Are We On The Cusp Of An Aviation Bubble? ? Civil Aviation Forum ...

I was wondering how can aviation support the amount of planes and financing it is bearing and the future. I am no expert on the subject but I look at it like so. Airbus and Boeing are always trying to see who can piss the farthest but when they offer discounts on bulk orders its seems like they are setting them selves for disaster. Everyday I look at the blog post by Matt Cawby and I can't imagine how Lion Air is REALLY going to fly the planes they are receiving atop of what they ordered recently with 201 MAX 9's. Yes I understand it's a 737 and or a 320 which are the most prevalent modern passenger planes now and in the future. I also get growth, expansion and fleet renewal but it seems over and above what the market can bear in terms of durable goods go. This production keeps the wheels spinning at manufacturers but what happens when the glut of aircraft begins to look like the 787's parked at Everett Washington. Ideas?

I definitely think that there is a bubble on commercial aircraft at the moment. I think that it's more likely that the burst will manifest itself as depressed values on used planes as they flood the market rather than airlines not taking delivery of new planes.

Quoting rotating14 (Thread starter): Airbus and Boeing are always trying to see who can piss the farthest but when they offer discounts on bulk orders its seems like they are setting them selves for disaster. I'm not really following you here; no airline orders planes they don't want just because the OEM's are offering them for cheap. The cost of operation so grossly overshadows the purchase cost that you absolutely have to have a business need for the aircraft or you won't buy it. The OEM's discount to compete with each other, not to create demand. Demand is almost completely out of their hands. It's not like car sales; you can't just talk someone into spending billions of dollars because they're getting a good deal on a product they don't need. Quoting rotating14 (Thread starter): Everyday I look at the blog post by Matt Cawby and I can't imagine how Lion Air is REALLY going to fly the planes they are receiving atop of what they ordered recently with 201 MAX 9's. I think you're underestimating the impact of the growth of the middle class in Asia. There are literally billions of people in Asia, most of whom still can't afford air travel. As those economies modernize and their middle classes grow it will be like having multiple US-sized air travel markets pop up. Quoting rotating14 (Thread starter): This production keeps the wheels spinning at manufacturers but what happens when the glut of aircraft begins to look like the 787's parked at Everett Washington. Ideas? They're not even keeping up with demand...most airlines would take their orders earlier if they could. I'm not sure what the "glut" is. Tom.

We had a huge bubble in the mid-2000's, which collapsed with the Global Financial Crisis. Aircraft values and lease-rates skyrocketed, only to collapse a handful of years later. With both Airbus and Boeing looking to be discounting significantly to even mid-tier customers, it is possible that airlines and lessors are wary of being caught with their pants down again when the bubble eventually bursts, so instead of paying a premium and driving up values like they did before, they are now demanding large discounts to keep values low - and stable. With Airbus and Boeing both having increased production a fair bit the past decade, their production costs have dropped so their margins look stable even with deeper discounts.

Quoting tdscanuck (Reply 2): I think you're underestimating the impact of the growth of the middle class in Asia. There are literally billions of people in Asia, most of whom still can't afford air travel. As those economies modernize and their middle classes grow it will be like having multiple US-sized air travel markets pop up. There's often a lot of growth and good feelings, and it's all true. For a while. The issue is that there's always something that upsets the apple cart: terrorist attack, war, rising fuel costs, recession, etc. Looking at growth today and assuming it's going to stay that way for the better part of a decade is usually a mistake.

Quoting BMI727 (Reply 4): The issue is that there's always something that upsets the apple cart: terrorist attack, war, rising fuel costs, recession, etc. Looking at growth today and assuming it's going to stay that way for the better part of a decade is usually a mistake. No event, even a global recession, is going to drive several hundred Chinese/India/Indonesian middle class folks back to peasant farming...the industrialization of Asia has been going for decades and it's got a long way to go. Shocks like 9/11 or war will certainly change the rate of growth but there's still a market of several *billion* potential air travellers out there that aren't in the market yet. Tom.

There is a partial bubble, yes, but when it bursts the impact will not be as bad as you think. As for Lion Air, like Tom has said, there is a huge growth that you will almost not believe if you have not seen it. And forget not, that a part of these orders may be intended for replacement rather than growth. In fact, the aviation growth in Indonesia may well outperform China soon. There is a reason why Tony Fernandes wanted to be based there.

Quoting rotating14 (Thread starter): I can't imagine how Lion Air is REALLY going to fly the planes they are receiving atop of what they ordered recently with 201 MAX 9's. You do realise that Indonesia's economy is growing at about 7% per year, and the country has a population of around 240 million people, don't you? Passenger numbers through CGK increased by 400% between 2001-2011, and the airport is now the World's 11th busiest.

Quoting BMI727 (Reply 4): The issue is that there's always something that upsets the apple cart: terrorist attack, war, rising fuel costs, recession, etc. Looking at growth today and assuming it's going to stay that way for the better part of a decade is usually a mistake. Don't forget that a large chunk is replacement... for the Classics, MD80, 757s, etc.

One of the most basic principles of economics is supply and demand, in parts of the world in recent years (Ireland is a good example) there was too much property built that put too much supply on the market for the demand that wasn't really there. At least aircraft can be easily destroyed and parts reused / recycled therefore if there is too much supply on the market it can be corrected by getting rid of the older less efficient models. When we look at the last 15 years of world events; dot-com bubble burst and the subsequent economic fallout, 9/11, war on terror, the threat from terrorism, SARS, Bird flu, the Global Financial Crisis of 2008 onwards and many plane crashes that would put the average person in fear of flying yet the industry is one that keeps on going. I know a few airlines have gone bust in the last few years and a few others are letting go staff or making loses but they will want new aircraft in order to have a more efficient product. The aviation industry may be in some sort of bubble but that can be fixed easily by breaking up older aircraft and the demand for air travel / cargo will always be there or increase.

Quoting planemaker (Reply 8): Don't forget that a large chunk is replacement... for the Classics, MD80, 757s, etc. Yes, but airlines still have to pay for the new planes. And as old planes are cast off in large numbers, their prices will drop, quite possibly to the point where they are in competition with new planes. Really, I think that's more in line with what will happen when the bubble bursts. The vast majority of orders held now by manufacturers will be delivered as planned, it's the owners of the plane and potential future orders that may take a hit if used plane prices fall off a cliff. Suffice to say that I wouldn't want any 737NGs or A320s on my books come 2018-2020, because it would be really difficult to get back what they cost.

Looking at the NEO/MAX orders I suspect a bubble is forming. Many of the airlines probably wont be in service in 2016..

Aside from whether airlines have the need for all these new planes - will the finance packages be available at an acceptable rate be available for so many planes, especially for the airlines that are relative newcomers. Also will the airports where these planes be flying from - especially in the far east where aviation is booming most - have the infrastructure to cope with the additional flights that will be generated?

Quoting rotating14 (Thread starter): Everyday I look at the blog post by Matt Cawby and I can't imagine how Lion Air is REALLY going to fly the planes they are receiving atop of what they ordered recently with 201 MAX 9's. Very easily - just look at a map of Indonesia and the population centers. Quoting planemaker (Reply 8): Quoting BMI727 (Reply 4): The issue is that there's always something that upsets the apple cart: terrorist attack, war, rising fuel costs, recession, etc. Looking at growth today and assuming it's going to stay that way for the better part of a decade is usually a mistake. Don't forget that a large chunk is replacement... for the Classics, MD80, 757s, etc. The most important factor is passengers changing mode from ferry to plane - until recently taking the boat was the only intra-island option for most of the population. The entry of LCCs like Lion Air has changed that considerably, but there is a still a long way to go. Flying might not have the best track record in Indonesia, but it is still miles ahead of safety on the water. Dan ?

As some have argues, the airlines sees a demand since they are ordering so many airplanes. And I do believe that there is a large unmet market in the world for airlines. What I believe can be a problem for aviation is the fact that the U.S and E.U. are allowing less financially secure airlines the best interest rates possible. Then a new airplane will be cheaper to own and operate than a used one. Why should an airline want to buy a used 7 year old 737NG or A320 that would cost me more to operate, than a brand new one? I believe that this is why we have seen relatively new airplanes being parted out as their value decreases faster than their technical value. If this trend continuous and airlines are getting troubles selling perfectly good airplanes, then I believe the bubble will burst.

There could always be a short term pop, such as in 2008, but in the 5 to 10 year span it shoudl sort itself out naturally based on costs. If the NEO /MAX and 787 / 350 are anywhere near what they are being touted as (which I believe), then the market and demand will all be 100% fuel and cost based. Assuming current or higher oil prices, then In 5 to 10 years once production gets up to speed of the new models, then we'll be seeing 2012 built 738's and 320's being scrapped and the prices dropping like we are seeing for 318's and 736's, and the values of the NEO's and MAX's will be very high since the operating cost will be so much lower than the 2012 version. If fuel prices drop for a while (like they did in the 1990's when no one expected it either) then A and B are going to be wondering what to do with all the new stuff they are building...the main value proposition for the MAX and NEO is fuel burn, and if the cost of fuel drops, then who cares! Niche markets will still be there for those routes where the MAX and NEO get the extra range / load numbers to make it work physically (WS from YYC to HNL, everyone's fav 757 sub the 321NEO for the shorter Atlantic and 100% nonstop transcon runs if A can squeeze the range / payload out of it). There aren't too many of those routes though that have a natural market but the available metal can't quite do it. So - low fuel prices will make it a bubble for the manufacturers, and for anyone else holding the can when the music stops. So, A and B need / want / are counting on high (at least current) oil prices to move the new products, which is probably the way to bet anyway. Even if oil drops for a while, it would come back, and as long as A and B have a couple of decent production and cash flow years now without any more 388 and 787 financial fiasco's, they should be able to weather a 3 to 5 year tight spot if (when?) it happens. As for the market size - with airfares being so cheap (relatively) compared to 20 years ago, and with the continued increases in efficiency / productivity in the industry relative to everything else, the 'relative' cost of travel is still well within reach for a larger % of the planet than ever before - so while there will always be ups and downs, there will continue to be more ups I imagine.

The cost of ATF......a real hurdle.

Quoting BMI727 (Reply 10): And as old planes are cast off in large numbers, their prices will drop, quite possibly to the point where they are in competition with new planes. Operating cost is too big a portion of the equation for that to work out on most routes. The only place where very old frames can be economically competitive is on short routes (low fuel burn) or routes with no competition. Tom.

Quoting BMI727 (Reply 10): Yes, but airlines still have to pay for the new planes. And as old planes are cast off in large numbers, their prices will drop, quite possibly to the point where they are in competition with new planes. Quoting tdscanuck (Reply 17): Operating cost is too big a portion of the equation for that to work out on most routes. What Tom said. G4 is spending significantly more to add the A320 family to their fleet because even though they can continue to add MD-8x planes for next to nothing, their operating costs are so much higher that even with the minimal utilization they get, it's no longer cost-effective. The MD narrowbody fleet will be turned into beer cans and the sides of the trucks that haul them. A320s and 737NGs delivered before the 2000s will also likely go straight to the desert to serve as spare parts depots.

Quoting Stitch (Reply 18): G4 is spending significantly more to add the A320 family to their fleet because even though they can continue to add MD-8x planes for next to nothing, their operating costs are so much higher that even with the minimal utilization they get, it's no longer cost-effective. And because they know that A320 values will fall off a cliff in a few years. This isn't just narrowbodies either. With 787s, A350s, and 777s being delivered, there will be A330s and 777s hitting the market. Values are likely to drop and that will keep them competitive with new planes, especially where time may be important.

Quoting BMI727 (Reply 19): And because they know that A320 values will fall off a cliff in a few years. I expect that not to happen until a few hundred A320neos are in service, so I'd shoot more for a decade from now. Quoting BMI727 (Reply 19): This isn't just narrowbodies either. With 787s, A350s, and 777s being delivered, there will be A330s and 777s hitting the market. Values are likely to drop and that will keep them competitive with new planes, especially where time may be important. 777-200s, early-build 777-200ERs and A330-300LGWs will likely go directly to the desert for spare parts. 777-300s might see a second life as charter planes or they might also become spare parts, as well. Later-build 777-200ERs and A330-200s will find a home with charter operators. The only model I feel has a good chance to find new homes with scheduled carriers is the A330-300HGW as the economics of the type are strong.

I think we are in a bubble and that it will burst around November or December, the day after ?someone? bombs the Iran nuclear facility. Iran will, in turn, mine the Straits of Hormuz and the price of crude oil will rocket. People in the West will be reluctant to travel but I do not expect much of a down turn in the Far East market. The crisis/price of oil will have a further impact on the already troubled Euro Zone, LCC will see some down turn but are better placed to deal with it. The western airlines will be parking in the dessert. Just my 2cents worth.

I should also add that the 777-200ER and A330-300HGW will likely also form the basis for feed stock for freighters. A 777-200ERBCF will be no match for a 777 Freighter, so I don't expect conversions to impact sales of new builds for that program. And I am a bit skeptical of Airbus launching the A330-300F as a new-build freighter program. [Edited 2012-08-12 10:25:46]

Quoting tdscanuck (Reply 5): No event, even a global recession, is going to drive several hundred Chinese/India/Indonesian middle class folks back to peasant farming...the industrialization of Asia has been going for decades and it's got a long way to go. Shocks like 9/11 or war will certainly change the rate of growth but there's still a market of several *billion* potential air travellers out there that aren't in the market yet. They aren't going back to farming, but if something the magnitude that hit the US/Europe hits Asia, they will be grounded for a while. Then companies will start to default on their export-subsidized loans. This, of course, would happen aviation bubble or not. But the fall is bigger for the sector if there is a bubble. Quoting grimey (Reply 9): At least aircraft can be easily destroyed and parts reused / recycled therefore if there is too much supply on the market it can be corrected by getting rid of the older less efficient models. Agreed. It's not the same thing as a house that will be around for decades. Quoting planemaker (Reply 8): Don't forget that a large chunk is replacement... for the Classics, MD80, 757s, etc. A good chunk is going to start-ups with just about zero credit rating.

Wait untill all 7 billion citizens of this planet are middle class and want to fly ? Heck, even lower incomes can fly with LCC's. And with so many people nowaday living and working abroad there is more and more ethic travel besides leisure and business.

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