Outlook 2012 for the key aviation segmentsDespite a relatively good performance of the passenger market during 2011, the outlook for 2012 is not so clear. While in many global regions the industry as such seems relatively well organised and capable of a positive financial result, factors beyond the control of the airlines could change the picture completely. The preliminary 2011 global system-wide traffic growth of 4.2%, expressed in tonne kilometres performed (TKP), will be difficult to repeat in 2012. IATA’s baseline forecast of December 2011, however, still assumes a 2.9% TKP increase in 2012, whereas IATA’s banking crisis scenario might swing this figure to –1.3%. The banking crisis scenario is based on an OECD scenario that starts with a disorderly sovereign default in the euro zone, sending the OECD area into recession with a very negative impact on global trade. While in IATA’s baseline scenario the anticipated capacity growth of 3.1% ATK already slightly exceeds the expected demand growth, in the crisis scenario – even with an anticipated stagnant capacity – the situation will be even worse.
For 2012, IATA expects the strongest expansion to take place in Latin America. The anticipated 8.3% (ATK) capacity increase even lags behind the 8.5% growth in demand (in TKP). Latin America, however, is expected to be very sensitive to the global economic developments so under the crisis scenario capacity expansion would only be 3.3%, and demand even less at 2.3%. Regardless of the economic crisis, the Middle East airlines are likely to continue their strong expansion. In 2012, Middle East carriers are expected to increase their capacity by 5.8%, fairly close to the anticipated baseline demand projection of 5.7%. Under the crisis scenario, a still-robust Middle East capacity expansion of 4.8% will still slightly exceed the anticipated 4.5% increase in demand. Africa is projected to see TKP growth of 3.5% (crisis scenario: 0.3%). The Asia-Pacific carriers are expected to see demand grow by 2.0% (crisis scenario: –0.2%). Growth in the mature European and North American market is projected to be 2.5% and 2.2%, respectively. Obviously Europe is more sensitive to the crisis scenario, seeing growth turn negative to –3.7%, worse than the North America crisis figure of –1.0%.
Under the baseline scenario, IATA still expects airlines to show a net profit of US$3.5 billion, about half the US$6.9 billion the airlines made in 2011. The European sovereign debt crisis would undermine the profitability of the global airlines significantly: under this scenario, a net loss of US$8.3 billion could be the result. One factor that can significantly change the picture will be the fuel price. Normally, weak economic growth results in lower oil prices. But it cannot be excluded that in 2012 the Iran conflict could cause further rise in oil prices, despite a weak economic environment. Currency exchange fluctuations may even exacerbate the situation for European carriers. Given these circumstances, DVB believes that some airlines may not be able to avoid bankruptcy during 2012/2013.
Despite the many uncertainties, airlines as well as leasing companies continued to place orders for new aircraft in 2011 and a solid order intake for selected new airliner programmes is expected to continue in 2012. In the twin-aisle segment Boeing finally delivered its long-awaited advanced 787 Dreamliner, but due to production problems the delivery volume remains limited. Airbus will not yet have its advanced twin-aisle opponent, the A350, available in 2012 either – consequently, demand for the older types, especially the Airbus A330 and Boeing 777 remains strong. The risk remains that once deliveries of B787 and A350 aircraft gain momentum, an oversupply of relatively young current generation aircraft that served as interim lift could materialise in a few years. With the air-cargo market in the doldrums, prospects for freighter conversion of older twin-aisle aircraft such as the B747-400 are limited and in many cases the only viable option may be break-up for part-out.
The single-aisle market segment was very much influenced by Airbus’ launch of a more efficient re-engined version of the popular A320 family, dubbed the A320neo, in December 2010. Over 1,200 “neos” were sold last year. Contrary to earlier expectations that Boeing would develop an all new single-aisle aircraft, the Seattle-based firm followed the European example and launched a re-engined version of its best-selling 737 family, named the 737 MAX. It was only towards the end of 2011 that Boeing started to book firm orders for the 737 MAX but it is expected that during 2012 a significant volume of this type will be sold. The launch of the 737 MAX may preserve the market symmetry between the A320 and the B737 that has ensured relative stable values for new aircraft in the all-important single-aisle market for many years. While the backlog for current generation single-aisle aircraft is significant and stretches well into 2016, several market observers have questioned the manufacturers’ stated policy of increasing production. These observers fear that the planned record output will result in an oversupply situation, with negative impact on equipment values.
DVB believes that even without the increased production there is a distinct risk of growing pressure on values of the current generation narrowbodies once the new generation A320neo and B737 MAX enter service. DVB research indicates that historically aircraft values have been most impacted by a combination of the availability of a superior technology successor aircraft, coinciding with a downturn in the demand for air transport. Especially in case of continued high fuel prices, the claimed 15% fuel burn improvement of the new aircraft will compel operators to replace their fleets, despite maybe slightly higher purchase prices for the new aircraft. The fact that a significant percentage of single-aisle aircraft is only leased by airlines – and not owned – may facilitate a quick transition to the next generation. Within the A320 and B737 families, DVB has noted a strong move away from the smaller family members, the A319 and B737-700. Relatively strong demand for air travel and better fuel efficiency per seat of the larger aircraft are amongst the reasons for this development.
DVB anticipates that the market for used single-aisle aircraft will once more come under pressure. Even relatively young aircraft of popular types frequently prove difficult to place with solid lessees, and often for disappointing lease rates. Market prices for these aircraft reflect this softness. There is no single cause for this problematic used equipment market, and factors that are believed to contribute include the airlines’ desire to operate new equipment, the high production rates of new equipment, the approaching end of production for the current generation, and the focus of equity investors and financiers on new aircraft. This situation has limited financiers’ appetite for used equipment transactions.
For 2012 and probably even more so in 2013, DVB is concerned that maybe not all aircraft transactions will be able to attract debt funding as a result of the financial and economic crises. While there are significant amounts of equity available for investment in new or very young aircraft, availability of debt funding is limited as many banks do not prioritise this activity. This so-called funding gap will most likely not affect the market for new commercial jets as this segment has the benefit of strong political support from government-owned ECAs.
While commercial bank funding may be a bottleneck, the ECAs will most likely once again take a significant share of the estimated US$90–95 billion funding requirement for new aircraft. 2012 will be the last year that airlines and lessors can benefit from relatively advantageous conditions offered by the ECAs. A new agreement amongst the ECAs, the so-called Aircraft Sector Understanding, could potentially drive up the cost of ECA-backed facilities, maybe to the benefit of commercial banks and capital market structures. The ECAs, however, generally do not play a role in the financing of used aircraft, a segment of the market where DVB is traditionally very active. For the coming years it seems DVB will be one of the very few financiers in this market segment. While the economy may start to improve in the second half of 2012, a tight supply situation in the air finance market may continue – even throughout 2013.