FlightGlobal reported yesterday (May 7) that supplier GKN’s CEO predicted Boeing will cut production next year of the 737 to 21 a month. This would be 32%, roughly in line with a forecast made in January by Steven Udvar-Hazy, CEO of mega-lessor ILFC. He also forecast Airbus will have to do likewise.
Most people scoffed at Hazy’s prediction, including many in Boeing and Airbus, who said Hazy was talking out of self-interest. Whether he was or wasn’t, Hazy has an uncanny knack of accurately predicting things. He also predicted that cancellations and deferrals will outpace orders and so far, he’s correct about that at Boeing and pretty close at Airbus.
Whether he’s proved correct about his forecast, the one by GKN–in which the CEO said he came to his conclusions after talking with Boeing suppliers–goes well beyond anything we’ve heard, also in talking to suppliers. We’ve consistently been told that supplier planning for 2010 is more like 26-28 a month and that Boeing at worst has discussed as few as 24 a month.
In February, our forecast for 2010 was 26-28 a month, or about 15%. We were the first to come up with this figure.
We go further than simply calling up Boeing’s PR department and getting an expected statement from it that all is well. Following the GKN item, we rechecked with our sources and affirmed the 26-28 planning by suppliers we talked to previously.
In an interview with KOMO radio (Seattle) on the topic, we also expressed our view that with oil prices coming up again ($57-$58 since the $29 low of a few months ago), airlines may be inclined to hold onto their orders for new, fuel efficient 737s (and Airbus A320s). The industry is also seeing signs that the decline in cargo traffic seems to have bottomed out, although it’s not recovering just yet. Cargo is a leading indicator to passenger traffic, and some airlines in the US and Europe have also indicated they see a bottoming, though unlike cargo (with four months of data to go by), passenger traffic data is based on only a month or two.
These factors suggest to us that airlines may be more willing to hold onto their orders. The wild card remains the availability of capital with which to finance the orders. While 2009 financing seems reasonably assured, concerns about 2010 seem to be growing. Boeing’s CFO James Bell termed the 2010 order book balanced with a continuing over-commitment level in 2011. This means that any more deferrals in 2010 will eat into Boeing’s production levels. Rates will either have to be reduced or Boeing’s sales team will have to pull rabbits out of the hat to sell the newly vacant positions. And Boeing Capital Corp. will likely have to be ready to step up its customer financing.
But for now, we simply don’t buy into GKN’s prediction because we do our own checking, rather than relying on a phone call to Longacres to reach our conclusions.