Analysis Spotlights Middle East’s Risky Capacity Assumptions

Global passenger traffic must continue its recent strong growth trend to fill seats in airplanes still on order, and the Middle East stands out as a particularly volatile region should demand slow, a Canaccord Genuity analysis finds.

The detailed analysis, which breaks down mainline aircraft orders by region and expected delivery date and projects retirements, shows that airlines will add about 6 percent more seats annually through 2022. Traffic growth has averaged 6.4 percent for the last five years, and has gained still more strength of late, International Air Transport Association (IATA) figures show. Through July, global traffic, measured in revenue passenger kilometers (RPKs), had risen 7.7 percent year-over-year on a capacity bump of 6.1 percent.

“While passenger traffic continues to push above the historical 5 percent average growth, we believe the current outlook for overall capacity growth of 6 percent leaves no margin for error,” Canaccord analyst Ken Herbert wrote.

The region with the most intrigue—and highest risk for aircraft suppliers—has become the Middle East. Canaccord's analysis shows that Middle East airlines plan to boost capacity by about 8 percent per year over the next five years. Widebodies will account for the vast majority of those seats. 

“While traffic currently supports the planned fleet expansions, considering the significant exposure to the Boeing 777 (including the 777X) as well as the A350 and the A380, any slowdown in the traffic in this region would have an outsize impact on the delivery schedules at both Airbus and Boeing, in our view,” Herbert wrote.

The Middle East’s key international RPK measurement has shown signs of weakness, due in part to disagreements with U.S. carriers and their government that have led to market-share losses on U.S. routes. International RPKs flown by Middle East carriers rose just 4.5 percent in July, less than half of the five-year average of 11.2 percent. Still, the July figure proved slightly better than that of June, which saw an anemic increase of just 3.6 percent.

Canaccord’s analysis sees the global mainline passenger fleet increasing from 22,512 at the end this year to 28,597 by the end of 2022. Deliveries will add 10,213 new aircraft, while retirements will remove 3,070.

An uptick in retirements is key to converting backlogs into operating aircraft. Canaccord’s analysis found that airlines parked only 164 aircraft in the first half of 2017, which is down year-over-year. 

“We do expect some pick-up in retirements toward the back end of 2017, but our full-year assumption of 334 could end up being high,” Herbert wrote. “The lower cost of fuel, coupled with high load factors, have contributed to the step-down in retirements.”

IATA's latest analysis shows that while fuel prices rose in August, due in part to hurricane-related production disruption in the U.S. Gulf Coast area, the medium-term outlook calls for prices below $55 per barrel for Brent crude—low by recent historical standards. The trend could keep older aircraft flying longer, perhaps pushing out new-aircraft delivery dates.

“If fuel prices remain relatively low, we believe any slowdown in traffic would have greater pressure initially on the backlogs,” Herbert wrote.