[R-G] [BillTottenWeblog] Airbus and Boeing Face a Dark and Painful Future

Bill Totten shimogamo at attglobal.net
Mon Jul 14 18:05:31 MDT 2008


by Kristen Lagadec

Global Public Media (July 01 2008)


When you google 'Airbus Boeing Peak Oil', the top result is this article
that I wrote in the summer of 2006. Being a Cassandra proved right gives
one all sorts of uneasy feelings, but I will carry on in that direction
and offer a revised version of my prophecy, adorned with new details.

In a nutshell: people are talking a lot about the difficulties for
airlines with $150-a-barrel oil. But we also have to understand that it
is going to be much worse for aircraft manufacturers. They probably know
it; but they cannot believe what they know, and they cannot say it
either. This is not just another crisis for air transportation and
aerospace construction: this is the last crisis until the end of the
fossil fuel era.

Hard times for airlines

First an important premise: there are no serious alternatives to jet
fuel for airliners. And even if there were, they could never be cheap in
a world of expensive energy. The problem is not that oil is scarce: the
production has never been this high - that's why we call it Peak Oil.
The problem is that energy supply is not meeting global demand: until
demand abates, any type of energy will end up costing the same, be it
classical kerosene, gas-to-liquid synthetic jet fuel, or biodiesel.
Regardless of the environmental footprint. Just know that if it was
technologically feasible, filling an A380 tank with biofuel would use up
150 hectares of yearly yield, considering an optimistic figure of 2000
litres per hectare for Jatropha biodiesel. You'd need 150x2x365x150 = 16
million hectares - the arable land in France - to power the currently
ordered A380 fleet.

Meanwhile the fuel efficiency improvements do not come anywhere close to
compensating the price surge. Boeing claim that their new 787 will burn
twenty percent less fuel than current jets of the same category (namely
the 767 or A330). Twenty percent is how much oil prices rose between the
beginning of April and mid-May 2008: thirty years of technological
improvement in aircraft and engine design will offset six weeks of price
increase, and no technological Deus ex Machina will change that deal.

The obvious consequence is that cheap flights are gone for good. We are
currently witnessing a fast concentration of the market, because the
fierce competition prevents airlines from transferring the whole fuel
bill to their passengers. As the weaker players exit the arena, ticket
prices will rise until the few remaining airlines can break even
financially. We will see a trend of de-democratization of air travel,
and people will gradually change their travel habits, starting with the
poorer and newer travelers.

There is a second key element that will drive air traffic down: as
planemakers' market forecasts point out, air traffic growth is
consistently correlated to world GDP growth. No need to be a psychic to
imagine that GDP growth will seriously suffer from expensive energy.
When people's purchasing power shrinks because of the energy bill, they
will think twice before flying. Note that a major economic downturn
could very well stop the rise in oil prices or even reduce them for a
while. But it will not help air traffic - unemployed people do not fly
all that much.

Meanwhile, environmental awareness is growing worldwide: the global
warming theme is increasingly popular with the sort of middle class
travelers who used to fill economy seats for exotic vacations. There
will be less scuba-diving in the Maldives; less horseback-trekking in
Mongolia; less leopard-spotting in Tanzania. Flying is losing political
correctness points by the day. This is even beginning to reach the
corporate world, although sometimes only for mere greenwashing concerns:
more firms are asking their employees to fly less, to favor
teleconferencing or to merge meetings. Business travel, the spine of
airline profitability, is probably weaker than most hope.

I also see a final, more tricky contributor to airline misfortunes: many
airlines have based their financial model upon the resell value of their
aircraft. Planes are a huge investment, with a long lifetime - a bit
like homes. Maybe you see what I am hinting at. Just as the housing
crisis brought many people to bankruptcy, many airlines will lose their
financial footing when the industry's obvious overcapacity and gloomy
outlook pulls the market value of second-hand aircraft down. All this
will contribute to reduce air traffic over the next decades, to the
levels of the 1990s, then the 1980s, then the 1970s ...

Harder still for aircraft manufacturers

The average natural decay of a fleet because of ageing is around six
percent a year. When yearly traffic is constant from one year to the
next, six planes for every 100 go into retirement, and are replaced by
newer planes. This means that if airlines cut the world's capacity by a
mere six percent each year, old retiring planes will not need to be
replaced, and no new aircraft will be sold at all. A six percent
capacity reduction is equivalent to just changing the Tuesday flight of
the daily San Francisco to Tokyo service from a 747-400 to a 777-300ER.
A reduction the economic press or the general public would hardly notice
can make Airbus and Boeing assembly lines grind to a halt. US carriers
will reduce capacity by ten percent to fifteen percent this third
quarter of 2008 alone.

"All told, the industry will cut capacity by nine percent in 2008,
according to James Higgins, analyst for Soleil-Solebury Research".
(quote from CNNmoney.com)

In short: airlines make money in proportion to air traffic; aircraft
manufacturers make money in proportion to air traffic growth. In a world
with negative air traffic growth, the former float, the latter drown.
Therefore, although we will probably not see the end of air traffic any
time soon, this extremely nasty leverage effect will make aircraft
manufacturers suffer considerably.

One might argue that in a world of expensive oil, airlines should scrap
all old, gas-guzzling planes and buy new, soberer ones instead. That
would be easy if they were making a lot of profit or could promise a
bright future. But when the industry is consistently in the red zone,
and getting redder, bankers do not follow. Few airlines have sufficient
cash to sign billion-dollar contracts without external investment.
Therefore airlines will be like people in poor countries: they will be
running old vehicles which use up tons of gas because they cannot afford
the newer models which make twice the miles per gallon.

Admittedly, a handful of airlines will be a position to buy the new
planes. When all the world's money ends up in oil exporters' hands, they
have to buy things from us to avoid drowning under the heap of green
bills. Aircraft are a great choice, as they are both
hard-currency-intensive and fossil-fuel intensive, which oil producers
have a lot of, as per design. Consequently, aircraft sales may in fact
undergo an increase because of high oil prices. This I call the
"Aboulafia effect". I conjecture that such an increase is inherently
short-lived. Middle-East carriers will probably become prominent
players, and gradually snatch the bulk of the market from the
traditional airlines. But air traffic will shrink nonetheless, and all
they will need to do is buy back the recent new planes from their
victims, scrap the old ones, and make the most of a declining market -
something they are becoming good at.

As if matters could be any worse, there will finally be a mean backlash
effect: thanks to cheap liquidity seeking asylum, the years 2003 to 2007
were absolutely euphoric in terms of aircraft orders. Manufacturers had
to invest massively in infrastructures and people in order to ramp up
production and honor those orders. But these planes will not materialize
into deliveries before a couple of years. There is plenty of time for
many airlines to go bankrupt or otherwise hit financial turbulence. This
will mean massive delivery deferrals, then cancellations, so that
assembly lines cannot even hold onto their current backlog. Who knows,
we may witness the very curious artefact of a negative net yearly
order-book. In the real world, that's called jumping off a cliff with a
lot of momentum.

"The combined value of the orders for Airbus and Boeing planes exceeds
$500 billion at list prices, so large-scale cancellations and deferrals
could easily amount to tens of billions of dollars and affect suppliers
of engines and other parts in addition to the jet makers". (from the
Wall Street Journal)

What next?

When that happens, it will be catastrophic for all the people,
organisations, or communities, which now contribute to the aircraft
manufacturing adventure. This could send Seattle or Toulouse the way
British textile, or French foundries went not so long ago. And do not
get influenced by prejudice. Aerospace does not have an intrinsically
higher value than those industries we have come to regard as lowly.
Today's ghost slums were full of very busy and extremely proud people at
the peak of their flourishing trade.

I do not know what the smartest move for aircraft manufacturers is, and
I am glad I am not in Tom Enders' or Scott Carson's shoes. Publicly
acknowledging that the air travel industry is on the brink of inevitable
decline would discourage investors and hasten the fall. And yet, the
earlier they can start downshifting, the smoother the forced landing.
They should be cancelling the B787 (a little too late for that one) or
A350 developments, and simply offer to fit new generation engines on
good old 767s and A330s. That would already be at least half the fuel
economy, for a much smaller cost, while not forcing new capacity on the
market place. Or silently work on a totally new kind of bird, absolutely
optimized for fuel efficiency, even if it changes the rules of the game:
a Mach 0.62, 20,000 foot, turboprop, middle-range, high-capacity,
DC-4-comfort machine that would be the soberest flying camel to get
people where trains can't go for the next half century.

Or maybe steer away from this dwindling trade altogether and find a new
frontier. How about giant wind turbines? If those do not sell, nothing
will anyway, so that may be worth a try.

http://globalpublicmedia.com/airbus_and_boeing_a_gloomy_market_outlook

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