Commercial Aircraft Economics

The aviation industry is of a cyclical nature. The industry is partially explained by economic factors. The key characteristics of the aviation industry that affect commercial aircraft are outlined below:

Relationship with general economic activity: Under favourable economics conditions, travel increases both for business and leisure reasons. Diring periods of an economic downturn, air travel slows. Special unpredictoable events, like terrorism or Severe Acute Respiratory Syndrome ("SARS"), have temporary negative impact on air travel but such an impact is usually failrly short-lived and/or regional in nature. Since demand for aircraft is worldwide, a regional slowdown in one part of the world is usually dealt with by moving aircraft to other areas. The postive long term relationship between travel and the level of economic activity is not disrupted by such short term aberrations.

Cyclicality: The aviation industry is highly cyclical, with such cyclicality reltaing to both the business cycle and also seasonal variations. Leisure activity is at much higher levels in the summer months ( at least in the northern hemisphere) resulting in higher seasonal demand for aircraft and usually higher profitability than in winter months. Air traffic has historically been substantially more volatile than the economy and in the absense of external shocks such as the terrorist attacks of 2001, has generally gorwn at a rate faster than the worldwide economy.

Lag between aircraft ordering and delivery: There is a sizable lag between the time airline want new aircraft and place orders and the time those ordered aircraft are manufactured and delivered. Aircraft orders are generally a functions of demand for seats and the financial condition of the airline industry. It is generally necessary for both of these conditions to occur in order to generate aircraft orders.




Highly regulated: A high level of technical government supervision exists in the commercial passenger airline industry which makes its difficult for start up airlines to enter the market. Many national authorities insist on local ownership. There has been a movement towards privatisation and deregulation in the global aviation industry in recent years, which may provide opportunities for improved growth and profitability of the global airline industry.

Limited choice of aircraft suppliers: There are two manufacturers of widebody and standard narrowbody jet aircraft, namely Airbus and Boeing and effectively two western regional jet aircraft producers, namely Embraer and Bombardier. The limied choice of suppliers and even models of aircraft facilitates a relatively liquid secondary market for common aircraft types which has a positive effect on aircraft resale and release rates.




World Aircraft Fleet

As noted above, the world's aircraft are divided into three jet categories:
Widebody jets, which are characterised by a twin-aisle fuselage, with capacity for a large number of passengers, from the mid-200's to 400 and above. Currently operating examples include the Boeing 747, Boeing 777 and Airbus A340.

Narrowbody jets, which are characterised by a single-aisle fuselage, with capacity for a smaller number of passengers than wide bodied jets. Currently operating examples include the Boeing 737 and Airbus A320.

Regional jets, which are generally single-aisled narrowbody aircraft that are smaller than traditional narrowbody aircraft, typically seating between 50 to 70 and up to 90 passengers.Currently operating examples include the Bombardier CRJ200 and Embraer ERJ145.

According to Avitas, the active globalWestern-manufactured commercial aircraft fleets at the end of 2005 consisted of more than 16,000 passengers jets and nearly 2,000 cargo jets. Furthermore, Avitas expects this to increase to approximately 31,000 jet aircraft ( being 28,341 passengers and 2,860 cargo) by 2015.




Factors affecting aircraft values
Changes in the value of aircraft are a moajor determinant of the economic returns received by aircraft lessors. The single largest determinant of aircraft value is the age of the aircraft. Other key drivers of the value of an aircraft include:

Macroeconomic factors - specifically, the growth rate of the revenue passenger kilometres, or RPKs, which measure the passenger demand for air transport. Since passenger demand usually has a high correlation with the global economy, RPK growth is a good indicator for the economic cycles in the airline industry. During periods of a business cycle trough most values diminish - some more than others. During periods of an economic boom, aircraft values may rise, again not at the same rate for all types.

Aircraft surplus or shortage - a surplus of unutilised aircraft can have a significant negative impact on aircraft lease rates and values. Likewise, a shortage of in-demand aircraft, for example newer fuel-efficient aircraft in times of high oil prices, can significantly boost aircraft values.

Aircraft-specific factors - factors specific to the aircraft type, such as popularity of a particular variant, engine type and vintage significantly affect aircraft value. For example, aircraft capable of carrying a greater load a longer distance or at a lower cost than their competitiors tend to retain value better.

Size of secondary market- a very important factor affecting the value of aircraft is the size of the secondary market. How many units of a given aircraft type existand among how many airlines is of paramount importance. An aircraft that has unique characterisits for one customer only will no keep its value if there is no large market to deploy it. The optimal aircraft with regard to keeping its value is one that can be redeployed with minimum cost, effort and time: an aircraft that is used by many other airlines which can almost immediately convert it to their own operation.