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Airline Industry

Boeing and Airbus fight to save orders as airlines shrinking fleets

Jun 12, 2009

Airbus SAS and Boeing Co. typically trumpet new jetliner orders at the Paris Air Show. This year it’s hard enough just keeping the ones they already have.

“The priority is not to get new orders but to maintain those we have and turn them into deliveries,” Airbus Chief Executive Officer Tom Enders said yesterday in an interview in London. Airlines are grounding planes faster than they are taking deliveries for the first time in at least 10 years, said Randy Tinseth, commercial marketing chief at Boeing.

Boeing collected zero net orders in the first five months of the year as 65 purchase agreements were countered by an equal number of cancellations. Airbus had 11 net orders after 21 were dropped. That compares with a combined 884 agreements in the same period a year ago, the end of a four-year buying spree in which airlines rushed to land more fuel-efficient jets amid surging oil prices.

The Paris show will be a proving ground for whether Airbus, the world’s biggest commercial airplane maker, and No. 2 Boeing can maintain production at the rates they have pledged to investors even after air travel slumped and credit tightened, causing carriers to cancel or defer orders.

The performance of the manufacturers sets the pace for builders of engines, aerospace parts and other aircraft, whose executives will descend on the French capital for the biennial event, which starts June 15.

‘Drastic Oversupply’

“The background is a decline in airline traffic at least three times worse than any 12-month period, potentially compounded by an unprecedented financing crisis,” said Nick Cunningham, an analyst at Evolution Securities Inc. “Production will have to drop sharply to avoid a drastic oversupply of airline capacity.”

Company meetings begin tomorrow in Paris, with the show opening June 15 for the industry and June 20-21 for the public. About 150,000 trade visitors and 250,000 other people came in 2007, the last year the event was in Paris. The number of exhibitors will exceed 2,000 for the first time, though there will be fewer new aircraft presented, according to the French trade group organizing the show.

As airlines cancel orders, Airbus and Chicago-based Boeing are scrambling to fill delivery slots with other customers willing to accept planes earlier. The companies have enough work to keep them busy for at least seven years, and both insist the long-term outlook is rosy.

For 2009, Toulouse, France-based Airbus still plans 480 deliveries, only three less than 2008, a record year. Boeing plans 480 to 485, returning to a growth trajectory intended before a strike cut 2008 deliveries to 375. Many planes being shipped this year were financed before the credit crunch.

Supplier Doubts

For 2010, the outlook is less clear, with suppliers less optimistic than planemakers.

“I expect recovery to 2008 levels could take several years,” United Technologies Corp. CEO Louis Chenevert said May 28 at a conference with analysts in New York. His company builds Pratt & Whitney jet engines and owns Hamilton Sundstrand, which makes electric systems for planes.

Evolution’s Cunningham is advising investors to bet against planemaker stocks now, rather than a few days into the Paris show, when short-selling after the hoopla of order announcements has been a common strategy.

The collapse in orders will be followed by a “deep decline” in deliveries spread over three to four years, the analyst said. He favors selling shares of European Aeronautic, Defence & Space Co., the parent of Airbus, and also shuns engine manufacturer Rolls-Royce Group Plc.

Air Travel Slump

John Leahy, Airbus’s chief operating officer, predicts that output won’t change much in 2010. Boeing hasn’t given a forecast. The manufacturers plan limited production cuts, even as airline traffic falls.

The slump has produced losses at carriers including Cathay Pacific Airways and Air France-KLM Group, causing airlines to slash capacity and fares. It’s not a climate for plane shopping.

Singapore Airlines Ltd. says it will mothball planes if it can’t sell or lease them. British Airways Plc is grounding aircraft and cutting winter seating by 4 percent. Southwest Airlines Co., the world’s largest discount carrier, will reduce capacity by 6 percent this year.

Global airline losses may total $9 billion in 2009 as revenue drops 15 percent, the International Air Transport Association said June 8, doubling a three-month-old forecast. IATA Chief Executive Officer Giovanni Bisignani said planemakers may deliver 30 percent fewer planes in 2010 and must trim production accordingly.

Leasing Leader

The forecast is close to that made in February by the biggest Boeing and Airbus customer, Steven Udvar-Hazy, CEO of International Lease Finance Corp. He predicted that planemakers will cut as much as 35 percent, starting in the fourth quarter.

The manufacturers reject that contention, yet a number of suppliers are making contingency plans for drastic rate changes.

“There’s considerable skepticism in the supply base that Boeing will be able to hold production rates level on the narrowbody line, in spite of their insistence that they’ve overbooked production slots enough,” said JB Groh, an analyst at D.A. Davidson & Co. in Lake Oswego, Oregon.

GKN Plc, Britain’s biggest maker of airliner parts, predicted in January that demand for single-aisle planes would plummet by midyear. Narrowbody planes include Boeing’s 737 and Airbus’s A320 series, and represent two-thirds of deliveries.

“Narrowbodies is probably an area that will get hit,” with reductions of as much as 25 percent in 2010 and 2011, said Zafar Kahn, an analyst at Societe Generale in London.

Slowing Production

Airbus intends to reduce monthly output of A320-series planes to 34 from 36, starting in October. It also will freeze output of widebody A330s and A340s. Boeing is slashing production of the 777 by 29 percent to five a month, starting midyear 2010, and postponing rate increases on 767s and 747s.

The U.S. company said in a May 21 meeting with investors that it won’t need to revise narrowbody plans. Analysts say otherwise, with at least five predicting the next day that Boeing will announce a 737 rate cut this year.

Boeing reduced its 20-year growth forecast for commercial- jet deliveries yesterday, saying there will be a market for 29,000 new planes, or 1.4 percent less than the number predicted a year ago. The company had increased the forecast by a cumulative 14 percent the previous three years.

“I’m not changing our forecast, and I’m not saying we’re going to surprise ourselves, but we always do,” marketing chief Tinseth said in an interview.

Quiet Rumor Mill

Even so, there is an unusually low amount of speculation about contract deals planned for Paris, Cunningham said. Airbus and Boeing revealed a combined $64 billion in orders last year at Farnborough, England, which alternates with Paris as the primary European air show.

The Middle East has been the driving force for orders in recent years, as carriers including Emirates, Qatar Airways Ltd. and Etihad Airways filled Airbus and Boeing order books to enable expansions at hubs in Dubai and Abu Dhabi.

At Farnborough, Etihad ordered Airbus planes valued at $10.7 billion and Boeing jets worth $9 billion. Dubai Aerospace Enterprises, the state-owned lessor, confirmed 100 Airbus jetliners valued at $13 billion.

The state of plane sales is tempting some airlines back into the market with the hope they can squeeze manufacturers for discounts.

ILFC’s Hazy said June 8 that he will increase orders in anticipation of greater demand from carriers to replace older models. Hazy had planned 150 purchases through 2019 and may raise the number by 30 percent in the next 12 to 18 months.

And UAL Corp.’s United Airlines has asked Airbus and Boeing to bid to supply planes to replace 111 widebodies and 97 Boeing 757 narrowbodies. CEO Glenn Tilton cited “opportune” timing for the order, which may be valued at $20 billion. United hasn’t ordered planes since 2001.

Boeing and Airbus fight to save orders as airlines shrinking fleets
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