Booms are followed by busts. This is the conventional wisdom of an industry that has weathered a roller coaster ride in fortunes with solar cycle-like predictability since the 1950s. It is also why Airbus and Boeing, uncharacteristically speaking with one voice, are trying to reassure the anxious market, investors and the supply chain that this time will be different.

The two manufacturers are raising production to all-new levels in response to record orders, but both Airbus and Boeing insist the global air transport industry is more resilient than ever to market fluctuations and the potential threat of a “bubble,” which could have drastic ramifications for the combined backlog of more than 10,000 aircraft.

Compared to the fragility of the backlog during earlier order-delivery cycles, there are “a number of reasons to be reasonably optimistic,” says Airbus' senior vice president of leasing markets, Andrew Shankland. Speaking at the International Society of Transport Aircraft Trading Americas 2014 conference in San Diego, Shankland notes global gross domestic product (GDP) has already grown to 3.2% in 2014 versus 2.3% in 2013—a year that saw Airbus take 1,619 net orders.

Revenue-passenger kilometers and freight traffic have also shown early signs of climbing beyond 2013 levels and have to date grown to 5.4% and 4.6%, respectively, in 2014. “It has been very encouraging to see,” says Shankland. Other factors, such as fuel costs and financing, which in past years have contributed to the severity of boom and bust cycles, are also favorable he adds. “There is plenty of financing available and fuel is relatively stable.”

Echoing many of these observations, Randy Tinseth, Boeing vice president of marketing, says the “market is looking a lot better today. We are being cautiously optimistic as we move forward. Today's average load factor is 79.1 percent worldwide and we expect traffic growth to be around 6 percent for the year.” Like Airbus, Boeing also reports signs of a continued slow recovery in the cargo market, which has been in the doldrums since 2011. “Over the last six to eight months we have seen progress,” he adds. “Airlines are also profitable, led by the U.S., and both the leasing and secondary markets are also faring well.”

Boeing finished last year with a record order backlog of around 5,100 airplanes, valued at nearly $400 billion, and expects to deliver as many as 725 aircraft in 2014. Airbus, which forecasts deliveries of 630 aircraft this year, has an even larger order backlog of almost 5,560. The backlogs represent more than eight years of work for both companies.

However, Adam Pilarski, senior vice president of Avitas, cautions that “we are in a bubble environment,” and asks “are the existing orders and deliveries rational?” While he believes the orderbook is sustainable if fuel prices stay high and new environmental rules are introduced, Pilarski says the overall importance of the fuel factor could diminish as oil becomes “less relevant in the future” to the global energy budget. “We have also seen a relatively weak recovery so far. Aircraft values are not doing well yet. We are just getting to the level where aircraft values are reaching base values,” he adds.

Pilarski, who has warned of a bubble before (AW&ST April 2, 2012, p. 30), also points to several potential vulnerabilities in the orderbook across various market sectors ranging from low-cost carriers in Asia to high reliance on groupings of carriers in specific regions. The three largest Middle East-based operators—Emirates, Qatar Airways and Etihad Airways—for example, took 1.4% of the orders in 2000 and 5.3% in 2013, but will account for 8.9% of the orders in 2023.

However, while agreeing there are potential weaknesses in the orderbooks of the two companies, some leasing companies believe the overall growth in global demand for new lift capacity will more than compensate. CIT Aerospace Transportation and International Finance President Jeff Knittel says the backlog for Asian low-cost carriers could be particularly vulnerable. “Asia is the high-opportunity, high-risk space where the winners and losers have not yet shaken out. In some cases, it is pretty obvious who the winners are. Asia is a new frontier and not all will-win, and not all trees will grow to the sky.”

Despite reassurances from the airframe manufacturers, Knittel says, the threat of a bubble—particularly one that impinges on older aircraft—is “something we look at a lot. If you are a manufacturer and you see high fuel costs, low interest rates, abundant liquidity and profitable airlines, then you are probably not going to be selling into a better space. That will not continue forever, so the question is: When capital is constrained and interest rates rise, will that carry on?”

Unlike previous cycles, the current expansion phase is seeing a greater wave of retirements of older aircraft than before. In addition, Knittel sends “kudos to the manufacturers for managing the risk in the orderbook. If you think about downturns in the past there were 'whitetails' (unsold aircraft) everywhere. In the last downturn, how many whitetails did you see? Very few,” he adds.

Steven Udvar-Hazy, chairman and CEO of Air Lease Corp., concurs, saying there are “more aircraft flying today that are older than 20 years than ever, so there is a huge replacement cycle.” He also agrees that there are “certain customers who over-ordered aircraft and others that got left at the bus stop. So our feeling is the market will eventually find the right order level and those other buyers that cannot take them all will figure out a way to defer them.

“If we have a slowdown, then I guarantee you that Airbus and Boeing will slow their production rates,” he adds.