Showdown in the skies: Have aircraft orders been overstretched?

Aligning aircraft procurement with expected traffic growth is crucial for airlines

The aviation industry is experiencing a surge in aircraft orders worldwide, raising concerns about potential overcommitment and a speculative bubble. Airlines expand their fleets for various reasons, but it is essential to balance growth with traffic demand to avoid overcapacity in the market. This analysis examines aircraft orders in several countries and compares them to projected aircraft retirements over the next decade. The findings indicate that some countries have more aircraft on order than anticipated retirements, potentially causing overcapacity in the coming years, while other countries need to order more aircraft to overcome a fleet shortage.

Aircraft on sale

Air India recently announced the acquisition of 470 new aircraft in the “World’s largest commercial jet purchase orders by number of aircraft” article, published by Reuters. Almost at the same time, Indigo augmented its cumulative A320 family orders by procuring additional 500 new Airbus A320/321 aircraft, increasing the total to 1,330 airplanes according to Airbus.com. However, such large aircraft deals are not exclusive to India, as evidenced by United Airlines’ acquisition of 100 B787 and 100 B737 aircraft, as reported by Reuters. Aircraft manufactures such as Airbus and Boeing are presently in a market situation, where airlines are competing with each other to place even larger orders. The recent accumulation of aircraft orders by itself is not a cause for concern. The aviation industry has always been characterized by its dynamism, with airlines continually striving for growth and expansion to meet the ever-increasing demand for air travel. One essential aspect of this growth is the acquisition of new aircraft. This phenomenon reflects the high demand within the aviation sector and establishes a solid groundwork for forthcoming expansion. Nevertheless, the question arises as to whether the airlines have potentially placed excessive aircraft orders completely detached from the predicted future annual traffic growth, creating a speculative bubble that may burst.

To evaluate the potential overcommitment of aircraft orders, it is helpful to examine the correlation between aircraft procurements and the annual rate of traffic growth. The traffic growth rate is used to project the anticipated volume for a future year at particular locations based on an existing traffic count, in line with the traffic growth rates provided by MORPC.org. This approach focuses on the most prominent nations in terms of their gross domestic product (GDP). To ensure the inclusion of two important and rapidly expanding aviation markets, the United Arab Emirates (UAE) and Saudi Arabia were added to this consideration.

To gain insight into the quantity of aircraft that will need to be replaced in the coming decade, it is useful to examine the projected number of aircraft that will reach or surpass 25 years of age within the next 10 years. This age is often considered as the standard lifecycle of an aircraft, although it is acknowledged that with proper maintenance, an aircraft can often extend its operational lifespan significantly beyond this threshold. To make a general assumption, 25 years is considered a benchmark for the retirement and replacement of aircraft.

Furthermore, an examination of the prevailing orders placed with the leading aircraft manufacturers, namely Airbus, Boeing and Embraer is conducted. The existing order backlog will be fulfilled in the forthcoming decade. Consequently, it is reasonable to infer that the aircraft currently on order will be operational within the next 10 years. By contrasting the quantities of aircraft that will reach the age of 25 years or older in the next decade (and consequently need replacement) with the aggregate orders of each country, it is possible to discern that several nations are poised for substantial fleet expansion in the forthcoming decade.

Capacity shortage in Western countries

Airlines operate in a highly competitive environment where growth is synonymous with success. To maintain a competitive edge, airlines often place significant aircraft orders. It is important to emphasize that expansion is critical for airlines. However, it must be balanced against the annual traffic growth rate to ensure long-term sustainability. Ordering too many aircraft beyond the growth rate can lead to overcapacity, resulting in lower load factors and reduced profitability. Empty seats on flights are costly both financially and environmentally.

It is evident from Figure 1 below, that the risk of overcapacity exists in India, China and some Middle Eastern countries. These countries have placed significantly more orders for new aircraft than they are projected to retire in the next 10 years. The scenario contrasts markedly with Western nations such as the United States and Canada, as well as Europe. In these regions, there is a notable anticipation of a substantial reduction in their aircraft fleets over the next decade.

Figure 1: Total number of aircraft that need to be replaced in 10 years compared to the current aircraft orders that will be delivered during the next decade

Examining just the number of aircraft is not the only way to approach this analysis. Replacing smaller aircraft with larger ones may result in a reduced fleet size. However, when evaluating the available seating capacity offered to passengers, there may still be room for growth. This is shown in Figure 2. The data is based on the average seating capacity of the aircraft, acknowledging that substantial variations can exist among different airlines.

Figure 2: Total number of aircraft seats installed in aircraft that need to be replaced in 10 years compared to the number of on-order aircraft seats that will be installed in aircraft to be delivered during the next decade

The circumstances remain largely unaltered for most nations, with one exception: the United States. Comparing the seating capacity, the United States will have more available seats in the next decade than it does now. This distinctly indicates that the aircraft additions to fleets in the ensuing years will have substantially larger seating capacities than those currently in operation.

To gain a more accurate understanding of prospective future developments, it is imperative to consider the anticipated evolution of future traffic. In summary, it is foreseen that all countries and regions examined in this analysis will experience positive growth. As per Boeing’s market outlook, significant growth is anticipated in various regions. For instance, China is projected to experience an impressive growth rate of 197% over the upcoming decade, while India is expected to see an increase of 118%, and the Middle East is anticipated to grow by 79%. In contrast, the United States and Canada are projected to exhibit the lowest growth rate, at 45%, according to Boeing’s Commercial Market Outlook. Nevertheless, these figures collectively indicate that, across all countries considered in this analysis, there will be a higher number of newly delivered aircraft than retiring airplanes in the next 10 years. The outcomes emerging from the individual evaluation of each country are presented in Figure 3 below:

Figure 3: Development of the fleet and available seat size compared to the expected annual traffic growth in each country

Upon examining Figure 3, it becomes clear that the majority of countries exhibit an annual traffic rate exceeding their current aircraft orders. This observation leads to the conclusion that, in most parts of the world, there appears to be a shortage of aircraft orders. There is a looming possibility of a capacity shortage in the coming decade unless airlines increase their aircraft procurement now. Notably, only two countries exhibit the potential for a surplus in orders, surpassing their anticipated future traffic development—India and the UAE.

Potential bubble in India and the UAE

While the disparity between projected traffic growth and fleet expansion in the UAE is relatively moderate, India presents a markedly distinct scenario. The quantity of currently ordered aircraft, scheduled for delivery over the next decade, significantly exceeds the forecasted traffic growth, approaching a nearly doubled capacity. Consequently, this situation raises concerns about a potential bubble in the Indian aviation industry that could pose a substantial risk in the future.

In conclusion, this analysis highlights the crucial importance of aligning aircraft procurement with anticipated traffic growth to maintain a sustainable and balanced aviation industry. It emphasizes that there is a notable gap between projected traffic growth and the current number of aircraft on order in many regions. This gap may lead to capacity shortages in the near future if airlines do not increase their aircraft orders. Conversely, countries such as India and the UAE face the potential risk of having placed excessive aircraft orders, which could result in future overcapacity and the potential bursting of a speculative bubble.

Author: Oskar Wosiek, Consultant, Lufthansa Consulting