Manufacturers Differ Over Future Jet Sales

It is well known that the aircraft business is one of very high stakes. Mistakes of any kind are expensive and recovery times can be lengthy. In production planning, in the development of new models, and in assessing competitors, there has to be heavy reliance on the company’s outlook over the next ten, fifteen and even twenty years. With so much dependent on successful forecasting, it is only natural for there to be suspicion of all the numbers and assumptions. But suspicion is not the same as cynicism. Suspicion means a constant awareness that forecasting is best viewed as a dynamic process which is subject to frequent re-evaluation and revision.

Regarding the methodology employed by manufacturers in making forecasts, the first step is to determine the total world demand for air travel. This involves looking at airline costs, the world economy, competitors, yields, regulations and so on – from which the demand forecast can be derived. The resulting figures are then evaluated with further attention being directed at load factors, utilisation, aircraft sizes, fleet mix, fleet requirements. From this comes a forecast of aircraft deliveries over the next fifteen years. This all sounds rather easy, but in fact considerable painstaking, detailed and time-consuming analysis has to be done to produce estimates in which manufacturers can have confidence.

In this context it is interesting to compare company projections with real world experience. As recently as 1985, the actual jet aircraft inventory stood at 6,700 active units. At the same time, Boeing, Douglas and Airbus lndustrie were forecasting the total to grow to between 8,000 and 9,000 units by 1997.

This item of recent history is of interest in showing how fast things can change. Current Boeing, Douglas and Airbus expectations for the size of the total world airline fleet include the actual fleet count in 1989. By that year it was already at the level which earlier had been projected for the mid 1990s.

How can this magnitude of discrepancy occur? In this case it was the combined result of increased deliveried and deferred aircraft retirements. Also apparent is the huge surge in confidence that accompanied the massive 1988 and 1989 orders for new equipment.

Looking on through 2002, Douglas sees a total active fleet of 10,500 aircraft. Boeing sets the figure at 14,800 by year end 2005. Airbus, with the most distant horizon, sees 14,000 by yearend 2008.

GPA, although not a manufacturer, is a major aircraft leasing concern and so prepares its own estimates. It arrived at a fleet count of 13,600 by year-end 2000. Finally, an independent fore-cast published in ‘Airline Monitor’, falls very close to the Boeing estimate.

This diversity of views is not surprising in view of all the assumptions which are required to be made. There seems however to be less variance in the expectations of how many new aircraft will be delivered in the years ahead.

A further measure of the market is given by the cumulative number of deliveries expected between 1990 and the target year of the individual projections. Here, there is a much closer consensus on deliveries than on the previously projected total fleet inventories. The GPA and Boeing estimates lie on the same straight line, as nearly also do those of Rolls-Royce and Airbus.

The contrast between consensus on deliveries and diversity on total fleets arises mainly because of the differing assumptions on aircraft utilisation, mix of aircraft sizes, and retirements.

The market projection by Fokker for instance, covers specifically the 75 to 120 seat (sizes are given on an all-economy configuration) market sector. Currently the company forecasts that deliveries will total 1,320 units through year-end 1999. Geographically, the market is expected to show North America with a 50% share, Europe with 26%, and the rest of the world with smaller shares. The 1,320 aircraft are expected primarily to be replacements for first generation twinjets, thus the total world fleet of 100 seaters is expected to remain nearly constant.

In this same market category, Boeing predicts deliveries of only 808 units through 2005 and expects the total world fleet to drop to about 1,800 units. Douglas is more positive, with deliveries totalling 1,646 through 2002 and a total fleet of nearly 2,700 units. Fokker and Airbus stand between these two extremes. Regardless of which of these 100-seater market forecasts is favoured, there are at least three important forecasting variables to consider. Taken together, these – in Fokker’s view-combine to support a strong demand for new, short-to-medium range 100-seat aircraft.

One variable is the recent US legislation concerning Stage Ill noise compliance by the end of this decade. Now that the deadline is defined, US airlines will have to come to grips with bringing aircraft at the smaller size end of their fleets, into compliance. The Fokker 100, for instance, is aimed directly at those first generation DC-9s and 737s as a replacement market.

Fokker recently studied the size of this market per individual carrier. A count was made of the number of 75 to 120 seat Stage II aircraft currently in each airline’s fleet. USAir, whose fleet philosophy has been to emphasize small twinjets, has the largest replacement need, with 204 units. Northwest has 147 aircraft to replace, United has 105, and so on. In total, the replacement need, including that of several smaller scheduled operators, is just on 1,000 units in North America alone. Under the recent Stage Ill noise legislation all of this replacement must occur within the next nine years.

The second variable supporting a strong market for new 100- seaters is the ever increasing cost of maintaining ageing aircraft. A review of the age distribution of the world’s small jet fleets shows that approximately 1,300 units are already in excess of 15 years old. In response to this situation there are the industry/government ageing aircraft task force programs organised in the wake of the Aloha incident.

Boeing, in its estimates for compliance with mandatory service bulletins on older 737 models, quotes figures ranging from $1m to $2m dollars per aircraft depending on condition. Douglas has announced that the average cost for all its DC-9s would be around $600,000 per aircraft. By comparison, ageing aircraft task force assessment of the Fokker F28 corresponded to average compliance costs per aircraft in the range of only $100,000 to $120,000. These lower costs are attributed to Fokker’s use of hot bonding manufacturing techniques and associated extensive corrosion protection treatment- as well as Fokkers’s comprehensive post delivery product support services.

Regardless of an aircraft’s origin, this upgrading work is in addition to normal maintenance costs – and as an accepted industry trend, these latter costs increase at the rate of 2 to 3% per year once an aircraft is over 15 years old. Clearly, the ever increasing cost of maintenance, as well as the travelling public’s perception of ageing aircraft fleets, will be a continuing source of retirement pressure. This in turn will support the market demand for new production.

The third forecasting variable supporting replacement of older aircraft is the uncertainty over future fuel costs. The potential consequences of this can be seen by comparing the fuel efficient Fokker 100 with an early model DC-9-30 over a typical 500nm sector. The Douglas aircraft consumes approximately 320 US gallons more than the Fokker. At 60 US cents per gallon, this corresponds to a $US190 per trip disadvantage for the DC-9, or $US420,000 on an annual basis. If fuel price rises to $1. 00 per gallon, the annual cost disadvantage increases to $US700,000 per aircraft. During the Gulf Crisis fuel in fact soared to $US1. 28 a US gallon though, fortunately is now around half this figure.

Considering the numbers of DC-9s still in service with Northwest, TWA, Delta, Continental and others – totalling some 555 units – the magnitude of the potential cost savings that could be achieved by replacement with more efficient aircraft becomes obvious. This doesn’t also take into account the large fleet of Boeing 737-200s which generally are less fuel efficient than their Douglas rival.

Collectively, these three variables are sufficient to give Fokker confidence in its forecasts. Worldwide there are nearly 1,400 aircraft in the 75 to 120 seat category which are 15 or more years of age. Nearly all of these are only Stage II certificated and have relatively high fuel burn characteristics. The younger versions of these aircraft types built in the late 1970s and early 1980s still have Stage II stigma and are notably fuel inefficient. There are approximately 600 of these units.

In summary, it can be said that developing high quality forecasts of future trends in the commercial aircraft market is an essential objective for all participants in the air travel business. For their separate reasons, manufacturers, lenders, suppliers, airport authorities, lessors, regulatory bodies, insurers and the airlines themselves all have a vital interest in this endeavour.

Is precision possible? No. Is suspicion healthy? Certainly. In fact there is nothing healthier than constant attention to the underlying assumptions in any manufacturer’s forecasts. Fokker has taken its own look into the future and, for its market segment of 100 seat jets, finds what it regards as a very positive long term outlook.