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Is There An Aircraft Bubble?  
User currently offlineBMI727 From United States of America, joined Feb 2009, 15749 posts, RR: 27
Posted (3 years 2 months 1 week 2 hours ago) and read 2882 times:

It seems like there have been a lot of huge orders for aircraft recently. Emirates is planning to operate 90 A380s and even more 777-300ERs and other Middle Eastern carriers are also ambitious, though not quite to the same degree. Then we see the benchmark for largest order of narrowbodies set three times in less than a year. The first two to growing Asian low cost carriers where the orders represent more than double the present fleet and the last to a struggling legacy in an announcement that coincided with the announcement of a nine-digit loss.

Taken individually, none of these seems outrageous. Ambitious certainly, but not ridiculous. But seen as a trend (there have been other large orders too) it looks an awful lot like a bubble to me. Airlines seeming mesmerized by the latest shiny new planes being offered, far enough down the line to have the current economy not be so much of a factor perhaps, and manufacturers only too happy to move merchandise.

Of course, airlines and aerospace is a very cyclical industry. If you aren't in a down time now, you've either just come through one or are fixing hit a rough patch. There is always something: the oil crises, the Gulf War, the Asian financial crash, the dot com bust (another bubble seems to be forming now), 9/11, SARS, the 2008 oil spike, the recession, etc. The market always seems to throw a curveball that upsets everything.

So, how much of this influx of orders do you all think is "real" and how much could be a bubble? Are airlines getting overextended and overoptimistic? Are manufacturers and lenders getting caught up in good feelings and how risky is it for manufacturers to increase capacity to try and meet this demand? How aware are the manufacturers and airlines when setting up these grand plans?


Why do Aerospace Engineering students have to turn things in on time?
5 replies: All unread, jump to last
 
User currently offlinea380900 From France, joined Dec 2003, 1116 posts, RR: 1
Reply 1, posted (3 years 2 months 1 week 2 hours ago) and read 2822 times:

There is a bubble in everything due to the easy credit provided by the Federal Reserve. That's why AA can have losses and order 400 planes or so (wihtout the options). So people are gonna say "it's Boeing and Airbus that are providing credit" but they could not do it the FED and the ECB were not flushing financial markets with money. And yes the ECB is a proxy for the Fed (see rates since 2001 to see that).

It is really that simple. And yes, orders are buoyant to a point not seen since 2007, the last credit bubble peak. It cannot last. My guess is that a lot of these planes will never be delivered.

So what's next? If there are no systemic financial market disruption we should see a very high level of inflation that will eat into everyone revenues. This will be an hidden tax on everybody and if you wonder, the proceeds will go directly to pay past and present bonuses of your "oh so valuable" friends in the financial services.

[Edited 2011-07-26 19:15:37]

User currently offlineLufthansa From Christmas Island, joined May 1999, 3217 posts, RR: 10
Reply 2, posted (3 years 2 months 1 week 1 hour ago) and read 2692 times:

Well to a certain extent i think so too.

The narrowbody orders ... while seeming crazy are driven primarily by oil costs. If oil were cheaper, those MD-80s wouldn't be on the radar for replacement by american...and the A320neo wouldn't be 'the drug of choice' at the moment for airlines desperate to do something about fuel. Yes...they are defnately under the influence.
If oil prices fall significantly... or if replacement fuels come online cheaper and sooner than expected, some of these airlines rushing for new aircraft are going to be at a disadvantage servicing these huge debt levels.


Widebodies.
Now this is the real interesting area. ME airlines are growing..and not organically, they're eating away at the existing market. Supply vs Demand says only so many seats are needed at a given price level, regardless of who provides them. So, this leads me to suspect there will be way too many widebody aircraft out there. now this could mean, particuarly for european carriers but even some of the asian carriers, like MAS for example, that older aircraft are either not replaced or replaced with smaller aircraft as ME carriers eat into their markets... or... we have a bubble. you can only fly around half full aircraft for so long before either they are retired, sold, parked or the airline goes bust and the same thing happens.

option 2.
Western carriers declare war on Qatar and the UAE and get their govs to tear up trade agreements blocking access to key markets stuffing up their hub model. Canada has already shown its willingness to do this. Europe is the key area here... and that wont happen until after all those shiny airbuses are delivered if it happens. LH, BA and AF would love nothing more, but they just dont order as much from toulouse as the ME does. The US wont do it because the ME really only serves as a hub from there to link India to the east coast, so its not a big threat. If Austalia did it, it would be a huge dint in the hub at least from european ports. If access is somehow blocked, then you'll have excess aircraft in the ME coming onto the market. I don't see this happening. I see western carriers shedding aircraft or failing first.

Point of story. Only so many widebody aircraft are needed at a given price level to meet the demand. prices can't drop because margins are already almost non existant. huge orders have been placed with the intension of canabalising existing carriers, not meeting new demand. Sounds like a bubble. Boeing be best to rush to deliver all these aircraft because there will come a point were there are too many. Lets not forget, the ME carriers have on order more widebodies than the entire North American fleet.


User currently offlineChicagoFlyer From United States of America, joined Jan 2006, 273 posts, RR: 0
Reply 3, posted (3 years 2 months 1 week 1 hour ago) and read 2681 times:

It's an interesting question. What makes a bubble? Just taking the memories of ol' MicroEconomics....

1) Pricing that exceeds value. This is certainly not the case. OEMs seem to underprice their products vs. demand. The A320NEO should be worth way more than $1-2M vs current gen A320...
2) Production that exceeds demand. This is not the case either given how far in line you need to be to buy a jet from Boeing or Airbus--and then only produce so many jets per month/year.

So we have increased demand that does not lead to many more units produced or much higher prices. What we see instead is enormous backlogs. So looking at it from OEM perspective, there's no risk of being hurt in a bubble busting, because demand will eventually return and they have a nice cushion to weather the storm. Unless they themselves screw up a program (787!), they are in great shape vs any reasonable changes in demand.

On the other hand there are lots of mini-bubbles in terms of demands from a region or an individual airline, which, on a micro scale, can pop dramatically--e.g. many implosions in 2008. The AirAsia or Emirates or American's orders are astounding.

Finally, there are also mini-bubbles in terms of new OEMs trying to enter the game. MRJ or C-series might end up really expensive...


User currently offlineBMI727 From United States of America, joined Feb 2009, 15749 posts, RR: 27
Reply 4, posted (3 years 2 months 6 days 11 hours ago) and read 2089 times:

Quoting Lufthansa (Reply 2):
The narrowbody orders ... while seeming crazy are driven primarily by oil costs. If oil were cheaper, those MD-80s wouldn't be on the radar for replacement by american...and the A320neo wouldn't be 'the drug of choice' at the moment for airlines desperate to do something about fuel. Yes...they are defnately under the influence.

That's all true, but while they definitely need the planes, shouldn't some people at AA be losing sleep at night worrying what could happen if there is a trough of travel demand when those planes are delivered? I would think that could cause a liquidity crunch.

Quoting ChicagoFlyer (Reply 3):
So looking at it from OEM perspective, there's no risk of being hurt in a bubble busting, because demand will eventually return and they have a nice cushion to weather the storm.

At this time no, but the worry would be what could happen if they begin to make investments in supply chain, facilities and people to meet the increased demand only to find out that a lot of the demand isn't real. Or, why wouldn't manufacturers offer good deals and encourage airlines to make these orders for astronomical growth (to keep Wall Street happy) and then not bump up production, knowing that a portion of their orders are a bubble of their own creation?



Why do Aerospace Engineering students have to turn things in on time?
User currently offlineytz From Canada, joined Jun 2009, 2025 posts, RR: 24
Reply 5, posted (3 years 2 months 6 days 5 hours ago) and read 1798 times:

There's no bubble. People just get alarmed when they see big orders.

Look at the underlying factors. Large majors have aging fleets which need to be replaced and they can't wait much longer for next-generation narrowbodies. Many parts of the developing world are now actually, well, developing. And with that there's huge and growing apetite for air travel.

Add to all that the impact of rising fuel prices. High fuel costs may reduce aggregate demand for aviation, but it also strongly improves the business case for replacing old airplanes.

Combine all that and now take a look at Boeing and Airbus' order book. It doesn't look that extreme.

Just look at the AA order. They ordered ~100 airplanes over the replacement level. Yet, most of those will go towards replacing older 738s (which will be hitting 20 years old by the end of the decade). And even at that level, looking at economic growth and population growth going forward in the US, it's not unreasonable to suggest that AA could grow by 100 narrowbodies over the next decade or so.


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