Slowing economies begin to impact Airbus, Boeing

Discussion
The global economy is showing signs of softening. Airline executives are worried about yield. The Chinese government is tightening its money policy. Tourism is off in Turkey, Egypt and parts of Europe due to terrorism fears.

New orders slowed last year from the multi-year frenzy in which Airbus and Boeing routinely posted comfortably more than 1,000 net orders annually. Last year, Airbus barely broke this level and Boeing recorded nearly 800 orders, well down from prior years. Both companies guide to 700-800 orders this year.

LNC viewed this decline as the inevitable downside of bell curves. The record orders simply were not sustainable indefinitely. This does not mean LNC viewed this as an order “bubble burst.”

What’s new is the emerging announcements of order deferrals by blue chip customers and increasing concern over softening demand.

Even though the International Air Transport Assn. (IATA) forecasts record profits this year for the industry, the warning signs are unmistakable.

Lower fuel prices

Lower fuel prices have made it less imperative that airlines place new orders now or in the near future, although JetBlue’s remark about higher prices as a reason to curb growth is interesting.

Sales of the Boeing 787, Airbus A350 and A330neo have slowed considerably. Low fuel prices are but one reason. Record backlogs for the 787 and A350 are another. But as LNC pointed out just last month, a surplus of 787s has developed.

Despite low fuel prices, Boeing hasn’t been able to goose sales of the 777 Classic this year and it fell short of its target last year.

A350-2000 on hold

Airbus is finding little interest so far in the prospect of a larger A350-1000, which now has the working name A350-2000. Cathay Pacific Airways publicly said it’s interested in the airplane, but few others so far have said so. The -2000, a concept about the size of Boeing’s 777-9, appears too big at this juncture. Our Market Intelligence indicates Boeing’s lethargic sales for the 777-9 is the result of little interest among potential customers for an airplane this size at this time. Some fleet planners have told LNC that their interest in the 777-9 is at least a decade away. The same would obviously be true of an A350-2000, then.

Cargo demand

Boeing 777-8. Would a 777-8F be Boeing’s future, rather than the 747-8F? Photo via Google images.

It used to be that air cargo demand was a harbinger of passenger demand. No longer. Air cargo demand has been soft for nearly a decade now. Boeing’s forecasts for recovery—and its hope for freighter sales—has been moving “to the right” for six years. Today Boeing believes the aging 747-400F fleet will spur demand for the 747-8F beginning in 2019.

We remain skeptical.

IATA issued this dour press release at its global AGM in Dublin earlier this month:

The cargo side of the business remains in the doldrums with 2.1% growth in demand. Airlines are growing their fleets with long-haul wide-body aircraft to meet strong passenger demand growth. This adds cargo capacity to a flat air cargo market. Cargo yields are expected to fall by 8.0% this year. Overall cargo is expected to generate $49.6 billion in revenues, down from $52.8 billion in 2015.

Main deck freighter load factors remain in the 45% range or below, a trend for the last several years. Air cargo remains highly directional. The use of belly capacity in 777-300ERs, A330-300s, 787s and now the A350s has been and will continue to increase.

Boeing’s hope for future sustainable and profitably demand for the 747-8F seems fanciful at best. Given the changing dynamics of the global air cargo, Boeing’s future may better rest with the 777-8F (a 2024 projected EIS) with a swing-tail option for those rare occasions where the 747-8F’s nose door has been in demand.

Impact of slowing demand

With some blue-chip airlines are now deferring airplanes, what is the impact?

  • None that we see on the general backlog. There undoubtedly will be some type-swaps, but overall we expect these airlines to take deliveries eventually.
  • Short-term deferrals could be filled by other carriers wanting to accelerate their down-stream orders.
  • No sales opportunities become available. Emirates Airlines is now expected to make its decision by year-end on a large order for 787-9s/10s or A350-900s. Boeing’s surplus of 787s and deferrals of 787s and A350s open up some slots to offer Emirates.

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