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Global Fleet Outlook: Deliveries peak, as order highs decline.

Airline Leader

Airlines are set to add more new aircraft than ever before in 2017. After years of record ordering and building backlogs, aircraft manufacturers are making good on their promises to ramp up production. The industry is enjoying record levels of growth and profitability; with solid passenger market fundamentals, and both airlines and leasing companies having access to ready liquidity, cheap debt and plentiful equity capital, making financing fleet orders easier than at any time before the global financial crisis.

Asia Pacific and Middle East are to take delivery of 60% of new widebodies. Globally, the Asia Pacific and the Middle East are the key spots for aircraft deliveries, the former for the raw numbers of incoming aircraft and the latter for the type of aircraft being delivered.

Airlines in the Asia Pacific region are due to take delivery of just over a third of projected 1,750 to 1,800 global aircraft deliveries in 2017. Passenger traffic in the region is being helped along at consistent near double digit rates by the rapid development of China, India and economies in Southeast Asia, with several strong large domestic markets (including the EU) and growing regional and intercontinental flows. Asia Pacific regional carriers will add around 350 new narrowbodies to their fleets and just under 150 new widebodies, which will be used for a combination of intra-regional and long haul routes.

Middle Eastern deliveries are being spearheaded by the large state owned Gulf carriers, particularly Emirates, Etihad Airways and Qatar Airways. Although now beginning to run into headwinds, these airlines have a combined 682 aircraft on order, of which 550 are widebodies. Geopolitics makes deliveries for some Middle East carriers uncertain, but the region's islands of stability also happen to be its dominant aviation markets, so the vast majority of orders and deliveries should remain unaffected.

There is one shift in the Middle East: the region's airlines are due to take delivery of 50% more widebodies than narrowbodies in 2017. Most aircraft will go to the large super-connector airlines, as regional carriers seek to continue to take advantage of next generation twin-jets to offer intercontinental services. Regional LCCs are due to account for about half of narrowbody deliveries.

Europe and North America are meanwhile favouring narrowbodies as carriers update fleets. European airlines are due to take around 400 new aircraft in 2017, while carriers in North America will receive about 350.

Both regions exhibit a strong preference for narrowbodies, as LCCs continue to expand and the more profitable network carriers renew their short haul fleets.

In 2017, North American carriers will take just one widebody for every 3.5 narrowbodies, while European carriers will receive one widebody per four narrowbodies. In Asia Pacific, this ratio is about 2.4:1, while in the Middle East, it is two widebodies for every 1.5 narrowbodies.

This contrast in widebody-to-narrowbody orders speaks volumes for which airlines will account for the bulk of long haul growth over the next decade.

European airlines have been growing at a notably faster pace than their North American counterparts, partially due to LCC growth and partially due to improving Eurozone economic performance and the more competitive environment. The region's LCCs have been responsible for the majority of new seat capacity since the end of the financial crisis, and are expected to take around 60% of new narrowbodies coming into Europe.

Global Orders by Aircraft

Global orders by aircraft

Global Orders by Seat

Global orders by seat

European LCCs are also increasingly experimenting with low cost long haul operating models, but so far only Norwegian Air has made significant orders, and will take nearly 20% of the 65 widebodies due to be delivered in the region. Other LCCs are interested in the model, but have been frustrated by regulatory issues and by long backlogs, denying them access to the right equipment.

In the meantime, Europe's traditional network carriers will continue to take the lion's share of the larger aircraft - although they, like some of the Asian network carriers, may allocate them to low cost subsidiaries.

North America has been characterised by strong capacity discipline, (made possible by greater consolidation and barriers to entry), particularly by the three consolidated network carriers - Delta Air Lines, United Airlines and American Airlines. In a low price fuel environment, and motivated by investor pressures to avoid capital commitments, these airlines have held back from adding new aircraft, in preference for working existing fleets harder and more efficiently. There have even been cases of taking stored aircraft back into service, a direct result of the low cost of fuel.

However, with profits in these regions at all time highs, major network carriers are moving to a position that the time has come for re-fleeting, taking advantage of new narrowbody technology, and to a lesser extent newer, and higher capacity, regional jets. The US big three now have just under 800 aircraft on order between them, in roughly a 5:2:1 ratio of narrowbodies, widebodies and regional jets.

Annual Aircraft Orders & Deliveries

Annual Aircraft Orders and deliveries

Annual Aircraft Orders & Industry Profits

Orders and Profits

Latin American and African carriers are taking few aircraft as their regional economies suffer. Latin American airlines continue to suffer from the economic woes of several lynchpin economies, with the Brazilian economy and air travel market having stagnated in 2014-2015 and then gone into reverse last year. The region's airlines are expected to take delivery of scarcely more than 100 aircraft in 2017, these weighted heavily towards narrowbodies. They are mostly destined for Mexican, Brazilian and Argentine LCCs, which have been defying shrinking regional traffic flows, although not necessarily profitably.

The few widebodies and regional aircraft are also predominately set to join the fleets of network airlines such as LATAM and Avianca.

African airlines are also suffering, with weak economic performance in key economies and ongoing security and political concerns only exacerbating the region's chronic infrastructure, regulatory and liberalisation issues, as well as mismanagement of several major regional carriers. African carriers are forecast to receive about 35 new aircraft in 2017. Not all news in the region is bad though, with Ethiopian Airlines showing that well led African carriers can expand and be profitable at the same time, and EgyptAir is putting into place a solid, long term recovery plan to stem its losses after a disastrous five years for the carrier and the country.

While deliveries are up, orders are trending down. We may have passed the peak for orders. The five large western aircraft makers delivered slightly better than 1700 aircraft to customers in 2016.

The two largest OEMs - Airbus and Boeing - continue their duopoly, delivering close to 85% of all commercial aircraft for the year, and accounting for approximately 95% industry revenue. Since 2008, these two manufacturers have increased output by two thirds, delivering a combined 1435 aircraft of 150 or more seats in 2016.

Even as record numbers of aircraft are joining the global commercial aviation fleet, airlines and leasing companies have also slowed their ordering. After an unprecedented spending spree on new aircraft, ordering peaked in 2014, slowed in 2015 and dropped below a book to bill ratio of 1:1 in 2016.

Aircraft ordering is usually closely linked to airline profits, but there has been a disconnect in this cycle in the past few years.

The downturn can be traced to a number of factors. Manufacturer's backlogs for several types are booked out for up to nine years of production, resulting in excessive lead times between orders and deliveries for the most popular aircraft. Also the persistent low oil prices have allowed airlines to retain older and the structural downturn in demand for dedicated freighters have also contributed to this ordering slowness.

There has also been a slowing in the total value of aircraft delivered. While narrowbody and regional jet sales have been solid, sales of high value widebodies have declined. Narrowbody deliveries are set to accelerate, while widebody production will grow only slowly.

Airbus and Boeing have made production rate cuts to the current A330 and 777 models, as demand has moderated ahead of the introduction of updated replacements. Very large widebody demand has dropped to near terminal levels. The A380 and Boeing 747-8 have won only a net 37 orders in the last three years. A380 output has been halved to one per month, and may fall even lower given the dearth of orders, and 747-8 production is now at 0.5 aircraft per month, under subsistence level for either programme.

Narrow Vs Widebody Aircraft orders

Narrow verses widebody

Airbus & Boeing Very Large Widebody orders

Airbus_Boeing_very_large_widebody

Airbus & Boeing Announced Delivery Intentions

Airbus_Boeing_Delivery_Intentions

Large Commercial & Regional Aircraft orders

Commercial v regional

Given current manufacturer production plans, particularly their announced intentions for narrowbody output, aircraft deliveries are expected to continue to increase out to 2020. By then, annual Airbus and Boeing deliveries could sit at 1850 aircraft per annum, or even higher.

The smaller regional/mid-sized aircraft manufacturers - Embraer, Bombardier and ATR - have seen a slow but steady improvement in their fortunes. In 2016, they delivered a combined 273 aircraft, their best year since 2008. However, unlike the larger OEMs, regional aircraft deliveries are set to stall, or even slow, over the next few years.

Skinny order books for some regional jet and turboprop types, due to low demand and some large order cancellations, have prompted a pull-back on confident production expansions planned by regional aircraft makers outlined just a few years ago.

Turboprop sales boomed when oil prices peaked, but demand has dried up over the past two years and backlogs are falling again. ATR's firm order backlog is solid out to 2019 at current production rates, and the company is waiting on some large orders. Bombardier's Q400 backlog is less than a third of ATR's and even at reduced rates, the backlog is now equivalent to less than two years' production.

Regional jet markets are firmer, particularly the C Series and the E-Jet E-2 families. Bombardier had two marquee orders in 2016, pushing the backlog past 350 aircraft, although upwards of 80 orders still have question marks over them. Bombardier wants another major order to ensure more stability for the programme.

Meanwhile, Embraer continues to accumulate small E-Jet E2 orders, taking the backlog for the updated aircraft to nearly 400. The C Series and largest version of the E2 are edging into the 110-150 seat market space, which the larger OEMs have abandoned in favour of the 160-190 seat narrowbody sweetspot.

The next few years will also usher in Russian and Chinese (and even Japanese) challenges to the Airbus/Boeing duopoly. Flight testing of the C919 and MC-21 narrowbodies is due to start in 2017, and China and Russia and are collaborating on a new USD15 billion medium range widebody programme. These new aircraft will undoubtedly divert orders in their respective home markets that otherwise would have gone to Western OEMs, although sales so far still vastly favour Western designs.

The global fleet outlook is split. Airlines will take more deliveries than ever before, and manufacturer output will continue to march upwards for the next four to five years.

Ordering promises to be more cyclical than manufacturing, although unless there is a major external shock, manufacturer backlogs will for the most part remain healthy.

Even a steep temporary slowdown in ordering is not necessarily wholly negative for manufacturers, as it gives them breathing space to sort their production plans.