PARIS – Earlier today at the Paris Air Show, Boeing’s VP of Marketing Randy Tinseth presented the aircraft manufacturer’s current market outlook (CMO), projecting demand for 41,030 passenger and freighter aircraft deliveries over the next 20 years at a market value of $6.05 trillion.
Excluding regional jets, Boeing projects demand for 38,060 planes valued at $5.9 trillion. Rival Airbus projects demand for 34,900 planes worth $5.3 trillion over the same period.
The 41,030 new jets represent an increase of 3.5% over the figure of 39,620 presented last year at the Farnborough Air Show. Boeing projected demand for 1,390 more single-aisle narrow bodies, 50 fewer small widebodies, 10 fewer regional jets, and 310 fewer mid-sized wide bodies.
The projected growth comes in spite of an uneven 2016, which saw both Boeing and Airbus record their worst non-recession years for net orders since 2004.
Boeing confident in demand drivers, but should it be?
As outlined in the slide above, Boeing remains bullish on the path of the airline business and saw 2016 as a strong year for the industry despite growth dipping versus 2015. This is a valid point.
As Tinseth notes, 2017 will represent the eighth straight year of growth in the global aviation market. However, the slide above is a bit misleading, in that none of the three metrics presented actually mean anything for Boeing’s business future over the course of this CMO.
Take traffic growth in RPKs. Today’s traffic growth is based on orders for aircraft placed 3-7 years ago, and orders placed in 2017 will fund RPK growth in 2020-2025.
It’s good that traffic is growing in the airline industry (as that builds optimism for the future) but it doesn’t mean much for Boeing’s ability to sell planes moving forward beyond the replacement market.
Said market represents only 43% of Boeing’s projected 20-year demand, and much of it is already spoken for by existing Airbus and Boeing backlogs. Next, consider the two profit graphs – they point to a great uptick in profitability for the world’s airlines across 2015 and 2016.
But that isn’t necessarily a good thing for Airbus and Boeing. The profit increase has come not due to an increase in revenue powered by widespread economic growth. Instead, it is due to the decline in fuel prices since June 2014 which has lowered airline operating costs.
That decline in fuel prices has thus far (admittedly just three years in) appeared to be remarkably resilient. The recent unease in the Middle East between Qatar, Saudi Arabia, and several other OPEC members would have sent oil prices soaring as recently as four or five years ago.
Instead, there’s been barely a blip, as market confidence about US production more than offset worries about the Middle East. The fact of the matter is that American producers of oil get more efficient every day, and that has created a cap on oil prices that will persist for at least the next 3-4 years.
One of the biggest drivers of increased aircraft demand over the last fifteen years was the rise in oil prices and operating costs. Obviously, 20 years is a long time, and at some point, oil prices may rise again, whether due to market forces, or exogenous ones like a carbon tax.
But the demand projected by both Boeing and Airbus feels a bit high in the wake of oil market changes. We would have been more comfortable with a figure in the 30,000-33,000 range.
Tinseth did point to several headwinds, including regional variation in economic growth, a moderation of global trade growth, and increased geopolitical uncertainty (including populism). But he didn’t point to low fuel prices, which is ignoring the elephant in the room.
Industry leading delivery performance doesn’t mean much over the span of the CMO
Tinseth also pointed to Boeing’s leadership in deliveries, including a 55-65% share in the widebody market as another reason for optimism. Per Tinseth, Boeing expects to deliver 760-765 new jets in 2017, once again allowing it to retain the lead over Airbus. But as with passenger growth, this doesn’t mean much for Boeing’s future share of planes in this CMO – that is better represented by backlogs.
The reality is that since 2010, Airbus has outsold Boeing by a cumulative 835 aircraft and has beaten Boeing head-to-head for net orders in six of those seven years (the exception is 2012, when Boeing was powered by the launch of the 737 MAX).
Boeing needs to focus on closing that gap (largely driven by the middle of the market [MOM]) over the course of this CMO. The delivery lead is great for present day cash flows and dividends, but it doesn’t mean as much for forward-looking investors.
Relatively accurate aggregates belie internal variation
As the slide above indicates, Boeing’s CMO and Airbus’ Global Market Forecast (GMF) from 1997 were relatively accurate at the top line.
However, both forecasts over-estimated demand for small and large wide bodies (particularly Airbus for the latter).
So where are the likely sources of differential for this CMO? It depends on how you classify the MOM space and Boeing’s potential new mid-sized airplane (NMA). If it’s a twin-aisle jet then the single-aisle market is too high; if it’s a single aisle then the small wide body share is too high.
Geography – Africa is underpowered
Per the slide above, Boeing isn’t using outlandish economic and air traffic growth scenarios to power this prediction (our main qualm is with fuel prices). Where we do see some upside for Boeing is in its projections for the African market, which are highly conservative.
As shown below, Boeing projects demand for 1,220 new aircraft in Africa over the next 20 years, which is barely enough to replace the existing fleet of ~900 planes.
Africa today is a lot like India in 2000 in terms of GDP per capita (PPP) (~5,000 excluding the outlier of South Africa) and population (~1.1 billion excluding South Africa). Over the 2000-2017 period, the Indian air travel market basically quintupled as per capita GDP doubled.
Even if per capita GDP increases by just 50% and the air travel market triples (Boeing’s slides imply something like a 2.2x), that would imply demand for 2,000-2,500 aircraft. And Africa (unlike India) doesn’t have relatively safe road travel and a well-developed rail system.
If anything, Africa is more like Indonesia, where the pace of air travel growth outstripped the pace of economic growth (given historic multipliers). We are bullish on African demand over the next two decades.
Whither the NMA?
Tinseth was eager to frame the NMA as taking on existing markets and opening new ones.
The key markets for the the NMA would be transcon US, west coast to Hawaii, and replacement for single aisle airliners flying regional [routes in] Asia. The NMA will have 25% more range and size than a 757, and it would fragment the North Atlantic in a way that we haven’t seen it before. The NMA will [also] pioneer routes and open up markets like the 787 has done with long-haul/thin market non-stops such as Washington DC to Prague. [You can] take the 787 model and transfer it to the smaller NMA. Network fleet planners are excited because they can re-imagine their networks. It will stimulate the market. We project demand of four to five thousand aircraft for the NMA.
We have already presented our view of the NMA in a separate analysis published before the show, but at a high level, we agree with Tinseth’s figures – 4,000 – 5,000 feels reasonable, with maybe half of the current A321neo backlog (~600 jets) fitting into that.
Other program notes
Beyond the NMA details, Tinseth also touched briefly on Boeing’s other programs. In the very large aircraft (VLA) space, Boeing ceased to project that as a separate segment of the market. Tinseth doesn’t believe that the A380 (or the 747-8i) will have a big role to play:
We don’t believe Airbus will every deliver on the [104 frame] A380 order backlog… We don’t see a significant demand for passengers 747-8I’s moving forward. The 777X will be the big airplane of the [VLA] market. We have 340 orders & commitments for that aircraft, [which is a] larger backlog than the A380 and A350-1000 combined.
Tinseth also downplayed concerns over the 777X’s customer base and wide body market softening:
[We have] big customers in growing markets, [and] still [see] strong demand. [We are] not worried about the seven customers who are facing competitive challenges… and there will be no deferrals or cancellations… [The] replacement cycle inn 2020-22 will keep this program growing… We have adjusted [production] rates down appropriately. In 2020-22, we expect delivery cycles for replacements to increase.
More broadly, Tinseth sees strength amongst freighters and the 767:
[The] 767 is under the radar. I will be long gone before it is done. It’s a freighter and military (KC-67) [airplane] with [the production] rate going up to two per month… Every percent [of] growth in the cargo market is equivalent to ten additional 777 freighters.