It is a good time to be in the airplane business. Backlogs are at historical highs and airlines are making record profits. CEOs such as Boeing’s Dennis Muilenburg and American Airlines’ Doug Parker say we are no longer in a cyclical industry. Boeing’s share price more than doubled last year, and the super-long waiting periods for new jet deliveries indicate that Airbus and Boeing have made an art of overbooking—taking more orders than they can fill in anticipation that a certain number of those sales will fail to come to fruition as airlines consolidate, change their fleet plans or fall on hard times.

When times are this good, a healthy dose of skepticism is in order. From the dawn of the jet transport age in 1958, most cycles from trough to trough have run 7-11 years. These cycles are calculated by looking at deliveries (not bookings!) of jet aircraft. We have now gone more than 13 years since the last low point, with no sign of a downturn. Either the world has changed, or we are experiencing a massive bubble.

“Bubble” is a loaded term, and I would not use it in the tradition of the Dutch tulip mania of the 16th century. True bubbles are by definition irrational. They are irrationally inflated by greed, and then suddenly burst in an unpredictable way. The current state of massive aircraft production levels is not irrational, but the result of several specific circumstances: the very low cost of capital, a prolonged period of high oil prices and the introduction of new aircraft and engine types in response to those prices.

But if Airbus and Boeing are basing production increases on rational calculations, some of those ordering the airplanes may be driven by non-market motives. A rising share of new actors in the market— both owners (lessors) and users (airlines)—are driven by non-economic factors, especially in China and in the Middle East. In China, where demand for new jets has soared dramatically, their actions cannot easily be predicted by the traditional tools that forecasters use. 

Ever since Steven Udvar-Hazy pioneered the concept in 1973, the share of operating lessors has risen steadily and now accounts for 40% of aircraft ownership. This represents the acceptance of leasing in the industry over time but also the emergence during the last decade of new lessors in China. 

Excluding BOC Aviation, China had virtually no lessors a decade ago. Today there are more than 100. They own about 2,000 aircraft, or 8% of the global fleet. Some of these new companies hired experienced leasing professionals or acquired well-established platforms. Others did not. But all are ultimately owned by the government of China, which by definition is not driven by pure profit motives.

Many participants in the leasing market assert that the reported historically low lease rate factors of less than 0.6% (lease rate as percent of value of aircraft) can be attributed to the emergence of the new Chinese lessors. Such rates make it extremely difficult for lessors subject to traditional economic realities to compete effectively.

To get a true picture of where the aviation market is heading, it is important to understand the political realities in China and how they affect Chinese aircraft lessors. The results of the October 2017 Communist Party
leadership elections represent a careful balance of power and interest of various constituents. These include different regional powers, ideological factions and supporters of previous leaders. 

Because China, using non-market objectives, had a lot to do with the current historically high levels of aircraft production, it is important to understand developments in that country to predict the future of aviation. It would behoove aviation professionals to know who Wang Qishan is and his role in the success of HNA Group or to speculate what the elevation of Liu He to vice premier means relative to the position of the existing premier, Li Kequiang.

In previous times, traditional economic analysis would help us understand and predict the aviation market. Some of the aviation developments now are driven by political considerations. The above-mentioned Chinese leaders represent different factions and approaches. Understanding these new realities can help us predict where aviation is going better than solely relying on standard economic analysis.  c

Adam Pilarski is senior vice president at aviation consulting and valuation firm Avitas in Chantilly, Virginia. The views expressed are not necessarily those of Aviation Week.