Airbus, Boeing deferrals may indicate slowing global economy

Discussion

United, American, Southwest, British Airways and Lufthansa cited a desire to reschedule capital expenditures, softening yields, low fuel prices and available used aircraft as reasons for deferring new orders, depending on the carrier.

United additionally said it doesn’t need the aircraft right now.

Turkish Airlines cited lower traffic in the region due to terrorist attacked, including within Turkey. The carrier had the additional burden of an attempted coup of the country’s president, followed by a purge that reached into the executive ranks at the airline.

Although the Turkish situation isn’t common to that of the other airlines, the cause-and-effect of deferrals doesn’t matter.

Economic worries

What is worrisome are the common threads cited by the other airlines and whether this portends a slowing global economy that could pick up steam and lead to greater deferrals.

International routes for years have been the preferred growth area for airlines as they tried to distance themselves from low cost carrier or ultra-low cost carrier competition. However, with an uptick in terrorist activities in the last two years in Europe and vacation spots in the Middle East, plus recent concerns over Brexit, the luster of trans-Atlantic and Europe-to-the-Mid-East routes faded.

During the same United investors’ day at which the 737 deferral was announced, aerospace analyst Helen Becker of Cowen & Co. noted:

The majority of United’s margin gap stems from underperformance in the US domestic market. Historically, United used the US domestic market as a feeder into its lucrative international network. In 2015/2016, the international segment came under pressure, with the US domestic market being the most profitable (really since industry consolidation). Many of the network changes United will implement focus on improving the US domestic market. United’s strategy in the domestic market will focus on up-gauging aircraft and de-emphasizing their regional operation. United will attempt to improve connectivity which, in turn, should improve profitability of their hubs.

Other warning signs

Europe’s EasyJet, an LCC, reported a plunge in earnings for the September quarter on Brexit and terror concerns.

The future of AirAsia and AirAsiaX, which appeared dicey two years ago due to over-expansion and over-ordering, seems to be settling down after some deferrals. But the proliferation of LCCs throughout Asia still raises a caution flag and questions about when the shake-out of all these new carriers will begin.

Without getting into a political debate, all the uncertainty surrounding the impending presidency of Donald Trump is a wild card.

China already rattled its sabre, threatening to cancel Boeing orders and move them to Airbus. Not many, yet, believe this to be more than rhetoric, but the Chinese government is capable of following through on its threats.

Whether Trump, whose positions change faster than the wind switches directions, will follow through on his campaign threats of imposition of stiff tariffs on Chinese goods remains to be seen.

Furthermore, the US Federal Reserve may finally raise interest rates in December.

Trump boasted of his desire to be unpredictable, but markets, countries and businesses don’t like uncertainty. The effects on the global economy are, or will be, anything but certain for some time to come.

 

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