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Airbus and Boeing are looking to ramp up production of new narrowbody aircraft at a time when world financial experts are warning the global economy is headed for a massive downturn.Governor of the Bank of England, Mervyn King, says: “This is the most serious financial crisis we’ve seen since the 1930s, if not ever. We’re having to deal with very unusual circumstances.” King made the remarks earlier this month after the Bank of England decided to inject £75 billion ($117 billion) of new money into the economy in an attempt to stop Britain from slipping into recession. The central bank’s return to quantitative easing is also a move to try and prevent a credit crisis.Data from Iata shows the decline in cargo traffic has been accelerating. Cargo traffic is significant because it is a bellwether for global economic activity. Iata’s figures reveal that air cargo traffic has been posting monthly year-on-year declines since May. In Aug. it fell 3.8% compared to a 1.8% drop in July, says Iata. Passenger traffic in Aug. rose 4.5%, but Iata notes that this compares to 6% in July. This is a sign that passenger traffic may be softening.“The falls in business and consumer confidence, the unresolved financial situation in the Eurozone and the stagnation or worse in world trade are all likely to weaken air travel and freight further,” says Iata. “Slipping load factors will add to the adverse impact this will have on airline’s profitability.”There is plenty of anecdotal evidence out there showing that airlines are discounting airfares to boost demand. This puts downward pressure on airline profit margins. Iata says it expects the airline industry to make $6.9 billion profit in 2011 and only $4.9 billion in 2012.With airline profits diminishing and financial markets in turmoil, will the banks still be willing to finance aircraft on order?During the 2008 global financial credit crisis, the banks faltered and it was the government-backed credit agencies that stepped in and saved the day. Are the European credit agencies going to be able to step up to the challenge again, considering so many European governments have their own credit problems to deal with?Financing is also crucial to the aircraft leasing business. Lessors are already feeling the pinch. The general consensus among industry players is that the A320 segment of the lease market has become hyper competitive this year. This is partly because Chinese leasing companies and other new lessors have entered this segment, they say. Airbus and Boeing may take comfort from their big order backlog for A320s and 737s. But things can quickly change. American Airlines made headlines on July 20 when it announced an order for 260 A320s and 200 737s, a deal touted as being the largest order in commercial aviation history. Now American Airlines is making headlines that are rattling Wall Street. Shares of AMR Corp., the carrier’s parent, fell 33% on Oct. 3 over fears American Airlines may have to file for bankruptcy protection, because its debt levels and labor costs may prevent it from surviving another global economic downturn. The airline’s spokespeople have gone into damage control by saying American Airlines has no intention of entering into a court-supervised restructuring.Despite the warning signs in the market, Airbus and Boeing remain optimistic. Airbus’s chief operating officer customers, John Leahy, says the European aircraft-maker is upping A320 production to 42 units per month and is considering a further increase to 44. He also says Airbus is doing a preliminary study examining what would be needed to boost production to 50 units per month. Boeing, meanwhile, is committed to increasing the 737 production rate from 31.5 per month now to 42 per month in 2014. Boeing Commercial Airplanes President and CEO, Jim Albaugh, disclosed in late Sept. that the aircraft-maker was studying what would be required to increase production rates beyond 42 per month.The two giants of the industry want higher production volumes so they can have higher profits and reduce customers’ waiting times for aircraft on order. But if the optimistic outlook leads to over capacity in the airline industry, then everyone ultimately suffers.
Copyright © 2013, Aviation Week, a division of McGraw Hill Financial.