You have planned, practiced, won some battles, been thrown a few curveballs, and coped with changes. Now it’s time to execute the game plan and see how it plays out. Am I talking about your favorite sports team? Not quite. For the last few years, commercial aerospace OEMs have seen massive orders and have made ambitious plans to quickly deliver the newer, more fuel efficient aircraft. How will this all play out, and will the players emerge champions as planned? We’re about to find out. It is playoff season, and the winners will be separated from the losers based on four “keys to the game”.
First, economic growth in emerging markets, which have been a key source of air travel demand growth and new aircraft orders, will determine how well the shiny jet syndrome will continue. The BRICS (Brazil, Russia, India, China, & South Africa) cannot all be counted on anymore due to a mix of corrupt politics, low oil prices, questionable fiscal controls, and economic sanctions. Moreover, a strong dollar is making aircraft, typically traded in dollars, more expensive, and the Fed’s December intervention signals the end of cheap capital. Other developing economies, many of which are highly leveraged on commodities, must continue to grow their middle class, a key driver of air travel demand. Should those new aircraft end up flying empty, an aircraft asset bubble would suppress values and spur a large used market.
Second, the upcoming year will be crucial for a number of aircraft programs ramping up or in development. The A320neo, A350, and CSeries will undergo steep production increases in 2016 in pursuit of record rates, which will show the resilience, or shortfalls, of the supply chain. With the high production rates, OEM financial projections will be extra sensitive to any supply chain shortfalls or delivery delays, and the implications are wide-ranging, particularly with strong cash generators like the A320 and 737 programs.
Third, 2016 will be a pivotal year in aircraft sales as OEMs attempt to bridge production between legacy and next generation programs. With a bridged link, cash flow is preserved and financial projections will remain strong. If OEMs fall short, rates will have to be reduced, likely displeasing investors. I anticipate that any rate reductions will be made by the end of the year, if not sooner, depending on sales performance. Which aircraft programs must be watched? The 777 program faces the biggest gap to fill to the 777X with a three-year gap, and any rate decrease poses challenges, as it’s a cash-cow for Boeing. Meanwhile, the A330’s backlog will carry it to the A330neo transition without a significant rate change.
Fourth, aircraft OEMs have been attempting to diversify their revenue to include more aftermarket and services streams, and 2016 may be a year of key contract wins. The signs already appeared in 2016 when both United Airlines and British Airways, two very traditional carriers when it comes to component maintenance, signed up for Boeing’s GoldCare program for their 787 fleets. Airbus is also expanding its Flight Hour Services (FHS) program with the growing A350 fleet, and added new carriers to its portfolio in 2015. With the young fleets growing rapidly and many aircraft beginning to come out of warranty, more contract announcements could be right around the corner.
Overall, the theme for 2016 will be to: sell aircraft, deliver them on-time, and sell a support package alongside them. This does not sound much different than any other year. However, what is different is that, with a backlog spanning into the early 2020s, OEMs are too preoccupied to devote resources to new development programs. Since aircraft programs have five years to be certified from when the application is submitted, the industry may not be looking at a new aircraft announcement for at least another three years, with entry into service around the mid-2020s.