says manufacturers’ record order backlogs will not lead to excessive airline capacity, and the company has identified a set of measurements it says proves that market conditions justify the large order totals.
Some industry observers assume that the size of the order books atand Boeing is likely to create surplus capacity, says Kostya Zolotusky, managing director of capital markets and leasing for Boeing Capital Corp., during a recent media briefing in Sydney. But he says that such views often misjudge the connection between orders and deliveries, which need to be considered separately.
Manufacturers have “a clutch mechanism between orders and deliveries,” says Zolotusky. This means they can slow down or accelerate deliveries as needed. Recent history proves that delivery rates adjust according to economic conditions, and manufacturers are “able to rationally manage deliveries,” Zolotusky says. “Data show we [can] do that quite well.”
Boeing believes its current order book is well-matched to projected worldwide capacity demand, Zolotusky says. However, it is more difficult to predict the regional mix. If growth does not emerge as expected in a particular market, the order book will be adjusted to put more aircraft in regions where growth is occurring faster.
“We are very confident in our total demand and aircraft type [projections],” says Zolotusky. “Our total order book is okay. [But] are we sure that [these aircraft] will go to the people that ordered them? We don’t know.”
In response to some airline executives and industry commentators who are concerned that overcapacity is starting to occur, Boeing has formulated a set of measurable criteria that attempts to identify some hard evidence to sort out what can be a subjective issue.
The six parameters in this model examine the state of the aircraft market, Zolotusky says. The manufacturer has been using these criteria in talks with airlines and in public discussions for more than six months. “There are a plethora of statements [about overcapacity] being made with no data to back them up,” says Zolotusky. So Boeing identified the factors it could measure to present an accurate picture of the aircraft demand environment.
These six measures indicate that the aircraft market is relatively tight, says Zolotusky. The first two categories are load factor and fleet utilization, which are both at record high levels. Then there is the balance between capacity and demand; this is consistently showing passenger demand higher than capacity.
A fourth measure is the size of the parked fleet, which has been relatively flat. The next category is lease rates and residual values, and these have been “very strong” in the past few years, says Zolotusky. Any perceived softness in lease rates has more to do with low interest rates, and lease rates are particularly high when adjusted for interest rate movements.
The sixth aspect Boeing considers is whether there is any “exogenous obsolescence” occurring. This term refers to a situation where the demand and value for a particular type of aircraft drops due to an external pressure not related to the overall aircraft market. There are no such circumstances at the moment, says Zolotusky.
Overall, there is a very strong market for aircraft, with healthy long-term demand, Zolotusky says. He also believes there will be enough funding available to finance future deliveries, although the composition of that funding is undergoing change.
For example, reliance on export credit agencies is on the wane, while capital markets are expected to continue to be the fastest-growing financing source for new aircraft. U.S. airlines have relied heavily on this type of financing for years, and now the Cape Town Convention, which came into force in 2006, is making it possible for airlines in other countries to do the same.