Paris 2011: Irrational exuberance by airlines could spell trouble for OEMs

Paris Air Show » 2011
June 20, 2011, 3:00 AM

Sanguine projections for equipment demand by the air transport industry suggest good times ahead for the likes of Boeing and Airbus, and increasing production levels by both of the world’s major airframe OEMs would seem to reflect a level of optimism not seen in quite some time. But for Adam Pilarksi, senior vice president with U.S. aircraft value specialist Avitas, the industry faces not so far-fetched dangers that could derail its impressive recovery from the most recent recession and prove the airframers’ zeal to speed production misguided.

Speaking with AIN in the weeks leading up to the Paris Air Show, Pilarksi wouldn’t fault the airframers for their decisions, however. Indeed, he said, they acted in their own best interests by raising production, particularly of widebodies. “Different parties have different interests in mind, and they follow their self-interests, and within each party there are also different players,” said Pilarski. “You cannot blame the manufacturers for selling aircraft, the same way if I go to a restaurant and order a chocolate dessert, the waiter shouldn’t say, ‘Hey, chubby, you don’t really need it.’”

The problem remains, however, that although demand appears robust for now, and airlines, particularly those in the Middle Eastern oil-producing countries, control significant capital to spend, the current rate of aircraft selling can’t continue indefinitely, said Pilarski. Indeed, he added, at some point in the not too distant future cancellations might decimate the backlogs Boeing and Airbus have accumulated. “Boeing and Airbus are sold out until, I don’t know, 2019 or something like this,” he said. “And they’re saying, ‘If somebody comes today and wants to buy planes, I don’t want to tell them to come back in ten years.’

  “I, Adam, believe that many of the airplanes that were bought will eventually disappear,” he added. “So right now Airbus and Boeing are acting in a rational way if you believe that everybody who bought planes will actually take them. I do not believe that.”

Pilarski wouldn’t venture a guess about when any rush toward cancelations will occur, calling it an unpredictable event. Several events could burst what he believes has created a new “bubble.” He cited the possibility of a terrorist attack in the Middle East, in which case airlines such as Emirates, Qatar and Etihad suddenly might find they don’t need all the airplanes they bought; the prospect of oil prices spiking to $400 a barrel if unrest in the region spreads to Saudi Arabia; or the specter of inflation, in reaction to which monetary authorities might increase interest rates too fast, resulting in a global recession.

However, he said that buyers have undoubtedly expressed irrational exuberance in their spending habits lately, particularly in the narrowbody market. Now, as China’s Comac, Russia’s Irkut, Canada’s Bombardier and perhaps Brazil’s Embraer enter into a market dominated by two players for years, Pilarksi argued that a proliferation of narrowbody types will only serve to weaken residual values still further.

“An important point…new aircraft prices have not been rising at the level of inflation for quite some time and with more competitors they will not in the future,” said Pilarski at the International Society of Transport Aircraft Trading (ISTAT) conference in March. “The most interesting point to me was the last decade, because at that time we went from three to two producers. We had a duopoly and if a duopoly could not increase prices, at least to inflation levels, what do you think will happen when there will be more competitors?”

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