Aircraft market levels off

  • 02-Oct-2008 10:18 EDT
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The huge commercial market’s pending slump will drag the industry down despite growth in business jets and a stable military market.

The aircraft industry is leveling off after a lengthy boom, but it is expected to plateau nicely instead of seeing the sharp drops of past cycles. Sales in the Middle East and in business jets will help cushion the blow, according to analysts at the Teal Group.

The current boom will continue a bit longer, but there will be a dip of about 25% early in the coming decade, Richard Aboulafia, Vice President of Analysis at Teal, said in a speech at the recent International Manufacturing Technology Show (IMTS) in Chicago.

However, he does not expect the slump to create the big problems often associated with downturns. “We’re no longer talking about breakneck production rates, we’re talking about plateaus. That’s far better than great growth and a big collapse,” said Aboulafia.

That optimism is largely based on the solid growth the industry has seen in recent years. “I’ve never seen such a fantastic expansion," he said. "It’s been unprecedented for eight years, and it’s the first simultaneous upturn for commercial and defense.”

One change from the past is that more planes are being financed. That’s a good sign, since bank financiers generally regard aircraft as good investments, he noted.

Another pillar is that production backlogs are currently high, at about 8000 jets. Even if a quarter of those orders are canceled, that leaves around four years' production.

The Middle East is responsible for a large portion of that backlog, with many companies adopting a strategy of preserving windfalls by investing in aircraft, said Aboulafia.

Companies need to adjust to that regional growth, preparing to provide maintenance and repair capabilities in an area where there’s no aircraft manufacturing. Looking forward, he questioned whether Middle Eastern airlines who have ordered scores of aircraft will suffer from overcapacity.

That region is also a key factor in business jets, which he called “a fantastic market.” Since the boom started in 2003, it has been a $24 billion-per-year market. It will also see a slump, but that will only slow the growth rate.

“We factor growth at 10% after the slump. In the past few years, growth has been 25%,” said Aboulafia.

Defense aircraft has also been “a fantastic market.” Pentagon spending is at a high of $134 billion, though it will decline if the U.S. gets out of Iraq. But even a noticeable cutback will leave the industry well above the $54 billion level it had a few years ago before the run-up.

Aboulafia was equally bullish when he focused on the equipment suppliers attending his speech at IMTS. Equipment suppliers have been strapped to meet demand, but efforts to respond are worth the effort.

“When you tool up for something, it’s quite likely that some portion of the line will still be used two decades out,” he said.

He predicted that the U.S. market share will rise from 51.4% in 2007 to 53.9% in 2017. Europe’s will also increase, from 32.9% to 36.9%. The rest of the world will shrink from 15.7% to 9.2%.

That decline will come despite China’s efforts to build aircraft. He opined that China would be wiser to follow the lead of Japan, which has a $4 billion market in contract manufacturing.

“China has taken the opposite tack, which I think will be a disaster,” said Aboulafia. “They should be putting money in a subcontracting market, which they’d probably be good at, instead of putting resources into this ridiculous effort.”

He supported his “ridiculous” contention by listing the world’s aircraft suppliers, noting that all of them have been in the market since the 1940s. Ninety percent of the market is concentrated in the hands of 10 players who have established an expensive infrastructure.

“The barriers to entry are enormous,” said Aboulafia, adding that there have been very few entrants since WWII.

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