At some point, the world might have too many planes again. But it’s a little early to worry about that too much.
The Paris Air Show returned this week after a long Covid hiatus. The typically biennial confab brings together executives from across the aerospace and defense ecosystem and usually yields a slew of plane and engine deals and industry prognostications. Analysts were bracing for a particularly robust orders bonanza this year as airlines scramble to meet a resurgence in travel demand and lock up delivery slots that are becoming increasingly scarce at both Boeing Co. and Airbus SE for narrow-body and wide-body jets alike. But the flow of announcements was more like a trickle than a flood. The capstone was IndiGo’s order for 500 of Airbus’s narrow-body jets. As the largest single order for aircraft on record, this is a big deal, but it’s also the only big, truly new deal to come out of the Air Show. The others were smaller or recycled. “In a booming demand environment, we were also surprised by the lack of orders,” Bank of America Corp. analysts led by Ron Epstein wrote in a June 20 report.
The relative dearth of fresh blockbuster announcements at the Air Show is in part a timing issue: Air India announced an order for 470 Airbus and Boeing jets in February that it firmed up this week in Paris with the addition of options for 70 more Boeing planes. Saudi Arabia signed a March deal for 78 Boeing Dreamliners split between two carriers, while Ryanair Holdings Plc agreed in May to buy as many as 300 of Boeing’s 737 Max jets. The commentary at least was flowing free and easy at Le Bourget airport, the home of the Paris Air Show. Executives alternated between complaining about stubborn supply chain constraints that are delaying deliveries and limiting the ability of manufacturers to ramp up production to meet all of this demand and cautioning about the risk of an eventual capacity glut once Boeing and Airbus can get around to filling orders backlogs that now stretch well into the end of this decade. The worry among some longtime executives is that in their quest to get a place in line, airlines are overordering.
“There’s a shortage of capacity. There are no airplanes available,” Akbar Al Baker, chief executive officer of Qatar Airways, told Bloomberg Television. “We have other players that are also flooding the market with huge numbers of airplanes, and I just hope that what they’re doing is right,” he said. Steve Udvar-Hazy, the co-founder of Air Lease Corp., told Bloomberg News the industry is suffering from “a herd mentality that’s not justified by economics or reality.” Both executives said they didn’t feel a need to place fresh large orders for aircraft right now, but that’s large because they already have robust undelivered backlogs. Air Lease has about 400 jets on order and added two 787 Dreamliners at the Air Show. When Qatar Airways’ current fleet needs replacements, “we will order more airplanes,” Al Baker said. That time is “not too distant.” Both he and Udvar-Hazy also said that the strong demand that the industry is enjoying is sustainable for the foreseeable future. In other words, they don’t think their companies aren’t about to get trapped in an aircraft bubble, but others just might.
Not all orders are created equal in the aerospace industry. Epstein of Bank of America expressed some reservations about the blockbuster bookings from Indian carriers. “We remain cautious regarding these commitments given gaps within Indian infrastructure, availability of financing, and concerns over India’s commitment to the Cape Town Convention,” he wrote in a report this week. The Cape Town Convention established an international registry for aircraft as a means of helping companies assert their rights over planes. But aircraft orders aren’t written in stone and signed in blood, either, something that became abundantly clear during the pandemic and Boeing’s myriad production, regulatory and political issues in recent years. “Many of them get deferred, or airlines will opt out of some of the aircraft or swap with other buyers,” Udvar-Hazy told Bloomberg Television. “Look at it as a dynamic order book. It’s not a static order book with Airbus and Boeing.”
At the last Paris Air Show in 2019, analysts started to speculate that the long-running boom in demand for air travel might be due for a breather and that the hefty order books at Boeing and Airbus might hold more planes than airlines actually need. That turned out to be the right question to ask, although no one predicted a global pandemic would be the reason. If there had been a Paris Air Show in 2021, it would have happened mere months after Covid vaccines started to be rolled out around the globe. Myriad restrictions on international travel meant many airlines had more seats than travelers on their larger jets, even as domestic demand rebounded. Now, airlines are having to trim their growth plans and lose out on some of the demand recoveries because they can’t get their hands on enough planes and fully functioning jet engines. It’s possible that aerospace executives, like economists, aren’t very good at forecasting what the world will look like five years from now, or even a year from now. A lot can happen between now and the stretch between 2030 to 2035 — when IndiGo’s 500 Airbus jets are set to be delivered.
Boeing, for its part, predicts that even after accounting for reduced flying demand from climate concerns and productivity improvements, the world will need 42,595 airplane deliveries between now and 2042, roughly doubling the existing fleet. Almost half of those orders are expected to be earmarked for replacing older, less efficient jets.
The more pressing issue for the aerospace industry is whether it can build the planes on order for this decade. “All our aircraft deliveries are delayed,” Al Baker of Qatar Airways said. Particularly in the US, the industry thinned its ranks drastically during the pandemic and has since struggled to rebuild its labor force. While companies have been on a hiring spree, the new workers lack the experience of their laid-off predecessors, and that knowledge gap is feeding into quality issues up and down the supply chain. The problem is particularly acute among the smallest suppliers who lack the capital to compete for talent with manufacturers further up the food chain and in other industries. Almost three-quarters of respondents to a Bank of America survey on the aerospace supply chain don't believe the industry’s issues will be resolved before 2025, and 40% said it was unclear where production levels would ultimately settle for 2023. The survey was conducted with Aviation Week Network, and the results were reported on June 1. More than half of the respondents were lower-tier suppliers with annual revenues of less than $25 million.
“When you pull the thread through almost everything, it almost invariably ends with labor: the ability to attract it, retain it, train it in time,” Mike Kauffman, vice president of the supply chain for General Electric Co.’s aerospace division, said at the company’s investor day presentation this week at the Paris Air Show. “We’re still being hampered by quality deviations — not the safety of flight, but things that are caught inside as we begin to ramp which causes us to pause or in some cases go backward. There are still material constraints.” GE has a 200-person team focused on supplier recovery and readiness. The rate at which Honeywell International Inc.’s aerospace suppliers back out of delivery commitments fell to about 15% in the first quarter, down from a peak of 20% to 25% in 2022. But the normal is less than 10%, so there’s still a way to go. A supplier for Raytheon Technologies Corp.’s jet engines used incorrect materials to make one batch of parts, forcing it to pause production and delay some shipments. The error will cost Raytheon about $500 million in free cash flow in the current quarter, although it expects to make this up over the balance of the year.
“Everybody is very excited. Both manufacturers want huge orders. But you can always get the orders. When will you supply them? That is the big question,” Al Baker said.
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