Oct. 12, 2020, © Leeham News: Every year, like clockwork, when Boeing publishes its 20-year Current Market Outlook, there is always another upward revision in forecast demand for new aircraft.
So, when the Chicago-based OEM admits that demand has taken a long-term hit, you know the situation must be dire.
Last week, Boeing belatedly published its annual CMO forecast for global commercial jet production and services. The forecast was quite a comedown as it marked a 2% fall from Boeing’s previous expectations for aircraft demand, with a whopping 10% drop for widebodies and freighters.
Airbus has withheld its 2020 Global Market Forecast while it continues to assess the impact of COVID-19.
Boeing tries to keep upbeat tone despite numbers
The CMO strikes a more optimistic note in its text.
“The current downturn is likely to lead to the replacement of many older passenger airplanes,” the summary reads. “This accelerated replacement cycle will position airlines for the future by improving the efficiency and sustainability of today’s fleet.” Boeing now believes 56% of aircraft to be delivered this decade and 48% through 2039 will be replacements, versus a 20-year forecast of 44% in Boeing’s 2019 CMO. But “replacement” requires new airplanes to be delivered, a distant prospect in many regions – especially considering how many low-time used aircraft have been placed in storage this year.
The region-by-region view was almost uniformly negative. Forecasts for developed markets like North America and Europe were decreased by 2% or less, while emerging markets like South America and Africa were slashed by 11%-13%. Only China’s demand forecast was increased from last year, by 6.3% to 8,600 units, and for reasons not explained anywhere in the CMO.
“China’s demographics and urbanization, combined with its ongoing economic transformation,” the CMO’s interactive version says, “are expected to maintain favourable market conditions for air travel over the next two decades.” But has this changed since 2019’s CMO was published? The same paragraph admits “China’s growth rate has slowed in recent years,” a trend almost certainly accelerated by COVID-19.
Regional jet growth outlook powered by implausible Chinese demand
Boeing appears to draw a boundary on regional jets at approximately 90 seats, classifying the Embraer E170 as a regional jet and E190 as a single-aisle. Its forecast of 2,430 regional jet deliveries over the next 20 years works out to an annualized rate of 122 units/year. Despite Mitsubishi’s withdrawal from the market, this is achievable from a production perspective. Embraer has historically produced up to 100 units per year, although it will need to devote an increasing share to larger E2 variants that Boeing classifies as single-aisles. COMAC and UAC will also start production this decade; LNA believes they will produce no more than 60 aircraft per year combined.
However, a comparison to Boeing’s 2019 CMO highlights forecast modifications which are hard to explain. Somehow, 20-year demand for Chinese RJs increased from 120 to 380 units, a change that more than explains the 8.5% increase from last year’s forecast. It seems difficult to imagine Chinese airlines would waste slots at constrained airports on sub-90-seat aircraft.
Regional jet demand is likely to be particularly light over the next several years, as RJ unit costs are viable only in markets with high unit revenue. Few high-yield markets are likely to return to previous levels this decade given the permanent reduction in business travel predicted by the CEOs of Delta and Southwest, among others.
Single-aisle demand: steady as she goes?
Boeing only reduced its 20-year single-aisle delivery forecast by 150 units or 0.5% from the 2019 CMO. North America demand was exactly flat and Europe was down just 0.7%. Although share shift from legacy carriers to faster-growing low-cost carriers is likely, it beggars belief that 20-year total demand in mature markets would not be materially decreased by a nearly half-decade downturn in passenger travel.
Emerging markets were similarly negative – except, again, for China. An 6.4% pullback in forecast demand for South Asia and 10.6% fall in Latin America, both relatively small markets, was more than offset by an 8.2% or 490-unit increase in the China forecast since the 2019 CMO. Although single-aisle deliveries to China are much more likely to grow than regional jets, nothing has happened since last year that would justify such an increase.
Widebody and freighter demand expected to fall in all regions
The latest CMO reduces widebody demand by 10.3%, with cuts in every region. The Middle East, China, and wider Asia show the largest reductions in absolute terms. However, Middle East widebody demand was reduced by only 11.1% and Southeast Asia by a mere 7.3%. These seem hard to fathom as long-haul “super-connectors” like Emirates, Qatar, and Singapore face growing local competition, increased “overflight” competition driven by the enhanced range of the 787 and A350 – and, above all, a downturn in passenger demand that seems highly likely to extend into the latter half of the 2020s.
The 10.6% slash in expected new freighters hardly comes as a surprise. Early retirements of hundreds of passenger widebodies, especially 777s and A330s, are likely to provide sufficient freighter conversion feedstock for most of the coming decade.
Demand forecast implies incredible ramp-up in production rates
In an investor note, Morgan Stanley used the CMO forecast data and various market share assumptions to estimate production rates for the current decade. It found that achieving 50% single-aisle market share for Boeing would require a ramp-up to 122 aircraft per month by 2025, a 114% increase from the previous MAX production peak of 57/month.
On the widebody side (including freighters), Boeing would have to produce 29 aircraft per month to achieve 50% market share. Given Boeing’s pre-COVID production of fourteen 787s per month and five 777/777Xs, plus the likely end of 767-300ERF production by mid-decade, such a growth rate seems unachievable.
However, the actual picture may be even worse than Morgan Stanley believes. Before COVID, Boeing’s 737 MAX had an order backlog share of approximately 38% versus Airbus’s 58% when all 100+ seat single-aisles are considered, including the Airbus A220 and Embraer’s larger E2 variants.
The bank’s analysts seem to have built their analysis on an implicit assumption that Boeing and Airbus are the only single-aisle competitors. In reality, Embraer is capable of producing 100 units per year – and E190-E2 and E195-E2 orders will start flowing eventually.
Also, COMAC’s C919 and UAC’s MC-21 should be in production from 2022. (Both claim they’ll enter service next year, but this seems unlikely under current circumstances.) Admittedly, initial production rates will be low, and the two combined have less than 1,200 orders and options. There’s no way to know how quickly each manufacturer will ramp up production, but a maximum of five aircraft per month or 60/year seems reasonable throughout the 2020s.
Boeing’s traffic forecasts have been too conservative – but what does this mean for deliveries?
As Melius Research told investors in a note after the CMO’s release, the air traffic assumptions in the CMO and Airbus’s Global Market Forecast have been consistently conservative over the past 20 years. The firm’s analysis showed that Boeing’s average annual traffic growth assumption in the 2000-2019 CMOs averaged 4.9%, while actual annual growth over the same period was 5.4% – even with 9/11 and the global financial crisis. The latest CMO calls for 4.0% annual growth through 2039.
Melius also claims the regression coefficient between GDP growth and air traffic growth has grown during the past 15 years, due to the rapid expansion of the global middle class. “We believe,” said Melius’s note, “this demographic-based trend will re-emerge post-COVID.”
Notably, the firm did not say whether previous aircraft delivery forecasts have proven accurate.
The CMO’s 20-year fleet estimates, said Melius, assumes aircraft retirement rates in the low 2% range, which is reasonably consistent with historical trend. The wave of retirements happening now is likely to eclipse the 4-5% rate seem in previous downturns, which normally would point to the replacement demand Boeing mentions. However, new entrants may opt to take lower-time used aircraft from desert boneyards if they’re priced competitively enough to offset inferior economics – and supply of such aircraft is stronger than ever.
It’s also possible that some governments will mandate accelerated aircraft retirements as a part of anti-carbon regulations, as the Melius note points out. This would likely be a boon to aircraft manufacturers.
Demand for new aircraft will not stay depressed permanently – this is a certainty. But troubling details in Boeing’s latest forecast make it clear the CMO is an aspirational guide, not one for planning.