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Is there an order bubble?

The debate about a possible order bubble in the aircraft market raged at the ISTAT Europe conference yesterday (22 September).

In the opening panel session Peter Morris, chief economist at Ascend, dismissed the idea. “Bubble? What bubble?” He told delegates.

Morris argued that timeframes for delivering the backlog had changed significantly and that overcapacity would not be an issue. According to Ascend’s predictions new deliveries will account for six to seven per cent of the fleet up to 2022, taking retirements into account.

“It doesn’t seem disproportionate... by and large the capacity seems to fit the profile we have for traffic growth,” he said.

Meanwhile, Adam Pilarski, SVP at Avitas, argued that the perfect storm which we have seen in recent years – including high fuel prices, low interest rates, easy access to government finance and a panic in the narrowbody market caused by the launch of the CSeries – could not last indefinitely.

While 60 per cent of those in the audience said they thought that oil prices would remain at $100 a barrel, Pilarski said that this was a “fantasy”, and a “nightmare world”.

He also said that those who dismissed the idea of an order bubble believed there would be huge numbers of aircraft retiring, which assumes a change in current behaviours.

Pilarski’s second argument related to new entrants to the aviation market and referred to what he termed “double counting”. This is where a number of groups see a market and try to cover it. “So you have LCCs especially in Europe and Asia trying to take over from the market of legacy carriers. You also have new lessors and investors and in the Middle East, which has bought huge amounts of aircraft. If they succeed, someone else will fail.”

The audience were asked whether they predicted overcapacity in the market and 73 per cent agreed that there would be. However, Morris argued that talk about over- or under-capacity was nonsense.

“I am reminded of a quote: ‘There’s no such thing as too much capacity’,” he said. “There is too much capacity at the wrong price and that’s the key issue. If there are business models that deliver that capacity to the market at the right price there is no overcapacity.

“One of the scenarios we see moving forward is that the more competitive business models will take a bigger share at a lower price.”

Later in the day aircraft financiers picked up the debate, with Thomas Hollahan, managing director at Citi, and Christian McCormick, managing director and global head of aviation finance at Natixis, also urging caution.

“You should always be worried,” said Hollahan. “This industry is still going to be subject to event risk – we just don’t know what it is. Most of the cycles of our industry have not been economic, but event driven, such as SARS or a terrorist attack. It’s always good to assume that another such event is not only possible, but likely and could be around the corner.”

McCormick argued that even putting special events aside there was enough to concern airlines. “The operating lessors are growing and becoming a significant portion of the industry, and we still haven’t figured out if there is double counting.”

The order bubble debate looks set to continue for some time yet, until one side triumphs. One thing is clear though, airlines should be carefully considering their contingency plans!

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