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Boeing, Airbus face new threat: low jet sales

Sept. 4, 2013, Washington, D.C. - 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.


September 4, 2013
By Reuters

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.

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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."

 

DOUBLE COUNTING

 

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.

 

ORDER CANCELLATIONS

 

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."