A prominent research firm is warning that Airbus and Boeing may be on a path to produce more jets than the airline market can absorb.

The two aircraft builders are planning to hike production of A320-family and 737-family narrowbody jets by 20% between 2014-18, on top of a 40% increase seen from 2010-14. But a substantial reduction in aircraft retirements, lower oil prices and the possibility of higher interest rates in the U.S. could combine to weaken demand and lead to a glut of jets, Bank of America Merrill Lynch analysts say in two March 2 notes to clients.  

The Merrill warning comes three days after Airbus announced it will increase output of A320s to 50 per month by early 2017, up from 42 per month currently. The European giant also revealed it is talking with its suppliers about taking A320 production up to 60 per month (Aviation Daily, March 2). For its part, Boeing is planning to raise production of 737s to 52 per month in 2018, up from 42 currently.

Huge backlogs at Airbus and Boeing enabled the two aircraft manufacturers to sail through the global economic downturn of 2008-09. But some analysts believe that has created a false sense of security. “The next downturn is long overdue,” Kevin Michaels, an analyst who heads ICF International’s Aerospace & MRO consulting practice, said recently.

Merrill says the production schedules announced by Airbus and Boeing suggest that the global fleet of in-service airline seats will grow 7% annually, “while global traffic may only grow at about 5%.” Meanwhile, a drop in crude oil prices from more than $100 a barrel last summer to about $50 per barrel has made it less imperative to retire older, gas-guzzling jets.  

Merrill’s analysts say aircraft retirement levels are down 34% from a year ago. The firm estimates that every 10% decline in fuel prices will decrease retirements by 6%.

Another question is whether historically low interest rates in the U.S. will rise, now that the country’s economy is on a sounder footing. Merrill estimates that a 1% rise in interest rates would decrease aircraft retirements by about 10%.