What order bubble?

Following the Farnborough Air Show last month, media and some aerospace analysts once again began asking the question: is the order bubble done?

We retort by saying, “What order bubble?”

We have been hearing since 2008 if the order bubble was about to burst. We’ve been asked this question many, many times. The trouble in answering this question is that nobody truly defines what they mean by “order bubble” when they ask if the bubble is about to burst.

Do people mean:

  1. Orders are about to collapse?
  2. Orders are going to be cancelled in great numbers?
  3. Will a large number of orders be deferred?
  4. Will Airbus and Boeing have to substantially cut back production?
  5. Will Airbus and Boeing be faced with producing “white tails?”

Our answers are:

  1. No. (Depending on what one means by “collapse.)
  2. No.
  3. No.
  4. No.
  5. No.

In other words, What order bubble?

Are orders about to collapse?
There have been some years in recent times where Airbus and Boeing booked more than 1,000 orders each. So some view less to be worthy of concern. Others point to the so-called book-to-bill rate, which is booking one order for every one airplane delivered. Book:Bill rates have run higher than 1:1 for many years and some think that a 1:1 rate, by comparison, is not so good news–and that anything less than 1:1 is bad news, worthy of driving down the stock price.

Others merely call the reductions an “end of the cycle,” also worthy of pushing down the stock price.

Our view: when Airbus and Boeing each have backlogs of more than 5,000 airplanes extending out to 2020 and beyond, who cares if the Book:Bill rate declines to 1:1 or even 0.75:1; or that the hyper-cycle is coming to an end? Neither Airbus nor Boeing can build planes fast enough to meet the backlog now. A little relief isn’t necessarily a bad thing, and we view any decline as only temporary in any event.

Are orders going to be canceled in great numbers?
To paraphrase former President Bill Clinton, it depends on what the meaning of “great” is.

Airbus has had more than 200 cancellations this year, including in one swipe the 70 A350s by Emirates Airlines. This was offset by an order for 50 A380s from Emirates. As for the more than 100 A320s canceled so far this year, any fair analysis of the Airbus customer “skyline” indicates the A320 customer base is of weaker quality than Boeing’s 737 skyline, so cancellations should not come as a surprise. This is why Airbus and Boeing overbook anyway” on the expectation there will be cancellations and deferrals.

Our view: when Airbus and Boeing each have backlogs of more than 5,000 airplanes extending out to 2020 and beyond, who cares if the Book:Bill rate declines to 1:1 or even 0.75:1; or that the hyper-cycle is coming to an end? Neither Airbus nor Boeing can build planes fast enough to meet the backlog now. A little relief isn’t necessarily a bad thing, and we view any decline as only temporary in any event.

Will there be a large number of airplanes deferred?
Our view: when Airbus and Boeing each have backlogs of more than 5,000 airplanes extending out to 2020 and beyond, who cares if the Book:Bill rate declines to 1:1 or even 0.75:1; or that the hyper-cycle is coming to an end? Neither Airbus nor Boeing can build planes fast enough to meet the backlog now. A little relief isn’t necessarily a bad thing, and we view any decline as only temporary in any event.

(Do you see a pattern emerging here?)

Will Airbus and Boeing have to substantially cut back production?

We believe there will be some minor adjustments in the production rates of the A330ceo and 777 Classic, but not in the single-aisle airplanes. We believe that the Boeing 747-8 is “done,” limping along until the USAF recapitalizes Air Force One and the Doomsday 747s. The A380 rate may be adjusted toward 2020.

Will Airbus and Boeing be faced with producing “white tails?”
A few 747-8s and A380s, perhaps, but generally no white tails are expected.

36 Comments on “What order bubble?

  1. Personally I wonder whether the people talking about order bubbles just see all the orders coming from developing regions (especially Asia), and view them with a prejudiced suspicion because they are not coming from Western airlines.

    Clearly the large order sizes also leads some commentators to the conclusion that the airline are reckless.

    In all likelihood though, it is those airlines placing large orders that are likely to succeed, since they will have a better cost base and market share.

  2. Two words:
    Precipitating event.

    Just as the first gulf war, and 9/11 were precipitating events leading to massive order cancellations and deferrals, we simply await that event, and it will happen.

    But this time it will be different. Airlines, lessors, and those that finance them are all in.

    It will be worse this time due to the leverage involved, and the marginal financial state of a great many carriers with orders and leases pending.

    A major conflict, and oil price shock, an major terror incident? Another financial market meltdown? That’s all it will take.

    Only the fittest and financially sound will survive.

    • 911 mostly seems to have hit the US. ( both as makers and takers of airliners )
      What order cancellations can be linked to the GFC and earlier the Asian Crisis from 1997/8?
      Available graphics show net orders thus cancellations are folded into the result.
      Boeing seems to have slightly more exposure to such events than Airbus.
      ( why? because Airbus cares for customers in non boom regions? )

    • You mean things like SARS, the typhoon in Asia, the market meltdown in 2008 and other such things?
      It has been an unprecedented decade of major items acting to the detriment of the economic environment which seem to be proving that Airbus and Boeing seem to have control of any affects that might come from various order bubbles bursting.

  3. There is no doubt that the next oil crisis will happen maybe in 10 years from now. That might bring traffic down a bit due to higher fares, and lots of old thirsty birds will be forced out of service. But will that effect new, highly efficient planes? Well I don’t think so, it might even trigger another order boost.

    • Oil prices react to potential conflicts. When they fall too low we see new
      conflicts sprouting up. Unfortunately this effect is loosing effectiveness.
      ( too much crying wolf imho ). Recent conflicts in Syria, Irak and Ukraine seem to have diminishing impact on oil prices.
      The well known warmongers appear to try fanning the Ukraine conflict into a full blown war. We’ll see were that will hit commercially.

      • Well, I am talking oil peak here, not the political situation. I am really not sure if alternative energies will be installed suffiently and alternative use (electric cars) will grow fast enough to avoid a serious problem when fracking is over its peak – and that will not take very long.

        We should never forget that our planet offers limited fossile recources which we have already plundered quite heavily. And yes, even oil will actually come to an end.
        Predictions are always very difficult, but I would place a bet on the fact that in about 10 years time demand for oil will seriously run away from production, creating the next big oil price rally.

        If that happens we might see demand for and development of large turboprops to replace short and maybe even mid range jets. Such development might in the extreme “blow up” the single-isle-bubble.

        • Fracking is a flash in the pan.

          Running out of resources will have low impact compared to the effects that fighting over resources will create. The political aspects can not be ignored here.

  4. We may categorize the within issue (Order Bubble, yes or no ?) sectorially and what we may point at is that specifically in the “WB” market sector, some players have adopted the BCG approach, going in heavy on capacity at attractive pricing to win market share. Those carriers have acted upon the appraisal that asset control = market control, securing forward enough WB paxliners as needed to consistently play their BCG strategy. There is some risk downstream : the other players and the OEMs should not misinterpret the BCG-type moves (it is a short-term positioning, not a long term trend !), or we may be facing excess WB throughput, ie beyond 500 WB/y all models summed up, looking into 2022 and beyond ?

  5. I suspect there is a grim agreement here. Production is not affected by what could have been called ‘precipitating events’ of the past. But we could (likely in some of our views) face even greater precipitating events. Of course in those events the problems of Airbus and Boeing (and the entire industry) will not be the major problems we will face.

  6. Could it also be that we are starting to see the effects of a shorter generation time between landmark improvements, to engines in particular? Also, the fact that there is less of a third world market for second-user aircraft, with airlines from relatively under-developed countries ordering new.

    • Engines decidedly are not a duopoly. Then engines still have a lot more room for improvements than basic airframes ( see the equivalence of the A330 and the “so much newer and better” 787 ). Though I would question the “landmark” quality of improvements, it is more a continuous process of detail improvements. Even the GTF is not a step change but a concept that has matured enough to be viable on bigger engines now.

  7. Landmark was perhaps the wrong term – generational might have been better. The RR Ultrafan is said to be a step change improvement on current engines, for example. We must be approaching the limits of conventional technology, particularly in terms of airframes. There have been intimations by posters on here that the A330 wing cannot be improved much, despite being 20 yrs old, so probably radical measures will be needed to achieve the next step-change.

  8. ( see the equivalence of the A330 and the “so much newer and better” 787 )

    Where do you see this equivalence? The only way the A330neo can compete with the 787, is by discounting the price.

    • If the a330 with engines on the same tech level as those on the 787 comes within
      a couple percent performance wise the billions dumped into the Dreamliner project
      go from investment to “wasted” ( John Leahy : 787 is a cheap chinese copy of A330 😉
      Keep in mind that Boeing could leverage 20 years of progress that they mostly didn’t have to pay for. The 787 just does not come near to affirm Boeings selfprojected image of excellence.

      • Wow, you are on the anti-Boeing kick today with that stream of conciousness dribble.

        If the 787 was a “cheap Chinese copy” as per John Leahy, then why did his company respond in not one way but TWO (A330Neo and A350…well 3 if you count the aborted A350Mk1). so much for a cheap Chinese copy, because if the 787 was, there would be NO NEED TO RESPOND TO IT. And in no way can you say “if the A330 with engines on the same tech level comes within couple of percent” then the Boeing investment was wasted. That’s just the height of ridiculous, and wishing for things to remain as they are. The 787 will continue to be far and away a better plane and has far more room for improvement than the A330. We’ll see how long the A330Neo experiment lasts and how successful it will be by mid 2025.

        Come on, Uwe. Put. That. Coffee. Down. Coffee is for closers only.

        • I don’t the know if the 787 is a cheap Chinese copy of the A330, but what I do know is that the A330 Neo will be at least as good as the 787. Of course Airbus has to respond just like the 787 was a response to the A330. That is what the business is all about.

  9. Tough crowd. So Boeing gets no credit for building the B787? After all, Airbus had to build the A350 that they would probably not have to if it wasn’t because of how airlines perceived the B787. it was execution that was messed up, not the concept or the airplane itself. I also think the benefits from what the learned on the building and the stuffs used on this plane will benefit the Boeing company for many years to come. Same as Airbus will benefit from lessons learned with its A350.

    • A tentative and maybe rather fannish interpretation that I already stated earlier here:

      Airbus did not go through with the A350 Mk1 as answer to the 787.
      Instead the A330 was set to soldier on as competitor to the 787 staying competitive by way of incremental improvements and availability. End of 2006 the dark clouds over Dreamliner development had been seen by Airbus. ( later condensed as the “lessons learned” graphic essay. IMHO the anti A380 s*storm was kicked off when Boeing realised that the 787 project was going pearshaped at least 2 years before the faux RollOut )
      Instead they launched the A350XWB ( a further morph in name only ) that targeted the range directly below the 777-300ER and intended to displace by incremental improvements. Designed to have all the sexy elements of the then current rage in airliner accessories bundled in a more sane way. In this context I would tag the A350-800XWB a decoy that did its job 😉

    • It is, but it seems that it really takes an Airbus V Boeing thread to generate a lot of posts!

  10. There are a few major orders that have questionable origins where relatively new players indicate they will enter into the leasing market as well as running airlines, but I believe they are all talking narrow bodies where A and B have such huge backlogs, the industry would survive any serious cancellations.
    Another Kingfisher for instance would be regarded more as an inconvenience than a cataclysmic event.
    There are a lot of very serious financial modelers out there deciding on investments of this magnitude so the possibility of a bubble is remote unless an escalation of some current political events creates a ‘no-fly’ climate hitherto unforeseen.

  11. Regarding the A320 cancellations, please note that when a A320ceo is converted to a neo or A321 it is “cancelled”, and then reordered again.
    (I guess this is due to legal demands)


  12. I think that with the problems that the Tigerair brand is having over most of west Asia and Australia, that many narrow bodies frames could be delayed or cancelled there.
    I also think that Lion Air is taking way to many frames a little too fast (same for Airasia X). Perhaps the will find the network to make them work, but is not just airplane that these airlines have to be concerned with. How about pilots, mechanics and support personnel. This is an industry where you can just pick workers out of a pool, they have to be qualified on their fields. Another question is safety. As we have already seem with some of Lion Air plane overshooting or not even making the runway, the safety level and the experience of pilots, mechanics and air traffic controllers have to be better than just good enough.

    • Leaves out the 747-8! (though I am still puzzled by how that program benefits from a few 747s for the US Government? If I am counting right, the number is 6. Not exactly a program saving number. Buy used from Lufhansa when they retire theirs.

  13. I personally subscribe to the concept of aviation industry supergrowth: that the relative growth of revenue passenger miles will continue to be a few percentage points above world economic growth for at least another couple of decades. The demand for air travel is strong, and will not yield easily.

    I imagine that if one would talk to young people almost anywhere, for instance in Oceania, Asia, Africa or Europe, and ask what they would like to do if the had a little bit more money, their answer would in one way or another involve air travel. They would like to study abroad, work abroad, go skiing, scuba diving or backpacking, or hike in the East African Highlands or visit the temple city Angkor Wat. Young people fancy a lifestyle that includes air travel. Consequently, as the world economy grows, the aviation industry will benefit from a disproportionately large share of the additional economic resources created; hence ‘supergrowth’.

    In the A&B duopoly, the OEMs are shrewdly balancing their output with estimated demand, creating significant backlogs. Available production slots are often effectively vacuumed by lessors, who stand to gain from supply limitations. In the era of significant backlogs, carrier fleet planners have to arrange for replacement aircraft yet farther ahead, adding to the backlogs even further. Case in point: Emirates are still receiving Boeing 777-300ER aircraft, yet they have already arranged for its phase-out, with firm orders for the in-development Boeing 777-9X, that will be certified six years from now and delivered throughout the 2020s. In this dynamic of industry supergrowth and elongating planning horizons, it’s to me quite understandable that backlogs are building. Long story made short: I don’t perceive strong grounds for order bubble alarm, and I agree with the Leeham Co. analysis.

    • I agree with this. There is a significant underestimation of the level of growth in demand for air travel in Africa and Asia, both business and personal. Together these account for 5/7ths of the world’s population, and are currently only at a fraction of their potential.

  14. A substantially better product creates its own demand. See: electricity, iphone, personal computer, diesel locomotive, jet engine, etc.

    The percentage increases in efficiency being thrown around in widebodies are crazy high. Airlines are forced into an efficiency arms race fueled in part by cash rich gulf oil states which also erodes the relative cost of air travel thereby stimulating more demand.

    Narrowbodies seems more like equal parts organic demand for travel by a richer world and very healthy gains in efficiency.

    The “bubble” deflates when the future gains in efficiency of the newest model don’t justify parking an airplane in the desert years short of the end of its useful life.

  15. Some people posting on this site are not providing any value and make the reading less interesting for us who are more interested in the industry and less interested in kindergarten arguments about A vs B. It is certainly interesting to read about A and B but not in the way some people do it. Airliners.net is the place for them.

    When i comes to the discussion about an order bubble, I do think that both Airbus and Boeing are very keen to being able to meet the demand from the market and hence make it hard for both new players like Irkut and Comac to get any substantial market outside their sphere of influence and also keeping Embraer and Bombardier from moving up. I’m certain that both Boeing and Airbus are very happy with how they share their part of the market today. I think that flexibility to rise and slow production will be increasingly important and that both the OEM and their suppliers are looking how they can do that in the future. Not an easy task I imagine.

  16. I just can’t see one order bubble. I can see a foam of many small bubbles with some larger bubbles. I just can’t see an event where many of the bubbles will burst at once.

    The airlines ordered according to their expectations. Quite different to other recent bubbles where some “experts” sold some Asset Backed Securities.

  17. At some point, in the not too distant future, both OEMs will have years where the ‘book to bill’ ratio is less than 1. This is inevitable but far from a disaster. Of course, the Wall St analysts will immediately downgrade the shares as they can only see from one quarter to the next, certainly not at the long-term required for a civil airliner program.

  18. We cannot say that there is a bubble because the commercial aircraft market is healthy and is still developing around the world at a relatively fast pace.

    But if a catastrophe of some kind were to happen, say a major volcanic explosion like Krakatoa for example, or a complete meltdown of the world economy like we have never seen before, it could potentially jeopardize the existing backlogs. But the impact of this extraordinary event would have to be sustained over a prolong period of time because the existing backlogs are huge.

    So we cannot say there is a bubble right now because there are no tangible signs. Aircraft are full and people travel more than ever everywhere on the planet.

    But we never know, a big snowball packed with dust could come from deep space and hit Planet Earth with little advance warning.

    Anyway, I hope we find MH370 before anything like that happens! 😉

  19. Baring significant events I don’t see catastrophe for either A or B, I can see booking valleys occurring and expected (we may be in one now) where book to build could be 0.5 or so for a year or two. Well backlogs will shrink, right now I believe they are way above historical norms of 3 year backlog.

    Every industry has rough periods where production needs to be cut back. Cat is experiencing that now in mining and construction equipment. Mostly there are factors outside of airlines / OEM’s control. With the backlogs currently there I think the commercial aviation segment will handle things better. A problem for the companies is that the military side of their businesses are very tight right now, so a commercial decline isn’t offset.

    What bothers me more is that the execution of new programs appears to be more botched up than before. All this virtual design magic really turned out to be hocus pocus, not necessarily the great leap forward. Yes design is more challenging as we are further out the curve so it is harder to make efficiency improvements, but the blunders have been incredible.

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