By Oliver Johnson | June 15, 2017 Estimated reading time 8 minutes, 11 seconds.
Senior executives from airlines, original equipment manufacturers (OEMs), the world’s leading aviation banks and aircraft lessors have converged in Toronto to discuss the state of the industry and potential opportunities at the 28th Canadian Airline Investment Forum.
Topics discussed at the forum, which took place at the Fairmont Royal York Hotel on June 13 and 14, included how and why airlines chose certain financial products, the current and projected performance of the Canadian aviation industry in the financial markets, and the introduction of ultra low-cost carriers (ULCCs) in Canada. The major OEMs–including Embraer, Mitsubishi Aircraft Corporation, Bombardier, Airbus and Boeing–also gave updates on their sales, aircraft programs, and market forecasts.
“Canada is regarded as an extremely favourable place to invest, and we’re seeing interest in all aspects of Canadian aviation, from MROs [maintenance, repair and overhaul facilities], parts manufacturers, flight training, airlines, and even aircraft manufacturers,” said Donald Gray, head of Blakes aircraft finance practice, in his opening remarks at the start of the forum.
Joe Rohlena, director of corporate ratings at Fitch Ratings, provided an overall outlook of the Canadian market, which he said represents the eighth largest aviation market in terms of revenue passenger kilometres. He said Canadian airlines were supported by a strong economy, resulting in a “very positive” outlook with 2.2 trips per capita. Despite the current optimism, he said it was known to be a cyclical industry, but that the airlines are well placed for whenever the next downturn happens.
“One of the things we’ve been saying a lot about airlines in general, particularly in North America, is that airlines are better positioned to handle the next downturn than they were the previous time around,” he said. “And I think that’s illustrated fairly well by the two big Canadian carriers.”
Discussing the various finance packages that Air Canada has utilized as it has expanded its fleet, Helen Kotsovos, senior director of financing at Air Canada, said diversification was key. “We continue to strive to diversify our finance opportunities, because one thing I’ve learned in 25 years in this industry is, you never know what’s around the corner. You should never rely on one form of finance, because you just don’t know what’s out there.”
Rohlena also touched on the launch of ULCCs in Canada, including NewLeaf, Enerjet, Canada Jetlines, and WestJet’s recently-announced ULCC in development.
“Canada is kind of unique among big markets in that it doesn’t really have a true ultra low-cost competitor, so it’s not too surprising to see interest from folks looking to fill that niche,” he said. “I think there’s a real chance that WestJet–and Air Canada, too–are likely to respond very quickly and aggressively to new competitors coming in, which I think will make it difficult for the ULCCs to gain a foothold.”
Tim Morgan, CEO of Enerjet (and co-founder of WestJet), said the emergence of ULCCs was important “because Canadians pay more,” and said that if more people can afford to travel, it would help stimulate the economy.
“The airline business is an evolution–things change as we move forward,” he said. “Canada really has not kept up. We have a big hole there–we don’t have a full ULCC, and it’s unfortunate because Canadians have not been able to take advantage of it.”
OEMs provide market forecasts
The OEMs also provided their input on the state of the market. Boeing’s Wendy Sowers, director of the company’s market forecast, said she predicted a steady annual worldwide growth rate in aircraft of about five per cent over the next 20 years, resulting in a need for 39,620 new airplanes over that period. Much of this growth, she said, would be driven by emerging markets, such as China and India.
“Overall growth in the Canadian market has outpaced the GDP [gross domestic product] growth in the marketplace–over 6.5 per cent since 2012,” she noted. “We have seen large growth in the twin-aisle, long-haul fleet in Canada from under 80 just a few years ago to getting close to 120 long-haul airplanes.”
Airbus, represented by Simon Pickup, Airbus Americas’ marketing operations director, gave attendees a look at its global market forecast, which was released just a week beforehand. The manufacturer predicts the worldwide fleet will grow from 18,896 to 40,120 aircraft by 2036. With fleet retirements and replacements taken into account, Pickup said he believed 34,166 new aircraft would be required over the next 20 years. Of these, 25,000 are expected to be single-aisle aircraft, about 8,600 twin-aisle aircraft, and 1,400 “very large” aircraft.
“It’s down to the fact that a lot of the growth will be in intraregional travel, you need very long-range airplanes–so that’s why we see such a huge demand for our single aisles over the next 20 years,” he said.
Pickup added that the growth would largely be fueled by emerging/developing markets, as well as an expected worldwide doubling of the middle class over the next 20 years.
In evaluating the state of the regional jet market, Jorge Nasser, manager of marketing at Embraer, said there was currently an evolution taking place within the airlines, with 50-seat aircraft being replaced by larger aircraft with 70 or more seats. This, he said, was why the manufacturer’s upcoming “E2” family of aircraft was being built to carry a larger number of passengers.
According to Embraer’s figures, there will be 6,400 deliveries around the globe in the 70- to 130-seat jet segment up to 2035, with 2,020 of those (31 per cent) being in North America.
Gordon Preston, vice-president of marketing at Mitsubishi Aircraft Corporation, shared Nasser’s optimism for industry growth. Mitsubishi is the new entrant in the regional jet market, with the clean-sheet design MRJ90 (88-seat) and MRJ70 (76-seat), with first deliveries set for 2020 and 2021, respectively.
Mitsubishi is predicting a requirement for 5,137 jets in the 70- to 100-seat category over the next 20 years, with 1,871 (36 per cent) in North America. Preston said an upcoming wave of aircraft retirements in the 70- and 50-seat category would help fuel this demand.
“The Canada market has been pretty consistent, historically, with very consistent growth,” he added. “Canada likes regional aircraft–about half of the fleet by number are regional aircraft between 19 and 100 seats.”
