ASA Conference Features Aviation Industry Predictions

Economist Adam Pilarski is known for being one of the smartest individuals in the industry. But his performance at the ASA/AFRA Conference demonstrated that he is also one of the most entertaining.

Dr. Pilarski notes that unpredictable events cannot be predicted. Why not? Because that is their definitional nature!

While we cannot predict these event, their consequences CAN be predicted. And one aid to predicting consequences of future events is an examination of the data of the past.

The nuclear accident at Chernobyl, the Iraqi invasion of Kuwait and the 2001 terrorist attacks in the US (9/11) were all unpredictable. Analysts have been able look at all three and describe the factors that should have caused them to be predictable. A handful of experts in each case claimed to have predicted the events before-hand. But none of them were credibly predicted in a way that permitted them to be averted or mitigated.

All three were very different events. All three were unpredictable in their own factual frame sets.  But if you look at the effects that each event had on aviation, you can see that the consequences of each were quite similar. For example, revenue passenger miles (an important aviation industry metric) fell and then recovered in very similar patterns (the 9/11 recovery pattern looks lightly different on a graph due to the SARs concerns that followed it, but remove SARs and you get the same exact pattern).

Dr. Pilarski explained that the two questions he hears the most right now are:

• How long will airlines remain profitable?
• Are aircraft orders justified by existing demand?

Taking the second of these questions, he explained that generally, there has been an excess of orders over deliveries.  This excess leads to a large backlog.  Part of the historical reason for this is that leasing companies and airlines have both ordered to meet the same demand. This leads to double counting and thus orders become an unrealistic prediction of deliveries.  But the current large number of aircraft orders could actually be different than past orders due to differing circumstances (sometimes changed circumstances mean that the past does not really predict the future).

Dr. Pilarski explained that the present economic expansion has lasted 56 months.  The average post WWII economic expansion lasts for 58 months.  So we are looking at an exansion that could be curtailed, if it were to follow past precedent.

But Dr. Pilarski thinks this one is different.

Revenue passenger miles are often closely tied to economic performance, so understanding the larger economic cycle is critical.  In the first 56 months of past economic recovery cycles, aircraft deliveries were generally down. In this recovery, though, deliveries are not down on the front end of the recovery.  This raises the important question, “Is this a different situation for aviation or do the current order and delivery numbers reflect an industry planning mistake?”

Dr. Pilarski thinks that this recovery is different.  He sees a number of sectors that have not yet recovered, but that will recover.  Based on this, he predicts that the economic recovery will continue, and that airline profitability will likewise continue.

Pilarski Prediction: Another three years of economic expansion.

What other factors will help bolster aviation?  Dr. Pilarski explained that oil is becoming less relevant in other industries so oil prices will be coming down.  This is good news for aviation, where he does not see us straying far from our reliance on petroleum.

With the world moving away from oil, lower oil prices would be translated into more aviation traffic. But environmental concerns may ground some older aircraft which could also affect aircraft deliveries.

Lower fuel prices will make aviation even more important to shipping because aviation will be more competitive as a shipper.  He also sees interest rates rising, and when they do, this will make it more important to move inventory more quickly, in order to obtain immediate return on investment while minimizing the cost of credit (which is often used to obtain the inventory).  This is another factor that will promote the recovery of aviation cargo as a viable alternative to maritime and land-based cargo carriage.

Pilarski Prediction: By October 16, 2018 fuel prices will be down.

Dr. Pilarski insisted that the audience check spot oil prices at 2:43 pm (don’t mark it on your calendar – he was kidding).

The real point of Dr. Pilarki’s somewhat tongue-in-cheek predictions is that you need to follow the data.  His public predictions are based on data just as his predictions for clients are based on data.  Reality can change due to unpredictable events.  And while you cannot predict the events, you can predict the consequences.  When reality changes, data helps you move faster to react to the new reality, and past patterns can help you model the consequences of your changed reality.