With a rising demand for air travel, enormous backlogs of orders for new aircraft and a slowly resurging corporate jet sector, business in the aviation industry is looking up.
However, a peek under the hood reveals signs the industry is going through a change that will see noteworthy consolidation within parts of the supply base and downward pressure on profits as original equipment manufacturers (OEMs) produce increasingly advanced systems.
Here’s a brief rundown of with going on in the aviation industry right now.
Technology advancements, churn
Major advancements in avionics, cabin design and noise reduction are all boosting customer demand. However, the broader use of composites, advanced manufacturing and the transition to new electrical systems are also quickly shifting the way aircraft are made. This in turn is creating difficulties up and down the supply chain as stakeholders try to keep up with OEM demands.
Robust replacement demand boosts bottom lines
With quickly aging fleets in fully-developed markets and higher demand for next-generation aircraft, many purchasers are now focused on replacing their older fleets. According to estimates, around 40 percent of all new aircraft deliveries will be replacements by 2020. However, long periods of low fuel prices may motivate operators to put off replacing of older aircraft.
The balance of supply and demand stability may be shifting
Some have expressed concerns that OEMs may be oversupplying the market, with deliveries rising by 30 percent between 2009 and 2014. However, evidence indicates that supply and demand may be properly balanced.
A bigger concern may be predictions of build-rates rising another 40 percent by the end of the decade. This would cause seat deliveries to outstrip demand for air travel. While the OEMs are anticipated to deliver seats at a rate of around 8 percent of the active fleet, airlines are anticipated to replace around 3 percent of their capacity while new growth is anticipated to remain at around 5 percent of capacity, which is less than the 5 to 6 percent of anticipated growth. The result would be an oversupply of around 1 to 2 percent, about 300 aircraft or 40,000 to 50,000 seats.
Some experts have projected that Boeing and Airbus will cut back build-rates, specifically in the wide-body sector.
Low oil prices
The continuing low price of oil has sparked airline profitability, but has industry experts wondering if prolonged depressed prices will dampen short-term replacement demand for new aircraft. So far, low oil prices has had little effect on OEM orders, partly because these decisions are meant to cover a 20 to 30-year timeframe and therefore are much more affected by the long-run projections for oil.
It is also widely believed that reduced oil prices will lead to more air traffic in the near future as fuel savings result in reduced fares and individuals use the savings they receive from lower energy costs towards recreational travel.
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