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 sector profile 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 abrupt change of fortune in the years just before and after the global crash of 2008. 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 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 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 dropped 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 froze or canceled orders, and passengers deserted airports.
However, despite the global downturn, Airbus announced in January 2010 that it had delivered a record 498 aircraft to customers in 2009—15 more than in 2008. This meant it beat rival Boeing in terms of deliveries for the seventh year running, according to Airbus. At the end of 2009, Airbus had a total order backlog of almost 3,500 aircraft and an order book worth US$437 billion. By contrast, Boeing’s aircraft orders tumbled by 79% to 142 amid the worst travel slump since World War II. Profit plummeted 51% to US$1.3 billion.
While demand for air travel returned in 2010, a giant ash cloud from the eruption of Iceland’s Eyjafjallajökull volcano severely disrupted European air travel, causing more than 100,000 flight cancellations and impacting over 7 million passengers. The event also underlined the importance of air travel to the global economy, with the impact on world trade through flight cancellations and lost or delayed business estimated at US$4.7 billion.
Presenting Boeing’s first quarter 2011 results, the company’s chairman, Jim McNerney, underscored the fact that the aviation industry saw global air traffic return to peak levels in 2010, though demand has since softened slightly, along with some softening in the European and US economies. Utilization rates continued to improve across both single and dual-aisle aircraft. The strong fundamentals, made up of continued global economic growth, firm demand for air travel, and good aircraft utilization rates, are driving high demand for aircraft, with Boeing recording 46 forward sales of its 777 airplane. McNerney told analysts that Boeing planned to increase its production capacity of commercial aircraft by some 40% during the next three years.
Unlike the auto industry, which was significantly impacted by supply-chain disruption following the Japanese earthquake and tsunami, Boeing saw little significant impact on its operations, with no meaningful delays in parts deliveries. Boeing’s 787 Dreamliner is coming to the end of its flight testing phase and, when it enters service, the 787-8 is expected to carry between 210 and 250 passengers, depending on seat configuration options, on routes of 14,200 to 15,200 km. The 787-9 can carry up to 290 passengers a further 550 km. The significance of the Dreamliner is that it brings big-jet distance ranges to mid-size airplanes, combined with much better fuel efficiencies and exceptional environmental performance by comparison with prior generations of airplane.
Every year, Airbus produces a forecast (“Global market forecast,” see More Info) for aircraft orders over the next 20 years. Trends noted in its latest forecast 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.
In its report, Airbus predicts a demand for 26,921 new passenger jetliners over the period to 2030, together with 927 new freight aircraft deliveries, making a grand total of some 27,848 new jetliners being delivered to airlines over the next 20 years. The market value of this addition to the global airline fleet is worth some US$3.5 trillion. The Airbus report also makes the interesting point that air travel demand is actually extremely resilient in the face of major global shocks. A graph of demand over time creates a pretty steady bottom-left-to-top-right chart, with short pauses after major oil crises, the Gulf crisis, the World Trade Center attacks, SARS, and the global financial crisis.
Boeing too, publishes an annual report, “Current market outlook,” which sets out the prospects for the aviation industry over the following 20 years. In its latest review, covering the period 2011–30, Boeing remains optimistic about long-term trends. The company sees passenger traffic growing at an annualized rate of 5.1% over the next 20 years, almost tripling over the period. This is back in line with the long-term growth trend for the aviation industry. Cargo growth will be slightly faster, at 5.6% per year. On the basis of its figures, Boeing puts total demand for aircraft at a slightly higher level than Airbus, at 30,000 new deliveries with a market value of US$4 trillion. The twin-aisle market alone will require 7,000 new aircraft like the 787. The company puts freighter demand at 970 new deliveries, with most of these being big freighters, such as Boeing’s new 747, due to come into service shortly. From 2010 to 2011 demand for single-aisle aircraft, much used by low-cost carriers, has increased sharply, causing Boeing to raise its estimate for the period by between 8% and 9%. In all, Boeing is forecasting demand for some 23,000 new single-aisle airplanes between now and 2030. Demand for large intercontinental aircraft is much smaller, at no more than 820 airplanes such as the 747-8 Intercontinental. However, this is a big-ticket market with a total value of US$270 billion.
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 2009 and 2010. The two aircraft giants are locked in a dispute over claims that they are each receiving commercial aircraft subsidies. Brussels has accused the United States of giving Boeing almost US$24 billion in state aid, while the United States says that the United Kingdom, France, Germany, and Spain have provided Airbus with US$15 billion.
In 2010 the World Trade Organization finally delivered its judgment on Boeing’s claim that Airbus was receiving illegal subsidies and could only have got off the ground with massive European state aid. It basically found that some aid was illegal and called for it to be withdrawn. In March 2011, Airbus got some satisfaction when its charge that Boeing was in receipt of illegal subsidies from the US was upheld, in part, by the WTO. Both judgments are currently being appealed. As Airbus itself noted in its press release following the March 31, 2011, WTO judgment against Boeing, the only real beneficiaries of these actions are emerging rival aircraft manufacturers in emerging markets.
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 January 2010, Airbus had firm orders for 202 A380s.
However, Boeing has a contrary view. The US company says that the future belongs to medium-sized planes that can service smaller airports. The Boeing 787 Dreamliner is specifically designed for this mid-size market, with an emphasis on fuel efficiency and lower emissions.
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. The first delivery was initially slated for May 2008, but that plane, on which Boeing’s fortunes are highly dependent, only began test flights in late 2009 and the company says deliveries will begin at some point in 2011. Boeing has orders for 866 Dreamliners from 57 customers—and the sooner it can begin delivering the jets, the sooner it gets paid.
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 100 km, 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, which entered production in 2010, utilizes 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 United States, the Federal Aviation Administration is encouraging the use of new fuels. Several flights have already taken place using biofuels. In April 2010, for example, a Boeing F/A-18 “Green Hornet” carried out a biofuel-powered flight and became the first US Navy fighter to be powered by a biofuel blend. The Navy noted that the F414 engine performed as expected during the 45-minute flight—and indicated “the aircraft did not know the difference between the bioblend and its traditional fuel source.”