Aircraft Prices Taxiing Toward Take Off

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Spend Matters welcomes this guest post from Brandon Ruschak, senior economist at IHS Pricing and Purchasing Service.

Aircraft prices are expected to accelerate in the second half of 2017, a turnaround from the weak price growth that has occurred for several years.

Low price growth emerged in 2013 due to the retrenchment of key input costs for aircraft manufacturing, but this trend has recently shifted. Rising input cost prices will contribute to the pricing turnaround to occur later in the year. Aluminum prices will move higher over the next two years, putting upward pressure on aircraft prices. Additionally, tightening labor markets are forcing up wages, adding more upward price pressure.

US Outlook: Supply

New orders for aircraft and parts have been declining the past few years. Orders fell 23.2% in 2015 and then a further 13.7% in 2016. As of January 2017, new orders for aircraft were down 35.9% year-on-year.

The fall in new orders has put downward pressure on backlogs, which have been gradually declining since the end of 2014. In January 2017, unfilled orders for aircraft and parts were down 3.9% y-o-y. The ratio of unfilled orders to shipments rose in 2016, suggesting the number of months that orders are backlogged has grown. This increase is due to shipments declining more quickly than unfilled orders.

Although lower new order activity is pushing down on unfilled orders, backlogs remain at historically high levels. Major aircraft manufacturers like Boeing and Airbus need to boost production levels to fulfill all the orders received in recent years. However, component suppliers to aircraft manufacturers have had some trouble keeping up with the demand, which has resulted in production delays. The ability for aircraft manufacturers to meet future deliveries will largely depend on the resilience of their supply chain.

US Outlook: Demand

After six years of growth, real investment in aircraft declined in 2016. From 2009 to 2015, investment soared 137%, but then tumbled 21% in 2016. This decline started at the end of 2015 and persisted throughout most of 2016. In 2017, aircraft investment is expected to be 17% higher than it was in the previous year. The strengthening global economy will motivate greater air travel and low energy prices will keep operating costs low for carriers. This will keep airlines profitable and encourage greater investment in aircraft.

World GDP growth will help to drive higher levels of aircraft investment, but the demand outlook for military aircraft is less certain. In the United States, federal defense gross spending fell from 2011 to 2015. Some resurgence in 2016 pushed defense spending up 2% from 2015 levels. Growth in defense spending will be minimal in 2017 and start to decline in 2018. However, recent budget proposals by the Trump administration could boost military spending in 2018 by 10% above current expectations. This would help strengthen demand for military aircraft.

Bottom line: Aircraft prices are headed upward at accelerating rates — buyers should not delay purchases.

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