Opinion: There’s An Aircraft Order Bubble—And It Is About To Burst

End of the Party 

There are two independent elements to forecasting: getting the prediction right and determining the time when the prediction will materialize. These two elements are quite different. For instance, we all know that we will die someday, but having an indication as to the exact timing could be very significant. Getting the prediction right matters to forecasters; getting the timing right matters to businesspeople. The first one gives you psychic satisfaction and all the prestige you can eat, while success with the second can make you a billionaire.

Analysts were able to forecast in the 1980s that air traffic in Asia would outperform the rest of the world based on predictions of independent economic, demographic and political variables. And they enjoyed the satisfaction of telling everybody, “I told you so.” Businesspeople who invested in aviation in Asia at the right time and circumstances became wealthy.

Different methodologies and skill sets are needed to predict an event and its timing. Right now, many analysts (including myself) believe we are facing an aircraft-order bubble that is about to burst. Our analytical side can identify the specific causal reasons contributing to the situation. Relatively high oil prices a few years ago pushed manufacturers to invest in more fuel-efficient engines and airplanes to replace the existing gas guzzlers. Low-interest rates made funds available for alternative investments. New players in China and the Middle East driven by nontraditional economic factors invested heavily in aviation. The outcome was an unprecedentedly long cycle of continuously increasing seat supply.

While some people believe this is the beginning of a new era without cycles, those restricted to analytical thinking know that it is only a matter of time before the house of cards collapses. We understand the reasons why we are experiencing the unprecedentedly long cycle. The relevant question is: Which parts of the industry will be affected in which way? And when will the whole thing play out?

I believe we are facing a substantial bubble of orders that will inevitably burst. Identifying the exact prick that will cause the puncture is more difficult, although candidates abound. The current geopolitical situation is fairly uncertain, with a real possibility of a trade war leading to a worldwide recession. The capacity reduction due to the temporary grounding of the Boeing 737 MAX decreases the pressure airlines are feeling with weakening demand. When the MAX problems go away, capacity will grow (both the grounded aircraft and the delayed deliveries materializing all at once) just as demand is weaker and summer is over. This could be one of the pins that will pop the bubble.

One way to determine the timing of the forthcoming downturn is to try to learn from those who correctly predicted unprecedented events. George Soros bet against the British pound and became a multibillionaire. Steven Udvar-Hazy was arguably the father of aircraft leasing but made his billions when selling his creation (International Lease Finance Corp.) 15 min. before the market crashed in 1990. Both are revolutionarily innovative, but they also had gut feelings, the ability to take chances and, to some degree, plain luck.

So what are we, the analytical nonfuture billionaires, looking at to predict the exact timing of the future meltdown? Starting with the economy, we are tracking five indicators for the U.S.: the current expansion duration, the unemployment rate, consumer sentiments, Treasury bills (differences between the long- and short-term rates) and the three-month interest Libor rate. For example, recent differences between the three-month and 10-year Treasury bills indicate an inverted yield curve (meaning yields on long-term bonds are lower than on short-term ones), which is often, though not always, a precursor of recession.

Trying to monetize the prediction of a forthcoming bubble burst is difficult. It involves the proper gut feeling and a considerable amount of luck. I am confident in predicting the rupture of the bubble, and I wish all readers luck in getting the exact timing right.

Published, Aviation Week & Space Technology Jun 06, 2019

Adam Pilarski