The Good, the Bad and the FUD

Most journalists I know would prefer to skip the Farnborough Air Show, but it’s such an important event, we’re compelled to go. This biennial show is run by the Brits, so it’s no surprise that it’s plagued by disorganization of legendary proportions.

Indeed, Farnborough’s organizers make the fictional hotelier Basil Fawlty seem like an exemplar of organizational acumen by comparison. No wonder the British lost their colonies. (Prediction: Scotland is next.)

And yet, Farnborough was chock full of exhibitors, flight demonstrations, important news, deal making, and hordes of decision-makers and C-level honchos. An aviation journalist such as myself really can’t afford to miss it. This year’s Farnborough confab, held just outside London, served as Mecca for 1,500 companies from 35 countries.

Boeing aggressively emerged from the gate at Farnborough and sealed two huge deals. Etihad Airways, the United Arab Emirates’ national airline, agreed to buy 45 Boeing mid-sized passenger jets, including thirty-five 787 Dreamliners, in a deal worth $9.4 billion. Etihad is slated to take delivery of ten 777s in 2011 and 35 Dreamliners in 2015. At the same time, FlyDubai agreed to buy 54 single-aisle Boeing 737 passenger jets for $4 billion.

Meanwhile, Airbus announced that it had won a $1.6-billion order from Saudi Arabian Airlines for eight wide-bodied A330s.

These huge contract wins are a vote of confidence in the future and in Boeing and Airbus. They underscore that airline operators are still hanging in there. Despite all of the fear, uncertainty and doubt (a.k.a., FUD) right now in aviation about high fuel costs and economic recession, OEMs nonetheless announced splashy deals at Farnborough.

That’s not to say our industry doesn’t face big trouble ahead.

The incisive folks at AeroStrategy, a consultancy that specializes in the MRO market, were in attendance at Farnborough. At the show, AeroStrategy’s analysts released data on how high fuel prices and spreading economic recession are forcing a restructuring of the $45 billion air transport MRO market, to wit:

• In recent months, more than 25 different airlines have announced the grounding of just over 610 aircraft — about 3.2 percent of the active global fleet.

• It’s the older aircraft being grounded because of their fuel burn characteristics — 67 percent are old version 737s (not NGs) and DC9/MD-80s.

• 80 percent of aircraft being taken out of service are in North America (accounting for almost 7 percent of the fleet there).

• Removal of these aircraft from the active fleet will reduce annual MRO spend by $1.35B — around 3 percent of the total market.

• If fuel prices continue to remain high, about 1,200 aircraft will ultimately be removed from service, reducing MRO spend by about $2.8B (6 percent).

• Recessionary pressure will reduce growth, although the impact will be offset by continuing strength in developing regions.

These statistics paint a stark picture. However, during the show, I spoke with Kevin Michaels, principal and co-founder of AeroStrategy. We chatted after-hours in a London pub over a few pints, and he counseled against over-pessimism.

"Let’s not forget the huge backlog of aircraft orders that the major OEMs are still carrying," he said. "It will take at least a couple of years for Boeing and Airbus to work through that backlog, a factor that will buoy the aviation industry for quite some time."

Moreover, as mentioned above, the $25 billion worth of orders from the Middle East announced at Farnborough, for 150 Airbus and Boeing airliners, certainly helps dispel some of the pessimism. Consequently, this venerable show in the U.K., celebrating its 60th anniversary, was a venue for good news, bad news, and everything in between.