With less than a week to go until Farnborough 2018, IBA predicts likely orders for the airshow, and analyses historical data to reveal the probable results from the aviation industry’s premier showcase.
In brief, IBA forecasts:
- An order tally (firm and MoU) that tops 900
- Strong orders for the neo and MAX families – with a bias towards the A320/A321 and -8/-10 variants
- Improving orders across both the Q400/ATR families and some sales for the E1 and E2s, but it may be too early to reap the benefit of the Boeing announcement
- A little movement on the Bombardier CSeries programme for both variants but this may not lead to firm/MoU level commitment
- 100 orders across the 777, 787, A330 and A350 families would be a good result
- The Boeing NMA (New Midsized Airplane) and the CSeries stakeholder changes should spark up some interest but IBA considers it may still be too early for the NMA launch;
- In terms of buyers, lessors will take around 40%.
To orders first, as a recap the current backlog for commercial aircraft airframers as at 1st July 2018, stands at a staggering, 15,367 aircraft, a number that is close to 1,000 units higher than the same point last year. The breakdown by OEM is shown in the chart below.
Over the past six summer Airshow seasons, Paris and Farnborough have accumulated 5,244 firm orders and MoUs, with a further 1,183 options across the 9 commercial airframe OEMs shown above. This equates to around 30% of the total number of aircraft ordered since January 2012 with between 30-50% taken by the lessors over the same period:
Of course, it is hard to predict annual orders at the best of times and even harder to narrow the event down to a week in July. OEMs love the PR from Airshows and the drought of orders from the start of the year are typically a deliberate attempt to maximise show-related announcements. In fact, when you look at December plus the Airshows, both Boeing and Airbus each accumulate between 35-40% of all orders from either Farnborough in July, Paris in June or in December. When looking at the top 10 months ever for Airbus and Boeing since 2012, approximately 70% of orders were taken from the two Airshows and December within each year.
The final figures for the top 10 months rise as far as 90% when Dubai and Singapore Airshows are factored in too!
Whilst it is possible to draw a correlation between just about anything, since the GFC and start of the current aviation cycle, the trend between oil price and annualised orders has been uncannily strong. This is not surprising given that most orders have been placed for new fuel-efficient technology, but even with such large backlogs in play, orders continue to come in as oil rises. Clearly, rising traffic plays a fundamental role in the growth of orders too, but it is more challenging to draw direct comparisons of how each year moves. Traffic has been rising between 5.3% and 8.10% year over year since 2010 and growing in an upward trend since 2012 with this year set to close at around 7%.
Most Airshows in recent years have also been boosted with the introduction of a new aircraft model (either at the show or in the preceding months), which has sparked interest and an ordering frenzy in some cases. This year, the media focus has been on the Boeing NMA and will they/won’t they launch at Farnborough. We think it is still too early to launch this July, but certainly we expect to see plenty of hype about this product during the week. Boeing have been pretty active in gathering support from customers, but pricing and engine options may not be there yet either. We are in dangerous territory after all, as whilst Boeing will want to curtail the A321neo, they won’t want to damage the 787-8 which remains heavily used on the capacities and ranges covered by the potential NMA.
The pricing gap between the largest narrowbody and cheapest widebodies isn’t that wide and airlines will only want to pay narrowbody seat prices. As the bubble chart below demonstrates (bubble size represents price), there is a 2,000+ unit, largely untapped, market that has yet to be explored in any depth for two airframers and two engine OEMs, but both Airbus and Boeing may come at this in two different ways – development ‘v’ pricing pressure.
On the customers’ front, we expect to see another good number of lessor speculative order placements this year too. In recent years we have seen a range of between 30-50% of orders placed by the lessors and given the poor lease rate factors obtained through the sale lease back market, we expect the number to remain at least towards the mid-end of that range, if not higher. Historically, lessor backlogs have been steadily increasing whereby the largest group currently hold around 19% of the overall backlog at close to 3,000 units. Despite some volatility, there is a slow upward trend, but given the poor LRFs and the ever growing list of Chinese lessors, we don’t see the trend reversing until there is a market shift. So once again, we expect to see some orders from the largest lessors to cover growth and replacement, plus some lessors who are new to ordering direct.
Of the airline customers, we have seen a real mixed bag over the years with the most unlikely candidates placing decent sized orders alongside the usual appearance from the LCCs and legacies alike. It is easy to forget that Monarch placed a 15 737 Max 8 order in last year just three months before going out of business.
This year won’t be much different. Notable large A320 family operators that have yet to place new technology narrowbody orders for the neo include China Southern, Aeroflot, Air China, United, Air France, and Air Canada – although all except Air France have collectively placed orders for 248 737 MAX, 45 CS300s, 50 MC21s, and 5 C919s. On the Boeing side, of the top 10 operators of the 737NG, only Delta, Hainan and China Eastern have yet to announce their intentions, although between them they have backlogs on 101 Neos, 20 C919s, 75 C100s, and as many as 142 Ceo/NG aircraft. Airlines have historically placed orders when times are good and cash is strong – much like today, but… profits have started to slip as increased costs (fuel and labour) have taken their toll. That being said, we still don’t feel any order is coming soon from Air France.
For some airlines where competition is particularly strong and/or overheads are high, there is trouble ahead. To combat fuel, buying the latest fuel efficient aircraft may provide the natural hedge, but rising capital costs will make others wary of spending. Buying aircraft today, however, isn’t about the current market, it’s about market share beyond 2025, and with backlogs ever increasing, all large carriers will want to cement their position if their neighbour has already started to do so.
Over previous years, A320 and 737 family aircraft have naturally dominated the orderbook and this year won’t change much in that regard. Apart from the 200-300 neo orders, we expect to see a couple of hundred MAX orders with bias towards the -8 and -10 variants. We may even still see a couple of legacy orders move in as we have done every year since the new programmes launched. Whilst the airframers would prefer to make the permanent switch over, and whilst the engine OEMs can match the demand, older technology aircraft could still theoretically be made available – especially when reliability is concerned. Overall in the NB market, lease rates are starting to creep up, and values have been way up for some time – so availability is very tight still for good aircraft. The profitability in selling older equipment is also a win-win for both airframe and engine OEMs alike.
Switching to other assets, despite a huge amount of development in the widebody space, we still don’t see that much positive movement this July; unless OEMs provide a pricing incentive. Notwithstanding rising traffic levels and a creeping oil price, many still feel they wish to hold onto what they have and see where the market moves.
The last two years in particular have been pretty poor on widebody numbers compared to 2013, when the last A380 and 747-8 pax orders (and even last 787-10 Airshow orders) were placed. As the market seems most concerned at the upper end of the widebody market, we expect the action at the lower end with orders being placed for 787s, A330s and A350-900s. Someone may surprise the show with a decent 777 order, but we don’t think any are rushed to secure slots as the backlog is getting pretty short now. If the price is right, we may see the odd small top-up order for a 777-300ER that tends to happen most years, but pricing would need to be very keen for that to happen. If oil was showing a stronger uphill tilt, we would expect to see a greater push away from existing technology widebody aircraft, but as we start to nudge 80 USD, most forecasts don’t push oil much higher just yet.
At the other end of the scale, smaller aircraft haven’t attracted much attention from Paris or Farnborough since 2013 when the E2 made its entrance. At this point, ATR and Embraer made the biggest dent in the orderbook which has been declining ever since. As fuel started to collapse, so did the push towards fuel efficiency. 2016 was so bad (its lowest point) that ATR failed to record any firm orders at Farnborough. Last year was a little better from the western OEM standpoint, but the total still failed to reach 100. Unlike for narrowbody aircraft, backlogs for the RJ/TP markets can be cleared somewhat quicker (2-3 years) so operators tend to buy in when required. With the exception of NAC, this space doesn’t tend to attract many other speculative lessors buyers either – that is unless there is a political angle from either Russian or Chinese based firms. The current RJ/TP market is experiencing a period of oversupply, so it may be yet another tough year for the usual suspects but the oil price creep may provide the boost this market sector needs. Another hurdle is that the MRJ/larger E2 can’t get over the scope clause hurdle which is happily covered by the E1 and CRJ aircraft families. We don’t expect unions to shift anytime soon, so a way round that would change the game somewhat. There should be a new spring in the step for the CSeries which has now got a new majority owner and access to the Airbus marketing machine.
Let’s not also forget the Boeing-Embraer connection too. Whilst it is too early to expect any push from the Boeing machine as the ink is barely dry, we may see some real pricing plays in the near term to push the E2 harder into the market. With both Boeing and Airbus aligning with the largest RJ suppliers and a lack of support or up gauging of the smallest members of their respective narrowbody families, it’s clear they want to protect their soft underbelly.
It is also worth noting what is happening at the engine OEMs too as it has been an interesting year across the board in terms of in-service issues. Rolls-Royce has attracted much of the attention over the past 12 months with Trent 1000 issues causing serious disruption to 787 operators that could help sway engine choice towards GE. Whilst several of the issues appear to be in hand, airlines will be looking for a flawless operation over the busy summer months. Moving over to P&W, issues on the GTF have taken a quieter position now as production ramps back up after a 4 month hiatus earlier this year, whilst CFM, who had some LEAP issues last year, appear to have maintained a decent production flow whilst handling entry into service issues as they arise.
So in summary what should we expect?
The build-up to this Airshow has already seen over 800 orders across all OEMs, which is higher than what we have seen over the past 4 years. Given the creep up of oil price and the tightness of the narrowbody market, orders will be strong for the Neo and MAX families – with bias towards the A320/A321 and -8/-10 variants – being wary on some sneaky conversions from MAX 9s! IBA expects to see a small handful of ceo/NGs creeping in, but not a lot.
We anticipate around 600 firm and MoUs for the neo/MAX families, with a total of 20 for the ceo/ NGs. We expect to see around 70 aircraft ordered across both the Q400/ATR families and some action on the E1 and E2s too that should match that, but it may be too early to reap the benefits of the Boeing announcement. We would hope to see some movement on the CSeries program for both variants but it may be too early to lead to firm/MoU level commitment. We don’t expect to see much happening at MRJ until the aircraft enters service, especially given the fact that their competition is getting serious backing. At the upper end of the market, around 100 orders across the 777, 787, A330 and A350 families would be a good result. The bias will edge towards the A350s and 787s, with a smaller number going for A330neos and a few orders heading towards the 777 family. If there is a surprise it could come from the widebody space.
In terms of buyers, lessors will take around 40%. If past performance is to go by, expect the top 10 lessors to buy top-up positions, with a few Chinese lessors buying a few more – pretty much all in the narrowbody space. Announcement-wise, the NMA and the CSeries stakeholder changes should spark up some interest but this feels too early for the NMA launch itself – that may be later this year. In all, the order tally (firm and MoU) could top 900 again, especially if the narrowbody tightness is to be believed, but increasing costs for the airlines may prevent the orderbook rising by too much.
Chief Operating Officer, IBA Group