As the world economy and the airline industry seemingly implodes, there is an increasing amount of concern emerging among some aerospace analysts and Internet bloggers over what this means for Airbus and Boeing.
The consensus is that Airbus and Boeing will begin seeing serious declines in aircraft deliveries as early as next year.
These concerns have been exacerbated by the announcement from China’s central government that it wants the airlines to defer deliveries next year. As we pointed out some weeks ago, this is highly unusual: China historically has been a stalwart through bad times for Airbus and Boeing, growing and ordering airplanes when other regions in the world were going through major downturns.
This has led some to particularly point to the new Airbus assembly facility in China as a risk factor for Airbus.
There certainly is sound reason for concern, but so far this is overwrought.
We participated in a conference last week that included Airbus and Boeing officials. During our private conversations with them, we came away more comfortable that for 2009 at least, the two companies are not going to see major declines in deliveries, based on current market conditions.
This is a different distinction than deferrals, and a this is an important distinction.
Airbus is planning on around 475 deliveries next year, about the same as Boeing (absent any lingering strike delays), we’re told. This is about the same as 2008 (with Boeing being reduced by the strike, nutplate and 777 galley supplier issues).
Why won’t deliveries be reduced next year in the event of deferrals? Because Airbus and Boeing overbooked sales next year (and in 2010) to such an extent that it can be argued in one sense both won’t mind deferrals because such relieves their oversales situations. We learned early this year that Airbus and Boeing had oversold A320/737 families each by about 100 airplanes in 2009 (and by lesser amounts in 2010/11), for example. This means both companies have to see at least 100 cancellations or deferrals next year alone before eating into the actual production rates, and both companies say they have other customers wanting to step forward to get delivery slots abandoned by customers.
For Boeing, deferrals also will help relieve pressure of catching up from the two month strike by the IAM and supplier issues.
How has the strike affected customers at Boeing? Some airlines scheduled deliveries going into the peak seasonality of the winter months. With airplanes delayed at least two months, some of the airlines now prefer to reschedule deliveries until next year when seasonality requires the extra lift.
Some observers look at the Airbus A320 assembly site in China, the government’s declaration to defer airplanes next year, and worry that this is a major negative for Airbus. This is just silly. The plant’s operation is in its infancy, assembling airplanes at the rate of one a month. At its peak–targeted for 2010–it will assemble four a month. Those worried that this plant will become a drag on Airbus because of deferrals simply don’t understand the Chinese mindset. Prestige, technology and long-term “benefit” that will aid China’s own ambitions for its own aerospace industry–including a 150 seat jet of indigenous design and production–mean this plant is safe.
The plant may be a drag on Airbus for any number of other reasons, but Chinese deferrals aren’t one of them.
In a timely story, Aviation Week just posted this piece about the Chinese airlines mulling over the government request to defer deliveries. AvWeek reports Air China declines to follow the government suggestion and other carriers are still mulling over fleet plans.
What about financing?
No question, this is an issue. To noone’s surprise at the conference, the forecast is that there remains a sizable funding gap next year. There will be fewer players with less money. One bright spot is that the US Exim Bank, which traditionally only guarantees loans, is prepared to do direct loans (ie, taxpayer dollars). The assumption is that Europe’s ECA will likewise do direct loans as opposed to just guarantees.
Airbus and Boeing previously said they will provide customer financing. Engine suppliers also typically do as well, typically for about 20% of the deliveries, representing the roughly 20% of airplane values the engines account for.
What about the falling price of oil? Doesn’t this reduce the need to take delivery of airplanes?
Our view is that the urgency may be lessened, but the need is not. During the conference, only a week ago, oil was below $45bbl. Oil spiked briefly since then to around $50bbl and but fell back to around $45bbl as this is written.
Delta Air Lines, newly merged with Northwest Airlines, bases its 2009 business plan on $50 oil. But bankers at the conference urge the industry to budget for $100 oil.
It’s worth noting that Saudi Arabia needs $55 oil to pay for its national budget and has publicly stated that $70-$80 oil is the “right” price.
The current low oil price can’t last; airlines still need modern, fuel-efficient airplanes. The need to continue deliveries remains.