About That Jet Plane Bubble

30 Nov

Assembling planes is not like stamping out widgets. A question that must keep Airbus and Boeing up at night is whether the aircraft boom (which didn’t even pause for the 2008 financial panic) could turn into a giant bust just as plane makers are spending billions to lift production to unprecedented rates.

Paradoxically, the boom depends partly on high fuel prices. High fuel prices are an incentive for airlines to trade in existing models for newer, more efficient planes. Yet here’s the contradiction: High fuel prices, which ultimately have to be paid by passengers, also threaten the low-cost air travel upsurge that accounts for bulging order books.

The bubble also depends on cheap debt, and in many cases subsidized debt, which can lead to weird effects. IndiGo, the Indian start-up behind the whopping Airbus order, is said to be profitable only because it has been reselling planes and leasing them back.

Money-graphics-2008_872388a

Or take the giant order from American, a profitless airline because its pilots are among the highest paid, least-worked in the nation. Boeing and Airbus essentially agreed last July to buy their own planes and lease them to American on friendly terms. To the leasing companies and banks that actually own many jets, the U.S. bankruptcy system has been a boon. Carriers are allowed repeatedly to shuck bondholder debt and other obligations and return to flying, even if their unkillability also depresses profits for the industry at large.

Further contributing to the bubble, new jets are outright subsidized by taxpayers, in both the selling countries (including the U.S.) and buying countries. Take India, where traffic is surging nearly 20% per year. Planes are packed yet the industry still loses money. Why? One reason is state-owned, hopelessly inefficient Air India undercutting ticket prices with its fleet of brand-new planes subsidized by the U.S. Export-Import Bank.

India is the world writ small. Boeing, for one thing, is starting to see a wedge between itself and some of its best customers. Several U.S. airlines have sued to stop the Air India loan guarantees, which they say subsidize an oversupply of jetliners and undermine the global fare structure.

This big picture would hardly seem a pretty basis for the long-term bets that plane makers and their vast supplier networks are making in ever higher output. Yet the stock prices of Airbus and Boeing don’t seem worried, and neither do analysts. Jason Gursky of Citigroup has forecasted that, as long as oil remains above $60 a barrel, the boom in plane sales will not end badly. Never mind that sub-$60 oil would be a godsend to the airlines who are the actual customers.

The plane makers are not without rational motives. Bubble participants never are. Their sales frenzy is partly aimed at deterring new entrants from Canada, Brazil, China and Russia, which have been taking aim at a heretofore cozy Airbus-Boeing duopoly. Airbus and Boeing also can hope there will be time to adjust production schedules if today’s orders become tomorrow’s cancellations.

If we’ve learned anything, however, persistent mispricing of credit also leads ineluctably to “malinvestment.”

Superjumbo_1292

Airbus, of course, is too big to fail—Airbus is too big not to receive subsidies even in the best of times. And you only had to listen to President Obama, on his recent Asian trip, taking credit for Boeing’s sale to Lion Air to suspect Boeing, in a pinch, would become an implicit ward of the state too. In the meantime, one would have thought a duopoly would have the market power (and sense) just to raise prices in a boom. But apparently, while the music is playing, even Boeing and Airbus have to get up and dance.

 

http://online.wsj.com/article/SB10001424052970204449804577068083976709946.html

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