Leeham News and Analysis
There's more to real news than a news release.
Leeham News and Analysis
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Boeing sees little impact from fuel on orders
Jan. 13, 2015: Boeing sees little impact on orders from the falling fuel prices.
In a tele-press conference this morning, Randy Tinseth, vice president of marketing, said recent history shows that even as fuel prices went down, the backlog of orders went up.
Oil is currently hovering around $46/bbl. The last time it was this low was 2008, after the global financial collapse. It took 2 1/2 years for oil prices to recover to around $100/bbl.
Tinseth noted that the Boeing 787 was launched with oil was $40/bbl and the 777-300ER at $30/bbl.
He said airlines still face aging airplanes that not only become more fuel inefficient as they age, but maintenance and other costs add to the inefficiency. These airplanes will have to be replaced.
With the backlogs out to 2020 and beyond, Tinseth said that delays of the Boeing 747-8, 787, Airbus A380 and A350 created a pent up demand for wide-body aircraft. Airlines are flying some equipment longer than they anticipated and new orders will continue to be placed despite the long backlog.
John Wojick, SVP of Global Sales and Marketing,acknowledged, however, that the long backlog kept 787 sales to 65 gross orders (41 net).
Wojick said that last year’s success in selling 63 777 Classics assures the skyline is filled through 2016. He did not comment on the production gap from 2017; Boeing’s 2014 annual financial results will be released Jan. 28, at which time some guidance may be offered by headquarters.
Wojick called the competition with Airbus “fierce,” but noted Boeing delivered more airplanes last year than Airbus and commanded two thirds of the wide-body market for the year. Boeing benefited by a surge in 777X orders, firmed up from the November 2013 launch of the airplane at the Dubai Air Show. Airbus suffered from a cancellation of 70 A350s by Emirates Airlines, resulting in a net negative 32 orders for this airplane for the year. This year should see a return to normalcy. Airbus has fairly evenly split the wide-body market with Boeing up to 2014.
The officials said Boeing continues to look at the product gap between the 737-9 and the 787-8 to determine whether there is a viable market. The A321neo, which is somewhat larger than the 737-9, is trying to fill this gap with today’s formal launch of the A321neoLR. Tinseth says Boeing is unconvinced there is a need for an airplane in this gap.
— Filling the gap between the 737-9 and the 787-8 —
Has Boeing completely abandonned the Sonic Cruiser general configuration? This 2012 patent is interesting:
http://www.faqs.org/patents/app/20120091270
Although this patent is mostly aiming at noise reduction, it shows that there might still be possibilities beyond the now standard tube-with-wings-with-two-engines.
Wonder what the lower fuel prices mean for the Gulf based carriers that represent much of the OEM backlog?
If the states can’t prop up the carriers based on petro dollars, what does that mean for their aggressive expansion plans?
Its the longer term that is important here, not short.
No one cancels orders on a whim, defer them yes and depending on how long the lower fuel prices are the sooner that becomes reality (and options on slots of various persuasions)
Right now its whistling in the dark, they don’t know either, just the usual spin.
Lets see how this is playing out 6 months from now.
Assuming lower fuel prices hold, many carriers will focus on lease extensions for older less fuel efficient airplanes which will extend lives a few years. There will likely be less pressure to immediately place new orders. All this will push new airplanes orders to the right.
The airplane manufacturers don’t seem to be consistent in logic about fuel prices. In the past, higher fuel prices were cited as a reason for increasing demand. When fuel prices go up it is good for down. When fuel prices go down it doesn’t impact demand?
Example:
http://blog.seattlepi.com/aerospace/2010/07/15/boeing-raises-jet-forecast-thanks-to-resilient-market/
“For the last 10 years we’ve consistently underestimated the demand for single-aisle airplanes,” Tinseth said. He said reasons for that include not understanding the role that low-cost carriers would play, underestimating the strength of emerging markets, especially China, and faster retirements of older, less-efficient jets in the face of higher fuel prices.
Fuel and Airplane.
Assume an aircraft has 55% of its Direct Operating Cost caused by fuel at 110 USD/bbl. Assume DOC are 100 USD. If fuel falls by 50%, the DOC will reduce by 28% (to 73 USD). Fuel will now command 38% of the DOC.
An aircraft that is 10% more fuel efficient than its competitor will have following advantage:
Oil at 110 USD/bbl:
Old Tech: DOC = 100 USD
New Tech: DOC = 95 USD
5% lower DOC for New Tech
Oil at 55 USD/bbl:
Old Tech: DOC = 73 USD
New Tech: DOC = 70 USD
3.8% lower for New Tech
Hence, the overall advantage of new technology is rather independent of the actual oil price. One can argue the opposite: airlines have more discretionary money (because they have better yields, and people fly more as prices are lower and they pay less at the gas station) and may spend this on new aircraft. Some may chose to give to shareholders as better profits. But these airlines will probably become history at the next oil price hike.