Report: China propels aviation growth

By Tom Risen|January 24, 2018

Teal Group analyst’s 2018 outlook is bullish on air travel demand, bearish on regional planes

Air travel demand from China’s booming middle class is among the factors making the 2018 outlook for global sales of commerical aircraft the “strongest in a decade,” said the Teal Group’s Richard Aboulafia in a speech Tuesday.

Aboulafia, in his annual market-outlook presentation to the National Aeronautical Association in Washington, D.C., joked that his previous forecasts were cynical, but for 2018 he projected “a dream environment” fueled by demand. He spoke broadly about different types of aircraft, often without mentioning specific companies.

Aboulafia led the audience through a series of charts projecting that civil aviation will grow by 3.5 percent in 2018, with a 5 percent growth in demand for large jetliners compensating for weakness in other segments, including regional aircraft and civil rotorcraft. He projected that the military aircraft industry will grow by 11 percent, with interest in next generation fighter aircraft dominated by the Lockheed Martin-built F-35.

Deliveries of F-35s are picking up, he said, and he predicted that they will account for 75 percent of U.S. military fixed-wing aircraft production by 2027.

The top factors that will determine growth in 2018, Aboulafia said, are flight traffic; sales to China; fuel costs and low interest rates that could encourage fuel purchases and investment in new aircraft.

Jetliners are a growing business because people are spending a greater portion of their money on air travel. In fact, the growth of revenue per passenger-mile is outpacing the growth rate of the world’s gross domestic product, he said. China’s growing middle class and population of 1.4 billion make the country “the epicenter of people converting their wealth into travel,” he said, and airlines in China are buying new jets to meet that demand.

“In 1990 China [bought] 3 percent of global jet output,” he said, referring to civil and military jets. In 2017, “they took 22 percent of global jet output.”

Aboulafia also sees a booming demand for aerial cargo transport. He said “the first six months of 2017 [were] three times the national average for cargo flights.”

Boeing and Airbus face protectionist rules on their exports to China, but they sell planes there anyway because its growing consumer market is too huge for aviation companies and other industries to ignore, Aboulafia suggested. He said the state-owned Commercial Aircraft Corp. of China disadvantages its aviation industry with rules that require non-Chinese aircraft suppliers to build products in China. These rules are intended to incentivize Chinese companies to buy domestic products and spur development of China’s industries, but he said Chinese airlines could meet consumer demand faster with fewer trade restrictions.

Protectionist trade tariffs against China proposed during the Trump presidential campaign in 2016 “would have been toxic” to aviation business in the U.S. and abroad, Aboulafia said, because China would have retaliated with tariffs or other restrictions decreasing the profit for U.S. aircraft exports. The aviation industry “dodged a bullet” because the Trump White House has not pursued those tariffs, he said. In 2016, then-presidential candidate Donald Trump said he favored a 45 percent tariff on Chinese exports to the U.S.

“The U.S. has half the market for building planes,” Aboulafia said. “There are no threats to that.”

Amid industry-wide growth, Aboulafia remained skeptical of the market for regional aircraft, which since 2002 have averaged 8 percent of commercial jet deliveries. He projected that regional aircraft deliveries would shrink by 14 percent in 2018 and remain largely unchanged through the 2020s.

“Long story short, if you are not Embraer you should not enter that market,” he said, arguing that the Brazil-based company has carved a steady business in the regional market, but one that is small compared to the single- and double-aisle jetliner market. Boeing has mentioned a “potential combination” with Embraer.

When asked about the companies that aim to make supersonic flights available on business jets, he said those would not disrupt the business air travel sector unless the U.S. and other governments repeal laws forbidding commercial supersonic flights over land. Subsonic turbine engines, he said, are also likely to become 1 percent to 2 percent more efficient each year for the near future, reducing the economic need for fully electric or supersonic commercial engines.