Boeing raises aircraft demand forecast; jitters resurface about China and falling lease rates
By June 20, 2017 14:52

Boeing raises aircraft demand forecast; jitters resurface about China and falling lease rates

Boeing is now predicting that the world will need 41,030 new aircraft over the next 20 years valued at $6.1 trillion dollars – an increase of 3.6% over last year’s forecast.

“Passenger traffic has been very strong so far this year, and we expect to see it grow 4.7 percent each year over the next two decades,” said Randy Tinseth, vice president of Marketing, Boeing Commercial Airplanes. “The market is especially hungry for single-aisle airplanes as more people start traveling by air.”

Boeing’s Current Market Outlook ( predicts that the narrowbody market, fueled by low-cost carriers and emerging markets, with need 29,530 new aircraft – an increase of almost 5% over last year’s forecast. The widebody segment will require 9,130 new aircraft with a large wave of potential replacement demand beginning early in the next decade. With more airlines shifting to small and medium/large widebody airplanes like the 787 and 777X, Boeing predicts that the demand for freighters will boost demand in the cargo market with 920 new widebody freighter predicted by 2036.

Boeing predicts that the Asia market, including China, will continue to lead the way in total aircraft deliveries over the next two decades. Worldwide, 57% of the new deliveries will be for airline growth, while 43% will be for replacement of older airplanes with new, more fuel-efficient jets.

Asia is still driving demand for aircraft and currently the Chinese aircraft leasing companies and their parent companies are continuing their acquisitive march for companies, new aircraft and market share. But darker clouds are gathering on the horizon and the savvier market observers are looking for those impossible-to-predict black swans that will lead to a massive correction in the market. Airline Economics has written about the Chinese black swan before (Issue 26, May/June 2015), but rather than focus on the risk from the shadow banking market, the likelihood is that the correction will come from a much more common issue – overextension, increased leverage, coupled with the rising cost of dollar-denominated funds.

Moody’s downgrade of China is already biting at the cost of dollars and increasing the risk of capital outflows that will heap pressure on the local bank market, but despite this, Chinese financial institutions and conglomerates are continuing to acquire more companies in this sector, aircraft lessors are continuing to order new aircraft and offer rock-bottom lease rates, while airlines are funding fleet expansion with short-term debt and rising leverage. The signs are building to a correction in the market that will shake the sector, which will make for rich pickings for traders in the market for almost-new aircraft at cut-rate prices.

The current situation is not helped by the fact that lease rates appear to be falling on most aircraft types leading us to ask where the market would be now if all deliveries were on time and on spec?

There are indications that certain A330-300s with good engine time and fresh out of maintenance checks are fetching just US$280kpcm; while there has been another instance of a new 787-9 going for just US$848pcm. The Neo and Max premium for the most part just is not there, sources say. If all the new deliveries had been on time and on spec as planned, there would have been a real problem for some aircraft owners.

The widebody aircraft market is being hit by the large Gulf carriers returning and grounding aircraft causing a serious glut with no real viable method of an economical transition to new owners. Leading institutional investors are looking at this and are getting worried; but should they be? Cheap money has kept the carrousel turning this far, with most of that liquidity coming out of China. But what if that tap is turned off? Worried eyes should rather be turning their attention towards China.

Lessors are taking aircraft at lease rate returns that make a profit impossible. Residual values are clearly not going to be as high as they think, so where is the logic to all this?
By June 20, 2017 14:52