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Coronavirus Has Popped the Boeing and Airbus Bubble

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·5 min read
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(Bloomberg Opinion) -- It’s not just air tickets that are being canceled as the coronavirus causes global travel to seize up. Purchases of aircraft are also being pulled.

Aircraft lessors Avolon Holdings Ltd., China Development Bank Financial Leasing Co., and General Electric Co.’s GECAS have rescinded orders for 173 Boeing Co. 737 MAX aircraft over the past month, worth $17.8 billion at list prices. Airbus is cutting output of planes by a third, while Boeing will reduce production of 787 Dreamliners by half, people familiar with the plans told Julie Johnsson and Siddharth Philip of Bloomberg News.

There’s likely to be more to come. The global aviation industry is being hollowed out by the prospect of international and domestic travel grinding mostly to a halt for 18 months or so: The International Air Transport Association expects traffic to decline by 48% this year because of the coronavirus.

One of the first places airlines will look to make savings will be in their multi-billion dollar capital expenditure budgets — in other words, in the plane manufacturers’ revenue. Even that won’t be enough to save many carriers without extraordinary support.

By far the biggest slice of revenue for Airbus and Boeing is the single-aisle jets like the 737 and A320 used primarily by budget carriers. Discount airlines are probably the ones least likely to get bailouts from governments, which often own stakes in competing, and ailing, flag-carriers. Without the extraordinarily large orders for such aircraft entered in recent years by the likes of PT Lion Mentari Airlines, AirAsia Group Bhd., InterGlobe Aviation Ltd., EasyJet Plc, Vietjet Aviation JSC, Norwegian Air Shuttle ASA, and Flydubai, manufacturers’ order books would be looking worryingly empty.

Boeing and Airbus have tended to shrug off the risk of one of these customers going belly-up. That’s because the multi-decade project to design and build a new aircraft isn’t driven so much by a poll of airlines, as models of where the entire aviation industry is heading.

Both aerospace manufacturers put out annual 20-year market forecasts, shaped by deep macroeconomic factors such as GDP growth, people’s propensity to travel as incomes rise, and urban population changes. For such long-range predictions, these surveys often do remarkably well. Boeing’s 2000 outlook estimated that global traffic in 2019 would amount to 8.06 trillion revenue passenger-kilometers; in 2018, the actual number was 8.16 trillion RPKs.(1)

That impressive track record has led to hubris. If you believe air travel demand has a mathematical relationship to economic growth and airline services will be made available wherever potential demand exists, then there’s no reason to worry if an airline with hundreds of planes on order goes out of business. The invisible hand will conjure up another carrier to take its place, or the orders will be shifted to some other part of the world.

Dig into the detail, though, and the outlooks are often no more accurate than you'd expect a 20-year forecast to be. Boeing in 2000 expected that the top three “domestic” markets of North America, Europe, and China would account for about a third of global traffic growth over the coming two decades. In fact, they’ve made up almost three-quarters of the increase.

Those forecasting errors were most dramatic in relation to fleet growth. The number of jumbo jets like the Boeing 747 and Airbus A380 currently in passenger service is fewer than were flying back in 1999, and roughly half the 1,184 Boeing predicted back in 2000. Small regional jets have also fallen from favor as the A320 and 737 have swallowed up more than two-thirds of the market. The failure of heavy twin-aisle jets like the A340 and A380 is hard to separate from the expectation two decades ago that they were a growth market.

What current predictions might turn out badly? One area is the assumption that demand for air travel keeps going up at a fairly constant rate in relation to GDP growth, even as economies become wealthy. That view was questionable at the best of times — even rich people don’t like to spend every waking hour on long-haul flights. It looks even more so in a world where the long shadow of Covid-19 will cause people to take their leisure closer to home, and where quarantine barriers could be in place for some time.

Business travel, the financial backbone of full-service carriers, will also face existential questions as companies assess how their white-collar staff have coped through a global lockdown. Travel tends to increase in tandem with trade; that would suggest weaker prospects, too, in a post-Trump, post-coronavirus era.

These aren’t purely spreadsheet problems. Airbus and Boeing have built their supply chains and balance sheets to support expectations of about 40,000 new aircraft being delivered over the next 20 years.

Aircraft pay off their vast development expense not in the first year, but over the entire time that planes are being manufactured. Almost a decade after its first delivery, the 787 Dreamliner still has more than $20 billion of such costs that must be gradually worked off as more planes are sold.

Right now, it’s the unlimited demand for the A320 and 737 that’s bailing the manufacturers out of the mistakes they made with the A380, A340 and 787. Should that start to stutter, they’re in for problems that — like those forecasts — could last decades.

(1) Revenue passenger kilometers or RPKs are a measure of passenger traffic equivalent to the number of paid-for seats on planes multiplied by the distance they were flown.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

David Fickling is a Bloomberg Opinion columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

For more articles like this, please visit us at bloomberg.com/opinion

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