August 2012

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Middle East, North Africa in turmoil and the state of the backlog

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MENA-Mosaic.jpgPolitical turmoil across the Middle East and North Africa is having a chilling effect on tourism in the region, driving up the price of oil to above $105 a barrel, threatening airlines worldwide. But what of the health of the aircraft orders in one of the fastest growing parts of the world?

The massive backlogs in these regions are supported by blistering economic growth and anchored by expanding tourism and a need for long-haul aircraft to connect distant points on the globe; both are key factors driving up narrow and widebody production rates on both sides of the Atlantic. 

Yesterday's cancellation of the F1 Grand Prix in Bahrain and the sudden shedding of one-third of EgyptAir's fleet are just two examples of how the revolutions spread across the region are taking their toll on aviation and tourism. Just like 9/11, SARS, the 2008 oil crisis, the global financial crisis the Icelandic volcano, aviation seems destined to be knocked off course by a series of external events bent on wreaking havoc on global travel. 

Let's take a look at what the region has on order: Algeria, Bahrain, Egypt, Iraq, Jordan, Kuwait, Lebanon, Libya, Morocco, Oman, Saudi Arabia, Tunisia and Yemen hold orders 159 and 184 widebody and narrowbody aircraft, respectively, according to Flightglobal's ACAS database.

Algeria 80
Bahrain 644
Egypt 146
Jordan 711
Kuwait 2920
Lebanon 20
Libya 914
Morocco 94
Saudi Arabia84327
Tunisia 116
Yemen 1010

The two largest backlog holders in the region by far - UAE and Qatar - so far appear to be unaffected directly by the political turmoil, though if regional traffic collapses as a result, that could have a knock-on impact on Emirates, Etihad, Qatar and Flydubai's short and medium-haul operations. Though these countries are far from immune from turmoil of their own, with protests planned in Doha on February 27. 

For Boeing and Airbus a quick glance at the numbers shows a 137% increase over the next three years in worldwide wide-body output from 201 aircraft per year to 464 in 2014, according to the Teal Group. Those increases are driven by the 605 outstanding widebody aircraft ordered by lessors, airline and cargo operators in the Middle East and North Africa. The figures above do not reflect VIP and military charter operators in the region.

Airbus has more skin in the game, with additional numbers from the Teal Group showing 23% of the Airbus backlog in the Middle East with 32% of its widebody aircraft, 46% of A380 orders and 39% of A350 orders planted in the region. For new market entrants, regional unrest may present further issues, with Bahrain's Gulf Air thought to be nearing a decision on 100-seaters, including CSeries.

On the one hand soaring gas prices could prompt the early retirement of less fuel efficient aircraft at airlines around the globe, further bolstering demand for fuel-sipping models as replacement aircraft. Though if high oil prices slow the recovery, demand for air travel could slow. Yet, regionally, any significant threat to long term growth may knock the best laid plans for production acceleration off course.

Though leaping ahead, this entire episode illustrates another external threat to the backlog, potentially undermining a portion of the justification for production rate increases, though it prompts a chicken and the egg question. Is a potential regional oversupply of aircraft the result of a loss in external demand or a failure by airframers to properly read the fragility of the marketplace and grow in a way that doesn't chase the cycle? 

Fundamentally, only Boeing and Airbus are responsible for their rate increases, so the latter may be more likely. I'd be astonished if the headlines coming out of the Middle East and North Africa aren't the number one item for discussion at strategy sessions at Airbus, Boeing, Embraer and Bombardier.

Multi-dimensional production planning at its finest.

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