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1998 was absolutely, positively, the peak of the order cycle January 1999 Download PDF

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In terms of jet orders, analysts (including Aviation Strategy) were wrong with the conclusions they made at the end of 1997. Against all predictions that year was not the top of the order cycle as 1998 jet orders have been even higher.

Apart from any last–minute orders that manufacturers managed to win in the final few days of December, Aviation Strategy’s annual survey reveals 507 firm orders for Airbus, 520 for Boeing and 360 for other jet manufacturers. This compares with 479, 515 and 252 orders for these three categories in 1997. Aviation Strategy’s usual rules about counting orders apply in these tables — firm orders only are counted, and we discount any manufacturer “firm” order that we believe is not firm (i.e. LoIs, MoUs, double–counted orders etc). With predictions from virtually everyone that the industry is definitely on the downwards part of the cycle, we can now safely claim to be at the top of the jet order cycle — definitely!

Orders, however, tell only one side of the story for the jet manufacturers. The past month has been dominated by the loss of 17% in the market value of Boeing, the decline of the share price followed Boeing’s profits warning for 1999 (a 25% reduction on previous forecasts) and that in the year 2000 aircraft operating margins will be in the range 1–3% (compared with 10% earlier this decade). In addition Boeing announced a downward revision of production rates across its entire range of aircraft. For example, the 747 which has been a cash cow for Boeing in recent times, will face a reduction in production from 3.5/month to just 1/month in early 2000. Consequently Boeing stated that it is to cut 20,000 jobs over and above the 24,000 job losses previously announced — a 20% reduction in the workforce.

Airbus, of course, has also had its fair share of trauma in 1998, most particularly due to its potential SCE metamorphosis (see page 3), but Aviation Strategy will take a closer look at the two largest manufacturers in its February 1999 issue.

The other manufacturers

By far the major winner among the other manufacturers was Bombardier, with a massive 202 jet orders, compared with 144 in 1997. Bombardier’s success story is significant. Regional aircraft turnover was C$1.7bn (US$1.2bn) in the financial year ending January 31, 1998 — accounting for more than 20% of Bombardier Inc’s total revenue. Bombardier is basing its strategy for the next decade on its belief that the largest share of the regional aircraft market will be in the 60–90 seat segment — it forecasts that by 2016 the average regional aircraft will be a 70–seater. But Bombardier believes there will be continuing demand for both jets and turboprops — hence the development of the 68–78 seat CRJ–700 and the 70–78 seat Dash 8–Q400.

Bombardier is also contemplating a 90–seat aircraft, dubbed the BRJ–X. This would fill the gap between the 120+ seat 717, A318 and 737–600 and the existing regional aircraft (up to 70 seats) from Embraer and Bombardier. Estimated development costs of C$1bn mean that Bombardier needs risk–sharing partners if the programme is to keep to an ambitious target of official launch in late 1999 and certification in 2003.

Elsewhere, US certification for the 37–seat ERJ–135 is expected in mid–1999, although Embraer’s stated target of 500 sales looks optimistic. Overall Embraer is still weak — it made a loss of $13m in 1997, although this was a significant improvement on the $40m loss in 1996 and the $307m loss in 1995. The results for 1998 will be crucial — if Embraer does not return to profitability despite all the cost and productivity improvements it has made in the last few years and an impressive 137 orders in 1998 (and a $41m profit in the first–half of 1998), it is unlikely to face the impending aviation downturn with any degree of confidence.

BAe was the undoubted loser among the other manufacturers in 1998. It recorded just 10 orders for the RJ100 in 1998, surely not enough for any kind of decent return.

  Earnings per share* ($) Implied
  1997 1998F 1999F P/E ratio AAEG*
UAL Corp. 9.97 10.63 9.35 6.3 8.4%
AMR Corp. 5.32 7.60 6.71 8.3 8.2%
Delta 6.34 6.67 5.00 9.3 4.5%
Northwest 5.29 -1.45 3.45 6.5 8.3%
US Airways Group 6.18 5.69 6.37 7.5 10.0%
Continental 5.03 5.98 5.34 5.6 8.4%
Southwest 0.93 1.23 1.26 16.8 14.8%
TWA -1.98 -1.09 -0.83 n.a. 13.0%
America West Holdings 1.63 2.30 2.06 6.5 13.0%
Alaska Air Group 3.53 4.97 4.39 8.6 10.5%
  -135 -145 -100 -100LR -200 -200ER -700 -100 328JET 728JET  
European airlines                      
Air Nostrum           5          
Brit Air     6       2        
CityFlyer Express               2      
Euro City Line                 9    
European Regional AL   2                  
Flandre Air 2                    
Lufthansa CityLine     3                
Lufthansa     10       10        
Luxair   5                  
Maersk Air       2              
Park Express               5      
Tyrolean AW         2            
Tyrolean JS                 2    
European total                     67
North American airlines                    
Business Express 20                    
Atlantic Coast AL           25          
Atlantic SouthEast AL         15   12        
Comair     30       20        
Continental Express   25                  
Horizon Air             25        
Eagle Air 75                    
Midway AL           23          
Trans State AL   6                  
North American total                     276
Asian airlines                      
Kendell AL         12            
National Jet Systems   2                  
Asian total                     14
Latin American Airlines                    
Latin American total                     0
African & Middle Eastern airlines                  
AME total                     0
Flightlease               3      
Lessors total                     3
All undisclosed orders                   0
TOTAL ORDERS 97 40 49 2 29 53 69 10 11 0 360

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