Airbus claims its place in a new world order

Farnborough Air Show » 2008
July 7, 2008, 5:40 AM

If Airbus COO customers and chief commercial officer John Leahy ever met a paying customer he didn’t like, it certainly wasn’t one of the world’s big aircraft lessors, whose strong balance sheets look all the stronger at a time soaring fuel costs eat away at profits of the world’s airlines. Lessors now account for some 16 percent of Airbus’ backlog, but during the company’s annual Technical Press Briefing held in Toulouse in May, Leahy said he’d like to see that proportion rise to between 20 and 25 percent.

“Lessors have proven to be extremely good in down cycles, helping us finance weaker airlines, airlines that have gotten into financial difficulty,” he said. “And the big lessors have balance sheets stronger than either Airbus or Boeing. So when push comes to shove and the market goes off the edge of a cliff, the lessors are usually the ones standing there, taking aircraft.”

Not that Leahy looked ready to concede that Airbus or the industry at large had started on the path toward free fall. But with oil prices at the time hovering near $130 a barrel, it seemed appropriate to consider the likelihood that a three-year surge in sales that culminated in a record gross order count of 1,458 Airbus airplanes last year likely had reached its peak.

So how, one might ask Leahy, has Airbus positioned itself for the next phase of the cycle? Airbus’ chief salesman said that, in fact, the company’s strategy to chase market share in growth regions has already paid huge dividends, and that as North America and Europe continue to lose ground to Asia and the Middle East, the European company only stands to benefit further.

“Think about the growth in China, think about the growth in GDP in India and think about the fact that there’s a pretty good rule of thumb that says aviation grows at about double the rate of GDP growth,” suggested Leahy. “That’s the reason people are buying more airplanes now because the market is growing rather dramatically.”
The industry has never seen the kind of fuel prices it now must absorb, however, and Leahy’s rule of thumb has never faced the test of $150 a barrel jet fuel. In fact, most of the major U.S. carriers have already signaled their intention to shrink capacity by as much as 15 percent over the next year, while Europe’s airlines consider cuts as well, albeit perhaps not so drastic.

But depending on the level of reaction of Asia’s big airlines to the fuel price crisis, the scenario Leahy painted in which a complete reversal in market balance occurs over the next 20 years might have already begun in earnest. According to Airbus projections, Asia will replace North America as the largest single market over the next 20 years, taking 31 percent of the total compared with 25 percent today; North America’s share will shrink from 31 percent to 24 percent, while Europe maintains its middle position, moving from 29 percent to 27 percent.

“And then we have the other dynamic–the accelerated deregulation of one of the most dynamic markets in the world–Asia,” said Leahy. “So you have a high-growth market that has been regulated, and at the same time that it’s continuing to grow at dramatic levels, you have deregulation opening up the skies and continuing high-growth rates into key hubs.”

One would expect Leahy to talk in glowing terms about the Asia Pacific and Indian markets, given that 21 percent of Airbus’ backlog resides there. Next comes Europe, at 18 percent; then China, at 13 percent; followed by North America, at 11 percent. Leahy also places a lot of emphasis on the Middle East, which now generates only 4 percent of the world’s revenue passenger kilometers but where another 11 percent of Airbus’ backlog sits.

Of course, one of Airbus’ highest profile A380 customers– Emirates Airline–hails from Dubai, and it stands to account for the region’s biggest source of growth in revenue passenger kilometers when it takes delivery of the 56 superjumbos on firm order. But while trunk carriers such as Emirates generate most of the growth in the Middle East, low-fare carriers–which account for some 30 percent of Airbus’ backlog–have become some of Asia’s fastest growing and most dynamic.

“One thing you might imagine is that legacy carriers isn’t our strong suit,” said Leahy. “Yes, most of the legacy carriers fly Airbus products, but that isn’t where we saw the growth ten, fifteen years ago. We saw it in emerging markets and we went after them… I’ve given up on trying to convince [U.S. airline executives] Herb Kelleher and Gordon Bethune to buy Airbus airplanes, but the fact is there are a lot of Tony Fernandes’ around the world.”

Fernandes runs Air Asia X, the new subsidiary of Malaysian low-fare carrier Air Asia that bills itself as the world’s first truly low-cost, long-haul airline. Now flying a single leased A330, it expects to take the first of 25 new A330-300s configured in an-ultra-high-density, 330-plus-seat cabin layout this October.

But as fuel prices show no signs of softening, many analysts worry that the trend in the U.S. toward less capacity in leisure markets and other low-margin routes could spread into places such as Southeast Asia and India, where growth rather than aircraft replacement constitutes most of the demand. Because so much of Airbus’ backlog resides in growth markets, any spread of serious economic slowdown outside the U.S. could place it in a particularly vulnerable position.

Leahy takes comfort, however, in a pattern that has emerged since the dawn of the jet age that shows a doubling of RPK growth every 15 years, even while world GDP growth averaged just 3 percent a year. Economic forecasts show that Asia–Airbus’ strongest market–will grow at a rate of 6 percent over the next 20 years.

“You can’t have world GDP growth without aviation growth,” said Leahy. “And that’s a very strong reason why even with high fuel prices people will find a way to continue flying.”

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