Boeing and Airbus Supply and Demand Forecast

1810 words (7 pages) Essay in Economics

12/03/19 Economics Reference this

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Supply and Demand for Global Air Transportation

As the global air transportation market evolves, commercial airplane demands surge, while air travel distances shorten, due to substantial technological improvements in passenger and freight traffic. The aviation industry is dynamic; therefore, it must continuously adjust to market forces. Aircraft long-term demand forecasting necessitates assumptions and predictions around the trends and drives the macro that molds the airline industry into the future. Boeing and Airbus undoubtedly dominate the commercial aerospace manufacturing market globally. Therefore, this paper will demonstrate how Airbus and Boeing employ the theory of supply and demand in the development of their forecasts.

Literature Review

The Aviation industry maintains a correlation between supply and demand from historical data for their 20 years traffic forecasting. Boeing uses three broadly critical dimensions of the macro environment, while Airbus uses fifteen explanatory variables that drive aircraft demand and supply. Both firms update their forecast annually to reflect the current business conditions and development of their long-term industry drivers’ analysis that significantly impacted their projection. The review studies would focus on the demand and supply shifters.

Demand Shifters

The law of demand indicates that higher prices lead to a lower quantity demanded and that lower prices return a higher quantity demanded ceteris paribus. The variables that affect the position of the demand curve are called shifters.

Strong consumer spending. Although global air travel proliferated historically, GDP remains a significant driver. Recently, passenger travel growth averaged between Boeing and Airbus (6.2 % Vs. 6.3%). The driving strength in air travel demand includes cheap airfares, elevated living standards in huge developing markets, tourism growth and travel relative to significant economies total consumer spending.

Lately, Boeing believes worldwide economic growth straggled the long-term average but, the booming supports increase air travel demand. However, remaining robust is customer demand in reputable economies like the United States. Also, shifting towards a more service-based economy are emerging market economies such as China, sustaining future demand for air travel. Worldwide economic outlooks projected this trend to continue. Airbus projected that more passengers would travel due to the lower prices offered, producing lesser yields and a higher focus on operational proficiency and the airlines’ equipment.

Economic and income growth. Both firms saw large emerging markets like  China and India as primary drivers of global GDP growth and demand for air long-term Market Outlook travel. China has contributed significantly to world traffic growth for several years, as its passenger growth increases yearly. India’s emergence as a high-growth economy has produced over 20 percent passenger traffic growth annually in the domestic market. By the early 2020’s, India forecasted to become the third largest commercial aviation market. The middle class in these countries grew nearly 70% for the past six years. While GDP remains an essential driver for air transport, it is indeed not the sole factor driving air traffic growth.

Travel and Tourism. The global economy, service sector consumer spending on travel and tourism continues to grow. Historical data shows, international tourist arrivals grew 3.9 percent in 2016, faster than overall GDP growth. Both air passenger traffic and tourism have grown sustainably since the financial crisis, especially in the Asia Pacific. The trend projected to continue with tourism and travel direct contribution to global GDP. Recent trends in air travel markets reflect broader travel and tourism developments.

The Iranian government intends to grow tourism, and infrastructure necessary for new hotels. Cuba’s improving geo-politics allowed for enhanced air links with US airlines. Market dynamics and infrastructure will continue to evolve further as airlines match capacity to demand. Aviation mega-cities are an essential component of the world’s aviation network today and in the future. The outlook for strong air travel demand is consistent with broad consumer demand trends and travel and tourism outlooks.

Regulatory and Infrastructure. Bi-lateral agreements in the Atlantic, in the US and Europe, enabled significant economic growth where real GDP has grown. Increasingly liberalized markets are critical factors in strong passenger travel growth historically. Since the American airline deregulation, market liberalization globally has been critical to the substantial growth of commercial aviation. Liberalization has allowed entrepreneurs to use people’s creativity to generate new ways to meet market demands and fill market niches previously restricted by the government. Liberalization has encouraged significant traffic growth by removing constraints on route entry, pricing, service capacity, and airline cooperative arrangements.

As airline rivalry and operating efficiency grow, pricing decreased while flight, frequencies, and product choices increased for passengers globally. Also, improved air services stimulate economic growth, creating a virtuous circle that leads to further air transport growth, and added economic growth. Besides, growth on existing routes, positive political activity between states also leads to growth, because of organic growth constraints. Budget carriers and Open Skies agreements are two prominent liberalization examples.

Airport infrastructure investment. Airport investment projects have proceeded at a rapid pace supporting air travel growth that has occurred and expected to persist for the coming 20 years. Predictably, the swift-growing Asia Pacific area dominated growth in modern airport construction and airport expansion. However, there are significant airport ventures around the globe. This global airport investment is a blend of improvements at current facilities and spending on modern airports. For instance, between now and 2021, almost $1 trillion will invest in new and existing airports globally, with 40 percent of that investment belonging to the Asia Pacific. Notwithstanding, this variable affects demand. Other demand drivers include strategies, and products airlines offer in the marketplace.

Supply shifters

The law of supply states that a higher price leads to a higher quantity supplied and that a lower price leads to a lower quantity supplied ceteris paribus. The variables that affect the position of the supply curve are called shifters.

System Available Seats (ASK). ASK, perhaps, is the most vital measure of capacity, representing the network seat supply by airlines to the system to meet projected demand. The ASK capacity metric necessitates transformation into the growth of ASK per unit yearly or quarterly and may compare to the nominal range from ASK historical growth data. Nonetheless, ASK data proves the most valuable indicator for both firms. Importantly, a rise in ASK connects with an almost simultaneous increase in Revenue Passenger Kilometer (RPK) demand.

Production Substitutes. Furthermore, Airbus and Boeing are testing themselves to the limit by producing existing jets at record rates while also starting to manufacture new aircraft on the same assembly line. This immense industrial challenge has already run into some problems at Airbus, while Boeing faces risk as it prepares the  777X long-range production. If either firm topples, there could be costly repercussions.

Sluggish Global economy and Recession. Notably, European carriers, like Lufthansa, recently declared that they would moderate their capacity growth while US Carrier United Airlines signaled its performance had been impacted by “passenger demand not growing at the same pace as industry capacity.” Emerging markets like China are at higher risk because they are encountering slowing growth or recession. Airbus and Boeing have significant orders backlog from airlines in developing countries. If global aviation markets are weakening, backlogs are vulnerable to deferral and cancellation.

Input prices and technology.  Boeing is focusing on driving down suppliers’ prices, an effort to decrease its operating margin of the commercial aircraft division over the next few years.  Meanwhile, Airbus is putting attention into keeping suppliers on target as it increases production of its modern aircraft. It is suffering severe teething problems with its new fuel-efficient products, prompting delivery delays. A key Boeing supplier has been struggling to keep with development programmers. Both firms are facing difficult military programs suffering from technological and transitional problems, prompting delays.

Supply chain issues. Airbus is having repeated problems with their French supplier of cabin interiors causing aircraft deliveries delay and net profit decline. Boeing fared better than Airbus in the production process but taking steps to minimize risk by pooling supplier’s raw material purchasing with Boeing and sharing manufacturing techniques.  Both companies are contending with the immediate challenge of ensuring their suppliers can cope with increased production. The firms work in cohesion with their parts suppliers, providing necessary financial and technological support to bolster on-time deliveries. The aerospace giant’s Boeing and Airbus have massive aircraft supply backlog equal to (7 Vs. 9) years of production.

Forecast growth. There are many deliveries demands for airplanes for the region forecasted period. Boeing and Airbus provided its 20-year forecast for average annual cargo traffic growth around 4.2%. The demand for new airplanes for Asia, Europe, North America, Middle East, Latin America, African and the commonwealth of independence States in the region is approximately (38%, 19%, 21%, 8%, 8%, 3%,3%) respectively.

Conclusion and Future Studies

Measuring the capacity balance of the global air transportation system for Boeing and Airbus requires comprehension of the system complexities and the cooperation among the firms that constitute the system. A complete assessment of numerous relevant system metrics is mandatory. Use of subjective data, a single metric, local studies, or a single-state meaning to evaluate or define the capacity balance in the aviation system is inherently imprecise, at time equivocal. As the industry evolves continuously, one must be cognizant of emerging alternatives, enhanced data or new signs that can present further insight and refined analysis, while guarding for ancillary indicators that can support judgments.

Finally, vigilant monitoring and tracking of indicators, also continuing research on the industry position and the impacting factors are mandatory. Based on a comprehensive assessment of the system employing an array of industry-relevant pointers, all indicators fall inside their nominal ranges. No evidence exists for persistent intrinsic overcapacity for Boeing and Airbus, and the industry capacity supply and demand currently balance.

References

Airbus. (2017, April 4). Retrieved from https://www.airbus.com/content/dam/corporate-topics/publications/backgrounders/Airbus_Global_Market_Forecast_2017-2036_Growing_Horizons_full_book.pdf

Baye, M. R., & Prince, J. (2017). Managerial economics and business strategy (9th ed.). New York, NY: McGraw-Hill Education.

Doganis, R. (2010). Flying off course: Airline economics and marketing (4th ed.). London: Routledge.

Hollinger, P. (2016, May 17). Airbus and Boeing contend with headwinds. Retrieved from https://www.ft.com/content/145f273e-1af2-11e6-a7bc-ee846770ec15

Boeing, R. (2017, December). Retrieved from https://www.boeing.com/resources/boeingdotcom/commercial/market/current-market-outlook-2017/assets/downloads/cmo-2018-3-20.pdf

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