there is unlikely to be a repeat of the position in 2002 when there was a new source of demand as a number of low-cost airlines placed orders for near-term delivery, the key question now is if we do not expect significant ordering - and there is an increasingly accepted view that for 2009 cancellations will exceed orders - what will be the extent of the reduction in delivery rates?

Taking this into account, this downturn appears more likely to be similar to that of the early 1990s rather than the start of the current decade.

Due to the impact of orders "padding" the bottom of the cycle in 2002-04, the fall in delivery rates in the 150-seat sector from the peak of 660 in 1999 to 432 in 2003 was equivalent to some 35%. Some observers have suggested that this could occur this time around too. However, if we overlay the pattern of what happened in the early 1990s when deliveries in this segment fell by 60% between 1991 and 1995, this suggests that by 2012 deliveries could be in the order of 280.

It is important to consider the aircraft already in the system, particularly those which will come off lease as part of a planned return but have no subsequent lease in place, and those which are returned to the lessor as a result of airline failure. In the last downturn some 12% of the narrowbody fleet was parked - a situation that existed for a number of years. It is reasonable to expect a higher percentage this time round, although a number of these will be older-generation aircraft which are likely to remain parked and then scrapped. The more interesting focus should be on those new-generation aircraft that are placed in the desert.

While the scrapping of older-generation aircraft will not be a surprise, the more interesting factor to contemplate is the age at which it is more remunerative (in either absolute or relative terms) for an owner to part out a new generation aircraft and the consequences of this on what the actual economic life of an aircraft is.

Broadly speaking, the economic life of a 150-seat aircraft is in the order of 25 years, but what if there is an increase in the number of aircraft parted out between 16 and 20 years old? When the sum of the individual parts is worth more than the whole, it would be decided that a more appropriate life of the aircraft is 18 years. The effect of this on the depreciation charge would be to increase it by almost 40%, and this would feature in all calculations of ownership cost.

Quite what the outcome will be nobody knows. Generalisations are dangerous and the actual effects will depend on who you are and what you provide.