Aviation Industry

Major Industry Trends

This report covers the entire aviation industry, including the airline and aerospace sectors. It focuses upon the civil sector of the aerospace business. The military sector is included in the separate industry report on defense.

The Economic Cycle and Aviation

The civil aviation industry is highly cyclical, being extremely sensitive to the economic cycle. In times of economic hardship, people simply fly less often than they do in the good times. This is true of both the leisure and business sectors. This characteristic is exemplified by the industry’s fortunes in 2007, 2008, and 2009. Many people in the industry described 2007 as one of the best years that they had ever experienced, with both the civil and military sectors benefiting from bulging order books. Indeed, 2007 marked the first time that a simultaneous upturn in the civil and military sectors had occurred. Factors supporting the industry included:

• Booming global growth, which supported demand for both cargo and passenger services;

• Buoyant corporate profits, which drove demand for business jets, and business travel in general;

• The rapid growth of demand in emerging economies, such as China and India;

• Conflicts in countries such as Iraq and Afghanistan, which drove demand for military equipment and services;

• Huge investment in new aircraft by the civil sector in response to environmental issues, and to the high price of oil. Fuel is the biggest operating cost facing any airline.

The fortunes of the two manufacturers that dominate the global civil aerospace market highlighted the buoyancy of the industry in 2007. The US aircraft giant, Boeing, enjoyed a record year for new orders, with 1,413 (net) orders racked up, surpassing the high set in the previous year. The European Aeronautics Defence and Space Company (EADS), which manufactures the Airbus range of airliners, also enjoyed a bumper year in terms of new orders, and said it had a backlog of 3,421 aircraft, representing about six years of production and “the highest backlog ever for the aviation industry.”

In 2008, however, the industry’s fortunes changed markedly due to a double whammy of rapidly increasing fuel costs in the first two-thirds of the year, and a marked deterioration in the global economy and financial system in the final third. By the time of the Farnborough Air Show (one of the most important events in the aerospace industry calendar, held every two years) in July, both Boeing and EADS remained optimistic about the outlook. The chief executive of Boeing, James McNerney, described soaring oil prices as an “opportunity” which would speed up orders for new aircraft that consume less fuel than their predecessors. Louis Gallois, the chief executive of EADS, told the BBC that he also believed that rising oil prices were encouraging airlines to buy new, more efficient airplanes.

However, independent analysts were far less sanguine about the industry’s future. Nick Cunningham, an analyst at Evolution Securities in London, told aerospace-technology.com that the outlook for civil aerospace manufacturers was worse than it had been for decades. He said: “I believe that post-2010 we will see a sharp drop in deliveries—remember, in a regular recession deliveries halve—and we will see deliveries remaining depressed for a very long period of time, as they were in the 1970s, and right through the 1980s.”

In December 2008, Nick Cunningham told aerospace-technology.com that, “the last few months have already been a desert as far as orders are concerned, and I think that this trend will continue for several years.” He added: “The macroeconomic background has deteriorated dramatically, and that will have a very big effect. As a rule of thumb, traffic grows by around double the pace of GDP growth. Thus, if the GDP of the developed economies declines (and it looks like the US, Japan, the UK, and probably continental Europe are going to see negative GDP growth in 2009, and possibly for some of 2010), aggregate global traffic volumes will decline.”

By the end of 2008, it was clear that the outlook for the global economy and the aviation industry had deteriorated even more rapidly than had been anticipated. In December 2008, global international cargo traffic plummeted by 22.6%, compared with December 2007, according to the International Air Transport Association (IATA), while international passenger traffic fell by 4.6%. The Asia-Pacific region, which accounts for 45% of global cargo, was worst hit, with a 26% drop over the preceding year, reflecting a slump in demand for the region’s manufactured goods. North American carriers reported a 22% fall in their cargo business, while European airlines saw a 21.2% decline. The slump continued in 2009. In March, IATA said that the airline industry’s losses could amount to US$2.5 billion during the course of the year, as traffic drops by about 3%. Civil aerospace manufacturers were forced to step up the provision of customer financing after the credit crisis hurt airlines’ ability to secure financing for aircraft.

In March 2009, both Boeing and EADS reported that cancellations of existing orders had exceeded new orders since the beginning of the year. Airbus earlier cut monthly production rates for its single-aisle and wide-bodied jets, as airlines freeze or cancel orders, and passengers desert airports.

Nonetheless, once the global economic outlook improves, the prospects for the aviation industry will surely follow suit. Every year, Airbus produces a forecast (Global Market Forecast, see More Info) for aircraft orders over the next 20 years. In its 2008 report, Airbus identified various factors that were driving the growth of air traffic over the long term, and which are likely to come back into play when the recession ends. They include:

• The rapid growth of emerging markets, where economies and demographic developments are both being driven by, and benefiting from air travel;

• The liberalization of aviation markets around the world, which is giving greater market access to airlines, and wider choice for passengers;

• The continuing growth of low-cost carriers across the planet, but particularly in Asia;

• The emergence of megacities, and increasing congestion at airports.

Boeing also publishes an annual report on the prospects for the aviation industry over the following 20 years, called Current Market Outlook. In its latest review, covering the period 2008–2027, Boeing remains optimistic about long-term trends. The company says that, while air travel has grown by an average of 4.8% each year over the past 20 years, passenger travel is expected to grow by an average of 5.0% a year, and cargo is expected to grow by 5.8% a year over the next 20 years. It adds that, “the fastest-growing economies will lead the transformation into a more geographically balanced market,” while more-productive new airplanes will play a greater role, and there will be a relentless pursuit of further environmental progress. Boeing also believes that, “as airlines seek better financial returns, they match the airplanes used more closely to the precise economics of the routes they fly.” This means that airlines will, in general, use larger regional jets and single-aisle airplanes, and more small and medium-sized twin-aisle airplanes.

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Market Analysis

The Battle between Airbus and Boeing in the Global Civil Aerospace Market

In 2003, Airbus overtook Boeing to become the world’s best-selling aircraft maker, a position it retained in 2008, when it delivered a record 483 aircraft, beating Boeing, which sold 375. Airbus sold planes worth US$100bn in 2008, giving it a market share of 54%. In January 2009, Airbus said it had total orders for 3,715 jets, which it estimated would take six years to clear, although this could be reduced to four years with cancellations. Boeing said it had 3,700 orders. The two aircraft giants are locked in a dispute over claims that they are each receiving commercial aircraft subsidies, with the issue awaiting rulings from the World Trade Organization. The EU and the US have accused each other of providing illegal subsidies to the companies. Brussels has accused the US of giving Boeing almost US$24bn in state aid, while the US says that the UK, France, Germany, and Spain have provided Airbus with US$15bn.

The two manufacturers have clearly conflicting views over the way the airline market will develop. EADS believes that the increasing problem of congestion is leading to “a clear trend towards larger aircraft.” Airbus says that this is evident in all seat categories, from smaller regional aircraft to very large aircraft, and will “result in the average aircraft size increasing by as much as 25% over the next 20 years.” This view explains EADS’s development of the Airbus A380, the largest passenger airliner in the world, which made its first commercial flight in October 2007. EADS believes airlines will increasingly require bigger planes to meet the growing numbers of passengers flying between major hubs. By the beginning of February 2009, Airbus had orders for 200 A380s.

However, Boeing has a contrary view. The US company says that the future belongs to medium-sized planes that can service smaller airports. To meet this demand, it has developed the Boeing 787 Dreamliner, an aircraft that Boeing says is much more fuel-efficient than its competitors, and produces 20% less CO₂. Boeing adopted a new manufacturing process for the 787, minimizing the work done in final assembly, simplifying tooling, and outsourcing production to a network of global suppliers. However, the 787 has been plagued by delays due to production glitches, and a two-month strike in 2008. The first delivery was initially slated for May 2008, but, in March 2009, Boeing said that it expected to make its first delivery in the final quarter of 2010. Airbus experienced similar problems with the A380—its first delivery was delayed by 18 months. By March 2009, Boeing had 878 current orders for the 787, from 57 customers.

Technological Developments

Aircraft makers are focused on reducing fuel consumption, and operating costs in general, in the battle to win orders from airlines. Fuel costs, which can account for 50% of an airline’s operating costs, can make or break an airline. Boeing says that its 787 Dreamliner will cut fuel use by 20%, thanks to new engines, and the use of lightweight composite materials. Meanwhile, EADS says that the A380 is the first long-haul aircraft to consume less than three liters of fuel per passenger over 100km, a rate comparable to an economical family car. It claims that the A380’s efficiency and advanced technology result in 15–20% lower seat-mile costs than those of competitor aircraft. Fuel-efficient engines and the use of advanced composite materials have played a vital role in reducing the A380’s operating costs. The airframe is made up of some 25% composite material, by weight, while the Airbus A350XWB, due to enter production in 2010, will comprise around 50% composite material.

Boeing and Airbus are also engaged in developing alternative fuels. The engine makers, Pratt & Whitney, Rolls-Royce, and General Electric are all involved, and the momentum is being maintained, even though oil prices have fallen considerably from their mid-2008 peaks. In January 2009, Alan Epstein, Vice-President of Technology and Environment at Pratt & Whitney, said, “It’s the first time in the history of jet aviation that the world is seriously considering going to a totally new fuel.” IATA has a goal of 10% alternative fuels by 2017, while in the US, the Federal Aviation Administration is encouraging the use of new fuels. Several flights have already taken place using biofuels. In January 2009, for example, Air New Zealand flew a four-engine Boeing 747 with one engine on a 50% biofuel mix. During the same month, a Japanese Airlines 747 flew with one engine powered by a biofuel made primarily from camelina.

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