Replacement Requirements Will Stabilize Demand 

For two consecutive years, airplane orders have set new records for the number of airplanes contracted in a year. Past experience leads many to believe that this must mark a peak in the upcycle and that the only way to go from here is down. However, the shape of the curve and the precise location of the peak may be different for this cycle than for historical cycles, due to the increased size of the installed fleet and the need to replace airplanes that can’t compete with the latest generation of fuel-efficient jetliners.

Viewed in the broader historical perspective, the record orders for 2005 and 2006 follow a four-year period of unusually low order activity. Further, the size of the global fleet has more than doubled during the last 20 years, from just over 7,000 airplanes in 1987 to more than 17,000 airplanes today. Consequently, the number of orders recorded over the past two years represents a smaller percentage of the installed fleet than did the number of orders that mark the peak of previous upcycles.

The source of orders in this upcycle is also different from previous cycles. U.S. and European network carriers—the drivers of all prior order surges—have been delaying replacement of airplanes during the past five or six years. In fact, capacity at U.S. network carriers has actually declined since the year 2000 as the fleet’s oldest and least efficient aircraft have been retired, but not replaced.

The most recent spike in airplane deliveries occurred about 10 years ago. Airplanes ordered during the previous upsurge will begin reaching replacement age at roughly the same time, creating a requirement for a large number of replacement airplanes—simply to maintain the fleet at its current capacity. As a measure of the looming replacement requirement, there were nearly 2,000 airplanes worldwide that had logged 16 to 20 years of service in 2006. About 1,000 additional airplanes had reached 21 or more years of service.

Unlike past upcycles, the current industrywide production increase is not driven by U.S. network carriers. Resumption of normal airplane replacement and fleet growth activities at network carriers will sustain the current upcycle, even as demand from other regions begins to level off.

Since 2001, carriers have relied on increased productivity and airplane utilization to make up for the declining number of aircraft. The fleet is now at all-time high levels of utilization. Airlines can no longer gain more seats to meet growing demand without adding aircraft.

The replacement cycle must begin very soon, in order to avoid untenable replacement requirements a few years in the future. In particular, U.S. and European airlines must address pressing replacement requirements. Further, to remain competitive with successful low-cost carriers and to keep pace with growing passenger demand, U.S. and European airlines must soon begin to purchase airplanes to expand their fleets.

Continuing high fuel prices and fare competition increase the pressure to replace less efficient airplanes with the latest generation of reliable and highly economical airplanes. Strict new noise and emissions regulations in Europe could accelerate the requirement for European carriers to replace their older airplanes. Consequently, airlines will not be able to rely on older airplanes to provide stopgap capacity, as they have in the past.

Increased production rates are not likely to erode the requirement for new jetliners. Large backlogs at both airplane manufacturers mean that the requirement for airplanes will exceed manufacturer ability to supply for many years to come. In addition, the fleet-growth requirement of the Asia-Pacific region will occupy a large percentage of available delivery positions for several years into the future. This and the urgent need for replacement airplanes virtually ensures that airline capacity will continue to lag behind passenger demand and that traffic growth will outpace capacity growth—despite increased deliveries.