NEW YORK With U.S. military spending in decline, Boeing and Airbus investors have been counting on record commercial aircraft sales to keep profits rising.
Now some industry experts are voicing concern that jetliner sales are at risk as economic conditions shift and smaller airlines that placed big orders take on bigger rivals.
The issue is among those to be addressed at the Reuters Aerospace and Defense Summit in Washington, D.C., September 3-5, which gathers top decision makers from the industry.
High fuel prices have spurred massive orders for new fuel-efficient planes. An era of low interest rates and export credits have made the new jets unusually affordable.
Boeing and Airbus have nearly 10,000 orders - about seven years of production - the biggest backlog in their history, and are building jets at historically high rates.
Boeing is on pace to produce up to 645 jets this year, more than at any time in its history. Airbus delivered 295 jets in the first half, up six percent from a year earlier.
The prospect of rising interest rates and steady or lower fuel prices could trigger a sea change. Industry experts warn that new orders could taper off sharply and cancellations and deferrals could rise.
A slowdown could affect not just plane makers and the tens of thousands of workers they employ, but the global network of suppliers, including engine makers in the United States and Europe.
Shareholders could suffer a sharp reversal in Airbus and Boeing share prices, which have soared 48 percent and 38 percent this year. Investors are counting on high production to bring the long-awaited cash payback from the heavy investments both companies made in new planes over the last decade.
Some airlines already are positioning to capitalize on the global shakeout.
Emirates Airline, the fast-growing carrier that connects Asia, Europe, Africa and the Americas through Dubai, said it aims to grab market share as weaker airlines struggle and fail in the next few years.
"The gap between the winners and losers - or between the customer focused and the less customer focused airlines - will increase," Thierry Antinori, chief commercial officer at Emirates said in an interview.
"So we see opportunity."
Boeing and Airbus predict the number of jets flying travelers around will double over the next 20 years to more than 30,000, worth some $4 trillion at list prices. This is just normal industry growth that has averaged about 5 percent a year historically, supporting demand for travel and planes.
"All of the data points to a strong and resilient airplane market," said Boeing spokesman Marc Birtel, noting that planes are full and airlines are making modest profits.
"There's no indication that the market is slowing down or that there's overcapacity."
Airbus says the current upswing in the cyclical aircraft business will lead to an "inevitable change in business plan for more than one carrier, ultimately resulting in order changes." Airbus and other forecasters already factor in lost orders, Airbus spokeswoman Mary Anne Greczyn said.
Yet some experts say the airlines themselves have been double-counting the demand for travel, and basing massive orders on faulty assumptions.
Boeing predicts, for example, that air traffic in the Asia-Pacific region will increase 6.3 percent a year over the next 20 years, driven by 4.5 percent annual economic growth in China and India and rising middle-class incomes.
But if each airline expects 6.3 percent growth and buys planes accordingly, they quickly create an oversupply of seats. While that's good for travelers, who will pay lower fares as airlines battle on price, it spells trouble for airlines.
"Expectations of unlimited growth are going to have to come down to Earth," said Richard Aboulafia, an analyst at the Teal Group, a consulting firm in Virginia. "There just isn't that much traffic to go around."
He said the industry is unlikely to have another decade like the last one, with cheap financing, high fuel prices, a new crop of efficient planes, the rise of Middle East carriers and strong growth in Brazil, India and China.
Middle Eastern carriers, leasing companies and many other airlines have been ordering jets to meet demand, said Adam Pilarski, a senior vice president and economist at Avitas, a consulting company near Washington D.C.
"But they forgot to tell all the other airlines to stop buying because they'll be carrying their traffic," Pilarski said.
Emirates, for example, notes that two-thirds of the world population is within eight hours flight of its Dubai hub. It has 193 aircraft on order, including 55 A380s, adding to 35 A380s already in its fleet.
Other Middle East carriers such as Qatar Airways and Etihad Airways are ordering jets to serve the same market.
Airlines typically put a token amount down when they place an order and pay the bulk on delivery. The large production backlogs at Boeing and Airbus mean airlines must wait years to receive the planes. In that time, interest rates are likely to rise, increasing the overall cost.
Airlines won't begin receiving the new fuel-efficient Airbus A320neo and Boeing 737 MAX, the popular narrow-body planes, until 2015 and 2017, for example.
"Just as the airplane is going to become more expensive to finance, the people buying plane tickets are going to have more demands on their pocketbooks for basics" like housing and cars, due to higher interest rates, said George Hamlin, president of Hamlin Transportation Consulting in Fairfax, Virginia.
Airlines jumped to buy new planes that offered 15 to 20 percent fuel savings when oil prices were soaring five or six years ago, and again when the new MAX and neo variants were launched in 2010 and 2011.
The need for fuel savings may not be as great two to four years from now when the planes are delivered and payment is due, Hamlin says.
So far this year, airline cancellations are holding steady at about nine percent of orders, in line with the average since 2000, according to Boeing and Airbus numbers. Cancellations spiked to 28 Percent in 2009, during the financial crisis.
Pilarski at Avitas said Airbus and Boeing likely booked more orders per year than they can produce, and expect some to be cancelled without cutting production. Much depends on when and on how quickly the capacity bubble bursts.
For Emirates, the prospect of some failed airlines in Asia or elsewhere only enhances its outlook. With a fleet of A380 and big Boeing 777s, Antinori said Emirates can afford to take 50 seats on an aircraft and "play the game" with low-cost carriers in India and elsewhere because the costs per seat on a big plane are so low.
Other big airlines with good brands that can offer low-cost and premium service also are likely to succeed in the years ahead, as are true low-cost carriers that have experience in running lean operations.
"The loss," he says, "will be in the middle."
(This story corrects Emirates orders for Airbus A380 to 55 from 65 in 25th paragraph)
(Reporting by Alwyn Scott; editing by Andrew Hay)