Air Transport World

Oh oh ...

The industry is entering a peak delivery period as signs point to a broad downturn

Boeing Commercial Airplane Group expects to deliver a record 550 jets in 1998. But all of a sudden, its own well-publicized production problems are not the only hurdle that must be overcome if this is to be achieved. The company's recent disclosure that it had parked 36 new jets because their customers could not or would not arrange financing signals a different challenge: Maintaining deliveries in the face of turmoil in the financial markets and growing uncertainty about the short-term outlook for the airline industry.

To pessimists, these 36 airplanes represent only the tip of a coming over capacity iceberg. The image of shiny new 737s, 747s, 777s and MD-90s, idle and unwanted on the tarmac, conjures up memories of the early 1990s, when the Gulf War-triggered traffic downturn and subsequent recession contributed to a vast overcapacity situation and horrendous financial losses for the world's airlines.

Hundreds of jets were parked in the desert and hundreds more never made it off the assembly line as cash-strapped airlines and leasing companies canceled previously announced orders. And while no one forecasts anything approaching the magnitude of that disaster, a number of experts with whom ATW spoke do see indications of the same kinds of problems, including a tightening of aircraft credit, softening of aircraft lease rates and overcapacity.

Although these are particularly pressing in Asia, they also exist elsewhere, providing further evidence--were any needed--that the current cycle has peaked and tougher days lie ahead for airlines, lessors, lenders and manufacturers. Boeing, which had confidently predicted that just 150 deliveries would be affected by Asia's problems, now says that number is expected to be much higher. The downturn "poses a significant risk to deliveries," particularly widebodies. And with little sign of a turnaround, the company is re-evaluating production rates.

"This is no longer an Asian crisis. That was how it just happened to start. The crisis is wider and there are signs that growth generally is turning down in other parts of the world," says Robert Martin, managing director of Singapore Aircraft Leasing Enterprise, a joint venture between Singapore Airlines and Boullioun Aviation Services. He sums up: "There is no doubt we're heading into a downturn."

Robert Genise, president and CEO of Bellevue, Wash.-based Boullioun, characterizes the aircraft-finance market as "jittery," adding: "The industry is going to be taking it a bit on the chin."

To be sure, these warnings seem a bit incongruous in light of the record-setting third-quarter earnings turned in by several U.S. Major airlines (see article, page 63) and continuing financial strength shown by Europe's leading carriers, and other observers are more sanguine. Among these is Reston, Va.-based Avitas, whose newly-published Global Outlook for Air Transportation predicts: "Asia's recession, although deep, will not be severe enough to affect U.S. and European markets this year or next."

Many airlines seem to feel the same way, judging by the pace of ordering. …

Log in to your account to read this article – and millions more.