Economic Outlook n° 1188 | Special Report | Transport: a two-speedworld
Euler Hermes
Factorsunderpinningthis resistance/growth in units
2008
Net orders Order book
1,433 7,400
Sources :manufacturers, EulerHermes
2009 413
6,850
2010
1,104 7,000
2011
2,224 8,200
2012e 1,700 8,700
Thisnewparadigmalsobreakswiththe successive drops inproductionthat characterizedthe sectorover thepast30years,due totheglobal economy.With eacheconomic crisis, the sectorwouldundergomajor correctionsover several yearsbefore resumingits growthtrend.As for the2008-09recession, the aerospace industry escapedthe trendevident inmany other sectors, as itsproductionlevelhasmaintaineda steadyupwardpathalmostwithout interruption despite the economic turbulence.Giventhe rise in productionalreadyplannedbymanufacturers and without regardfor the economicwoes facedin Europe,deliveries couldriseby a further10%in2013.
Thenumberofnetorders in2012,whichare estimatedtohavedroppedby about25%,have sufferedfromthe comparisonwithanexceptional performance in2011. Inresponse totheperformance of theAirbusA320Neoin2011, the starperformer in 2012wasBoeing's single-aisle competitor, the B737Max,whichaccounts formore thanhalfof annualorders.Despite thedropinorders, theglobal business resultsof the sector remainvery
comfortable, andtheorderbooks are full enoughto representbetween7and8yearsofoutput. The numberoforderswillprobablydropin2013toits average level,puttinganendtotwoyearsofhigh commercial activity,whichwasdrivenby themarket launchof aircrafts satisfyingtheneedsof the air carriers,whoseownprofitabilitywas threatenedby highfuel costs.
▶ Reasons toremainconfident about thefuture A closer look at themanufacturers’ customer portfo- lios offers reasons for optimism, since the sector is supported by three business activity and growth dri- vers. A regional analysis of customers shows the importance of Asian and Middle Eastern carriers, which alone account for nearly half of the orders in terms of value, even though theymake up only one- third of the current traffic. The second driver is the dynamic growth of the low-cost carriers, notably the Asian companies whose upside potential remains significant giventhe still limited inroadsmade by this type of offer in thatmarket. The third and last driver ◾◾◾
The high price of kerosene (aviation fuel)
▶ ASwordofDamocleswhichweighs ontheprofitability of all sector companies, regardless of their size andregion: the fuelprices.
Accounting for approximately one-third of operating costs, the price of kerosene is the barometer of sector profitability.Whenit surges, carriers see their profitsmelt; whenit remains stable, their profitability improves. In2012, these prices,whichwere still at all-timehighs,negatively affected the bottomlines of sector companies,which slipped back to anaggregatenet profit ofUSD4.1 billion. It isneverthelessworth noting the progress thathas beenachieved by comparing the albeitmodest level of 2012 earningswiththe abysmal losses recorded in2008 during a similar fuel price environment.Carriershave started to adapt to the quasi-structural factor ofhigh energy prices, but thenet profitability of the sector seems tohavehit anunbreakable "glass ceiling"under the current fuel prices. Thenext step following this first adjustment phase is the response by aircraft and enginemanufacturers,which marketednarrow-body aircrafts (the product line enjoying the strongest demand) withnewengines and enabling roughly 15%reductions infuel consumption. The enthusiasmfor these aircrafts (as supported by thenumber of orders) illustrates the need for the carriers to acquire amore efficient fleet,whichwill allowthemto find the necessary leeway to achieve profitability. Themanufacturers (and the sector) are the mainbeneficiaries, since their order books are further enhanced by thesenew aircraft.▣
Annual fuelprice andnetprofit trends for the air transport sector USD per barrel andmds USD