Boeing tries to tamp down oil price fall concerns

Boeing’s Investor Relations department in Chicago sent a message to aerospace analysts to tamp down concerns about falling oil prices and questions over the impact on airplane orders.

Its message is:

In light of recent questions around falling oil prices, [we] want to provide you a few key points on how we are thinking about the current fuel price environment.

Historical Perspective

  1. We closed the business case for and launched the 787 when oil was at $40/barrel.
  2. Between 2005-2007, oil averaged $60/barrel and we generated >3,000 commercial aircraft orders during that time.
  3. Industry aircraft orders are historically more correlated to airline industry profits

Airline Industry

  1. We are in regular contact with our customers, and to date none have indicated a desire to alter fleet plans due to recent oil price changes. In fact, many operators continue to be concerned about oil price fluctuations and spikes.
  2. We typically receive significant pre-delivery payments approximately 1.5-2.0 years out; beyond that time frame, airlines generally won’t move off delivery slots due to near-term changes in spot oil prices.
  3. To the extent that low fuel prices improve airlines’ short-term cash position, it can often be easier for airlines to justify new airplane purchases.

Boeing Value Proposition

  1. We believe that 15-20% better fuel efficiency remains compelling for our customers even in a lower-price fuel environment.
  2. Certain mitigating factors can boost aircraft demand in low fuel price environments, such as improved residual value of our customers’ existing fleet, resulting in better economics for customers looking to trade in older airplanes.
  3. We believe that fuel efficiency is just one element of the value proposition of our airplanes; others often include higher passenger and cargo revenue, lower maintenance costs and the ability to fly more-profitable routes.

Our take:

Setting aside the understandable self-promotion in the Boeing Value Proposition, which applies equally to the Airbus Value Proposition and which would have been better to label the New Airplane Value Proposition, we don’t find anything with which to quarrel here. We have received many calls from media and the financial community about the impact of oil. We tell these callers that we see no prospect of cancellations or deferrals on narrow-bodies, where the vast majority of the backlog is, due to low oil prices. Any cancellations or deferrals will be due to individual circumstances of the customer. The same is true of wide-body contracts, in our view.

Where we do see a potential impact is for the possible purchase of the Airbus A330ceo and Boeing 777 Classic. These airplanes are only marginally more fuel efficient than those built 10 years ago and lower oil prices narrow the delta to such a degree that the efficiency argument loses must of its luster. Only by deeply discounting the ceo and the Classic do we think sales will be forthcoming for these models. We think the 777-300ER pricing has to fall to $120m or less to become attractive and the A330ceo to $70m-$80m, depending on the sub-type–and probably less, considering that Delta Air Lines CEO Richard Anderson publicly pegged his target price for the A330-900 at $80m-$90m. Nobody outside Delta and Airbus knows for sure what Delta contracted the -900 for, but we’ve heard even lower pricing than the public figure, and this is entirely unconfirmed and from a partisan source.

Our bottom line is that what goes down (oil prices) must go up. Oil prices tanked in a straight line after the 2008 global financial crisis to levels that were below those today. It took 2 1/2 years to return to the pre-recession peak levels approaching $140/bbl. We certainly aren’t qualified to predict when and to what level oil prices will climb, but history repeats itself and most oil-producing nations can’t sustain low oil prices for their own budgetary reasons. Airlines and lessors know this, too–and so we view the backlog as safe and even if there is a pause in new airplane orders, it will be temporary.

21 Comments on “Boeing tries to tamp down oil price fall concerns

  1. Oil price does not have as much an impact on plane orders as the state of the economy does. And as long as oil prices are low the economy should keep going. That being said, if oil prices were to skyrocket to $200 a barrel, and stay there for a prolong period, airplane operators would have no choice but to order more fuel efficient aircraft.

  2. Looks like another tranquilizer for the share holders.

    BTW the A330-900 is not an A330ceo. A330-900 is an NEO and nearly as fuel efficient due to new engines as a 787. Don’t mention that to Boeing shareholders…

  3. “Our bottom line is that what goes down (oil prices) must go up.”

    Not this time. Sure, there will be some upward pressure here and there, but $60 for 2015 is quoted on all the biz news sources. Tar sand oil hit $40 yesterday and is still dialed in to increase output by over 260,000 barrels/day next year.

  4. I think that any customer of A330 CEOs or B777 Classic doesn’t order to replace a similar type. Even in a high fuel price environment, it makes little sense to replace a 1998 A330 with 2016 A330 due to 2% lower fuel burn.

    • I seem to remember announced pips for the Trent 700 that summ up to more than 2% for the period in question.
      You’d also get quite a bit of MTOW increase.
      No idea how a P2F conversions market for airframes influences such an upgrade.

      Finally I don’t believe any predictions of continuing low oil prices. What we currently see is a couple of synergistic effects working towards low prices. But greed will persevere over political motives and moves to strangle competing sources.

      • There are too many pressures out there right to keep oil low. There are also drivers that want to flood the market so the US producers will go away. Just like your comment about A380 sunk costs for Airbus, so is the story about US oil producers having sunk costs as well, so they have to keep producing. There are also some new oil spots that can begin producing soon. If they can get going at these prices it will be hard to drive the price up because of the availability of supply. OPEC wanted to get the US out and they have created a situation that forces them to have placed a bottom they did not want. And, I’ll buy a CEO for $65 Mil over a NEO for $75 Mil. AirAsia must have gotten a great for 55. My concern for Airbus has always been, if you drop the price so low for the A330NEOs why will a customer even consider an A350. Heck, if you do it right (and given the current prices of oil) you can buy two A330NEO and forgo a A350-1000. Increased frequency and better pricing.

        • “My concern for Airbus has always been, if you drop the price so low for the A330NEOs why will a customer even consider an A350.”

          According to Scott, Delta Air Lines CEO Richard Anderson publicly pegged his target price for the A330-900 at $80m-$90m. He ordered 25 units — but hold on a minute — didn’t he ordered 25 A350-900s as well , and wouldn’t that seem to indicate that your “concern” is not warranted?

        • Very interesting post. But I am not sure I understand what you mean when you say that “OPEC wanted to get the US out and they have created a situation that forces them to have placed a bottom they did not want.”

          When you say “wanted the US out” are you talking about the US Dollar versus the Euro?

          • … as an oil exporting entity.
            IMU the legal fences have been taken down in recent years.
            From the US point of view it is preferable to use up “offcountry” preferably cheap resources first.
            This raises the value of your own “stash”.
            Compare to the situation in the rare earth market and the US whining about “fair” access to chinese resources while having rather acceptable reserves at home.

  5. I fail to see how airlines would think “Great! Fuel costs are low TODAY so I better run out and buy a bunch of old 727s, A300s, and 747-100s because gas is so cheap and the price will NEVER go back up again! EVER.

    If airlines buy their airplanes like the people who rush out to buy SUVs during a momentary lull in fuel prices, then those airlines deserve to go straight out of business and their executive structure shunned for life.

    • No one is going to go out and buy old aircraft (737-300)

      However, 737CEO and A320CEO can be held on longer or purchased on the increasing used aircraft market.

      Ergo, Delta airlines picked up 717s, wingleted the 767s, keep the 757s (undercutting some of the A321NEOLr?

      Good current used aircraft of buy used good current aircraft could undercut the market.?

      No one changes near term plans that fast, its the mid and longer term that gets interesting and will we see “deferred ” orders?

  6. The statement ignores the macroeconomic effects of the current oil situation, and it’s eventual negative effects on the global economy. Massive amounts of leveraged debt are held in the oil sector, and those debts cannot be repaid at $40/barrel prices. The temporary strengthening of the dollar makes US exports more expensive. And both opec, and the rest of the world seem to be positioning for the death of the petrodollar, and the displacement of the dollar as the reserve currency of choice.

    Further, these tanking oil prices may turn out to be self perpetuating, lasting much longer than some believe.

    • You say that “the statement ignores the macroeconomic effects of the current oil situation, and it’s eventual negative effects on the global economy.” You have a good point. But I believe that low oil prices will completely offset this negative effect.

      There is nothing more threatening to the world economy than high oil prices and high interest rates. Since both indicators are very low right now we have two good reasons to believe that the world economy will remain strong for the foreseeable future.

  7. What about interest rates?also,how big is the effect of not lifting the fuel that you are not going to use?

  8. I think the big winner is going to be the A330-900 versus airlines paying or waiting more for a 789 or A359. Long term fuel price stability increases the value proposition of the A330-900.

    • The big winner now and for maybe next year are airlines with no new aircraft soon to pay like Lufthansa with A340.

      • You can add to that the fact that Lufthansa is particularly adept at fuel hedging. This might actually be one of the reasons why it kept the A340 in its fleet even when fuel prices were much higher.

  9. Aircraft ordered today will, on a rough average, be delivered 5+ years in the future and be in service until 30 years in the future. I suspect anybody who thinks they will have cheap fuel in 2045 is kidding themselves. Even if they start to give crude away there will be carbon tax, carbon quote, or something to push the cost way up. So I think claims that crude pricing today could kill the backlog is, um, a Wall Street analyst.

  10. And that I agree on.

    How long its this low I don’t know. I do remember (80s) when oil hit like $8 a barrel.

    Oil was too high on a lot of speculation and weak dollar and now its correcting and I bet the speculators have lost their butts.

    Flip side is there is also opportunity for economies to expand as the price of energy is a lot less.

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