JSA Predicts 21 Percent, US$12 Billion Drop In Jet Sales For 2002

World Airline News, Sept 28, 2001

The third quarter of 2001 - normally the second best quarter of the year - had been looking modestly better until the Sept. 11 tragedy. UAL alone could lose over $2.5 billion this year. Estimates of losses for the U.S. airlines for 2001 are now in the range of $4.8-7.5 billion - up from the $1.5-2.5 billion immediately before the tragedy. This year now will certainly be the first net loss year for U.S. airlines since 1994. Furthermore, it is now expected that U.S. airlines will lose in the range of $250-750 million next year.

As if an economic slowdown and terrorist attacks were not enough, airline labor costs took a sharp jolt upward when United, in its recent capitulation to its employee owners, agreed to lucrative pay increases, hoping to end the flight schedule disruptions that threatened its potential takeover of U.S. Airways - a proposed deal which has since fallen through. Then it was Delta with the richest pilot contract in the history of the industry. The impact of these contracts is reverberating worldwide.

Another effect of the air travel slowdown and cost increases is the acceleration of withdrawals of aircraft from service. According to Airclaims, during the first half of 2001, 112 aircraft were scrapped - including 37 727s and 16 DC-9s - versus 76 aircraft in the first half of 2000. There is essentially an inverse historical relationship between aircraft orders and aircraft for lease or sale. The final numbers for 2001-03 will undoubtedly further confirm this relationship.

One can look to the history of world traffic growth and airliner orders and deliveries for an idea of what the future may hold. As might be expected, a sudden downdraft in traffic growth, as happened following the Pan Am Lockerbie disaster in December 1998 and the Gulf War in 1990-91, resulted in low levels of orders over the 1991-94 period. Deliveries slowed nearly by half, not bottoming until 1995. With the higher levels of backlog going into the current slowdown, we foresee a repeat of the early 1990s, but with a lesser magnitude and volatility.

The impact of the sudden decline in the fortunes of the airlines is already reverberating severely up and down the food chain of the commercial aerospace industry. In a controlled slowdown, the industry reduces orders for raw materials and piece parts first in anticipation of a demand weakness, working thereafter up the food chain.

The current situation is anything but controlled. The plummeting airliner demand - particularly for narrow-body aircraft - is causing severe disruptions up and down the food chain as all are being slowed simultaneously. Inventories are likely to be piling up at all levels. Not only are OEM sales being impacted, but the after-market sales and services will be adversely affected as airlines chose to retire rather than overhaul older aircraft, given the excess of new aircraft coming on line.

Manufacturers Face Declining Estimates

Both airliner manufacturers have already announced cutbacks. Boeing now estimates that 2001 deliveries will drop by 38 aircraft from the previously estimated 538. Our estimate is for 504 deliveries in 2001. For next year Boeing is now estimating that deliveries will likely be in the low 400s. Our estimate is a more pessimistic 384 - a 24 percent decline. The company expects a further drop in 2003. We concur. We estimate that deliveries in 2003 will decline another 16 percent to a low of 323, before again beginning to turn up in 2004.