23 July 2010
How the market in the air can't seem to get it.
The problem with data is that there's just so much of it and that it tends to be contradictory in its messages. This is true at any time but moreso now when economic fundamentals have been so distorted by short term government policy that it's hard to know which way is up right now. It's vital therefore to choose which economic indicaters to take notice of and which to just ignore (or even to treat as contra-indicators).
One of the indicators that we think may be totally misleading is this week's Farnborough Air Show - we expect Boeing, Airbus and the more minor players to walk away with pockets full of orders, all stage-managed to appear that they have been culminated this week when in reality all the airline executives know sometime in advance what their commitments will be after months of hard-bargaining and really the show itself is a showcase not only for manufacturers and their products but also the airline themselves who'll generate a great deal of PR from buying the products.
What's moreeleven leaving aside the showmanship of the whole event, airline buying patterns are a totally unreliable indicator of economic demand. Judging by their performance there is no worse predictor of economic outlook than the airline sector - a sector which mystifies Warren Buffett (an airline -NetJets- part-owner) by its total inability to get commercial and economic decisions right in the 100 years of its existence.
No other sector has consistently lost money since day one and so any orders this week should be seen in a context not only of an industry that has for many years failed to replace aging technology and equipment because of the downturn since 2007, an industry where being lefty behind is bad for the image of the operator, where there genuinely is sustainable growth in certain regions like Asia and an industry that as a whole, doesn't have any idea what it's operating parameters will be this time next year BUT which tends to buy the infrastructure based on peak extrapolations of the rosiest views of today's high percentage utilisations, forgetting that they are built around current levels of seat discounting and also around a catch up in air travel due to needs built up during the very low capacity utilisations of the previous years.
What's more many of these contracts are looking out on the even longer term (which airlines are even less capable of forecasting accurately) with deliveries some years into the future and even production commencement some years away in the future. As a result there are, very importantly, many relatively flexible cancellation clauses offered at this stage. So for airlines not to order now is to lose ground in the PR battle with competitors. The flipside is that by ordering now, they're generally not making any commitment or obligation that they can't escape from in the future if they subsequently change their minds, so why not join the fun?
The real news to take away from the Farnborough PR fest willbe whether the airline(s) that you use most regularly is(are) committing to getting newer, more efficient and more comfortable new equipment, such as Thai Airways upcoming 380s - Farnborough is a better indication of what your own future travel choices may encompass than it is of any future economic expectations. If so, just hope that these don't get cancells afterwards...