The Paris Air Show starts next week, on June 15, and is traditionally a chance for aircraft manufacturers to show off new wares while one-upping each other with aircraft order announcements. But with their major customers in turmoil, this year’s show may be a rather dismal event for commercial planemakers.
In fact, UBS are estimating there are 1,300 too many aircraft in the aviation system, representing industry overcapacity of about 8 per cent. It hardly bodes well for aircraft orders. And in 2010, things will barely improve, according to the bank. There will still be 1,100 too many planes.
Here’s their commentary, and their detailed chart of over-supply estimates:
For overcapacity to clear, air traffic would need to bounce by c12% in 2010. Given historical trends and our expectation for dull economic growth in 2010, we believe a bounce back is unlikely. As such, we believe overcapacity can only be cleared if global production rates fall by c30% from their 2009 peak. This is materially below current production plans and presents a real earnings headwind for the sector.
That 2009 oversupply number is based on global air traffic falling 5 per cent in 2009. By contrast, the airline industry body, IATA, is forecasting an 8 per cent contraction in traffic this year — though crucially this misses some of the traffic generated by airlines not in the organisation — particularly low-cost carriers.
The oversupply estimate is of course, sensitive to air traffic movements, so UBS have handily provided this chart, which shows how the 2010 estimate changes according to different growth measures.
The 2010 estimate of 1,100 planes is based on traffic growing 5 per cent that year. If traffic were to stagnate however, with a growth rate of 1 per cent, that oversupply shoots back up to 1,600 planes. All of which makes for painful times for the planemakers and associated aerospace companies.
UBS have accordingly reiterated their sell ratings on Boeing, EADS (Airbus), Rolls-Royce, Safran and Spirit Aerosystems.
Related links:
Airline cycles, redux - FT Alphaville
Diverging strategies, airline edition – FT Alphaville
Aerospace mothballs – FT Alphaville
The art of aircraft ordering – FT Alphaville