Oil Cut May Yet Slit Airline Throats
October 24th, 2008
IATA Warns As September Traffic Figures Point To Sharp Decline
Airbus Seen As Having Riskier Backlog If Airlines Disappear Or Place Long Term Deferrals
Vought Suspends 787 Fabrication As Boeing Strike Begins To Bite
OPEC had originally scheduled to meet next month over concerns that the global financial crisis and economic slowdown was threatening to push oil prices down to levels not seen since last year - in bringing forward their meeting to today and cutting production by 1.5m barrels a day means the recent price drop may not last.
For the likes of ailing carriers such as United Airlines and US Airways which both this week posted massive third quarter losses largely down to their inept fuel hedging policies, the recent drop in oil prices is welcome respite - the cuts in production today will inevitable mean that the price on the New York Mercantile Exchange will still be volatile in the short term, but as the end of the year approaches, the traditional requirement in the northern hemisphere for oil and gas increases, and with it, a reduced supply will push prices up.
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That much is almost certain by default.
IATA today reported worrying figures for Septembers global traffic figures - a near 3% drop year-on-year which, summed up by Director General, Giovanni Bisignani as “alarming”.
“Even the good news that the oil price has fallen to half its July peak is not enough to offset the impact of the drop in demand. At this rate, losses may be even deeper than our forecast US$5.2 billion for this year,” he said.
For Airbus and Boeing, the risk is all to real of this production cut staging a price hike that could hinder the financial foundations of some of its most important customers. Just this year, Boeing noted it had had two cancellations with 80 deferrals. In contrast, Airbus has had 48 cancellations, with the prospect of Skybus’ deceased order, Kingfishers surreptitious A320 termination/deferral and United Airlines A319/A320 order yet to be removed off its orderbook.
At the start of the year, Boeing’s VP for Marketing, Randy Tinseth had correctly identified the historic differences between the two rivals - put simply, Airbus’s backlog over the last half decade has and continues to be at a greater risk of suffering cancellations.
“You see that in terms of cancellation rate, Airbus essentially had 5 times the cancellation rate compared with Boeing over the last 5 years,” noted Tinseth.
With traffic poised to take another descent while oil prices restart their upward path, the knock on effect to the two big jet makers is unavoidable.
As the strike with the IAM shows no immediate sign of being resolved, 787 partner Vought announced that it would be suspending fabrication of fuselage barrels.
“Given that Vought has already fabricated enough barrels to support deliveries through airplane 19, the company must continue to slow its production rate and take the necessary actions across the program.
Up until now, Vought has only released most of its outside assembly contractor workforce. Today, in addition to continuing this action, the company announced it is suspending its 787 composite bond fabrication operations, which will affect production and production support personnel.
Assembly employees will also be redeployed to concentrate on existing fuselages closest to completion. Over the next 30 days, a variety of additional actions related to its 787 program activities are being considered, including the possible temporary shutdown of the entire plant.“
While Boeing tries to come to an agreement with the IAM union, currently on strike, its recent increase in backlog will almost certainly mean that the IAM will argue for a bigger slice of the pie.
At the same time, the risk external factors bring, such as the current global financial woes means that a situation where both Airbus and Boeing risk losing orders as a result cannot be underestimated.
However, with over 80% of EADS income derived from Airbus, Boeing is certainly in better shape to cope with any shift in the economic climate.
(Prior articles on the Boeing/IAM strike can be found by clicking these links here, here, here, here, here, here, here, here, here, here, here, here, here, here and here.)
Sphere: Related ContentEntry Filed under: Aeroplane, Aerospace, Air Transport, Air Travel, Airbus, Airlines, Airplane, Airplane Order, Airplanes, Airport, Airports, Aviation, Boeing, Boeing Commercial Airplanes, Boeing Orders, EADS, OPEC, Travel
11 Comments Add your own
1. Chris Wallace | October 24th, 2008 at 5:23 pm
Well oil continues to fall as the markets believe that demand will continue to fall much faster then production will contract, resulting in a continued oversupply of crude on the world market.
Also, Asia is taking a serious bath from this global recession. The Nikkei has lost half of it’s value this year, which makes one wonder how safe the NH and JL 787 orders are in their entirety, to say nothing of the rumored NH A380 order.
And as the US economy stops buying, that means China will stop exporting. So with Airbus’ strong exposure in that market, one wonders how those orders will hold out. Of course, Boeing has exposure there, as well.
EK continues to say “everything is fine”, but if traffic starts to contract, will they find 50 A380s or 50 77Ws to be the more effective tool to meet demand? Fortunately for Boeing, EK already has 50 77Ws while they have only one (if that?) A380.
2. Graphite Epoxy | October 24th, 2008 at 7:55 pm
Yes it appears the OPEC move isn’t going to stop the oil decline. While it may well overshoot into undervaluation and then bounce up some, the oil price threat for now, seems moderated greatly.
Of course, Boeing CEO McNereny sees this as a positive for aircraft sales and leasing, but then again, what else would he say…..
As to traffic being down, true, but the trend has been on cutting routes anyway. And we aren’t seeing ticket prices and all the ancillary fees added by airlies go away either, and I’ll bet those are now permantent fixtues in the airlines revenue streams.
While the is no doubt that Airbus’ exposure is greater, the upshot is that re-fleeting to newer, more efficient aircraft really is a neccesity for any airline wishing to still be in business ten years from now.
3. mike j | October 25th, 2008 at 8:50 pm
Must there always be a “crisis” on planet earth?
Can’t the persons at the top just be honest for once and stop manipulating the economics?
4. mike j | October 26th, 2008 at 12:58 am
Interesting title to this article… perhaps just a coincidence.
The only “contribution” to this world from OPEC nations is slitting thoats on airliners… and sometimes in front of video cameras in dungy rooms… but never one thing good, ever.
5. James Baloun | October 26th, 2008 at 7:36 am
to mike j
“Can’t the persons at the top just be honest for once and stop manipulating the economics?”
This market crisis is a rare peek at the truth of economics.
If there is one thing made abundantly clear by the (sub-prime mortgage, credit default swap, commercial paper, hedge fund, stock market, government bailout) crisis it is that the power of the economic market forces can not be over-stated. The world’s most powerful financial institutions are brushed aside and shattered by the economic monster unleashed this year as if it was brushing aside a fly. The economy really does not care. There is no such thing as to big to fail.
I commented to a friend a few days ago that they are trying to put the monster back in the cage but on second thought, it never was and never will be in a cage. Even the so-called normal markets do not control the monster, they just benefit by its movements like the pilot fish who swim next to a shark. The few benefit. The majority have to live off the scraps.
When the monster is behaved the traders and bankers think they are in control. Now we can see that no one really controls the economy. The best we can do is try to steer it where we want it to go. I used to think Greenspan got a grip and steered us away from inflation and recession. It worked for a while but now the house of cards is falling down.
It is good advice for any business or government to determine which way the market is going and tailor their plans to go in that direction. You can not stop the tide.
In hindsight, the depth of greed in the face of common sense is astounding.
I will not soon forget my renewed respect for economics and disrespect for investors.
6. mike j | October 26th, 2008 at 11:17 am
blogger 5,
Good points made…
Interesting you refer to the “economic monster”.
But I don’t buy the “it just happened” theory.
If you ever watched episodes of Scooby-Doo (especially the earlier ones) the “monsters” always turn out really to be just some schmucks in costumes attempting to manipulate some economic situation for themselves only.
The real-life monsters on this planet are really truely the same type of schmucks, creating mystery and chaos for their own economic purposes, and misery for everyone else.
Under all the mystery and mess is where they are, very busy manipulating planetary economics for their own gain only, hoping they don’t get found-out and caught.
Members of the highest financial circles, ie International Bankers, Global Corporation Heads (something like that)… just look for a few names MAKING REALLY BIG MONEY in the middle of this chaos (while everybody else is LOOSING really big money)… possibly some know their names, I don’t… I’m guessing about ten individuals, total,
But our planet earth real-life “monsters” (I mean the ten schmucks) are much much meaner and deadlier than the cartoon versions, but almost as clumsy.
Anyway, it doesn’t really much matter what I see or believe… I’m just watching this cartoon play out.
And at the end of every Scooby Doo episode, the schmucks get what is coming to them like it or not, but it is often quite a feat to capture them… yet the good-guys always do win.
So maybe there’s hope for us good-guys… or maybe I’m just yapping.
7. Aurora | October 26th, 2008 at 1:31 pm
So what happens when macroeconomic reality meets “class warfare” culture & rhetoric? Burn the house down? Kill the goose?
8. Graphite Epoxy | October 26th, 2008 at 2:56 pm
“So what happens when macroeconomic reality meets “class warfare” culture & rhetoric?”
Rebellion. Political instability. Social unrest. Sometimes war or revolution.
9. James Baloun | October 26th, 2008 at 4:15 pm
Scooby Doo Economics - LOL!
‘Scooby Doo monster’ - I love the analogy. I am far from an economist so I can be wrong about this. I am just one of millions who have been forced to pay attention recently.
‘Hidden market manipulators’
Maybe to some extent. Maybe the manipulators can jerk the monster around. This time it got out of control. Goldman Sachs certainly did not want the die at the hands of the monster. If they were in control they should have done a better job.
“Rebellion. Political instability. Social unrest. Sometimes war or revolution.”
As an example I recall the fall of the Soviet Union. The government fell and the black market rose in its place. I was thinking that the economic forces in Russia continued in spite of the total collapse of the government. I suppose the Scooby Doo version would be the Soviet market manipulators traded places with the black market market manipulators (maybe literally).
But here again we get a peek the real macro economic monster. During the collapse the Soviet manipulators were weak and ineffectual and the black market was gaining power yet the economy continued without a gap. Similarly during the Iraq war the people on the street have fended for themselves at times.
There may be two aspects to the monster. The uncontrolled and the manipulated.
The monster continues during a rebellion, unrest or war. Somali pirates and international shipping clash where the two economies meet.
Economics are only the sum of human activity, sometimes with extremely powerful leverage mechanisms of varying transparency, legality, and ethics. All the way down to garage sales and old fashioned bartering where you are talking to the market manipulator. It seems that this sum of human activity that makes up the economy does not come with a mind or soul. When it falls hard it falls back on basic human needs of food and shelter. It is a strange monster.
10. mike j | October 27th, 2008 at 1:00 am
There are episodes of Scooby-Doo where the monster was real and the “manpulators’ did their best, but still couldn’t control it in the end… so our situation is probably similar.
The “economic-monster” is likely mass populations who hate being manipulated. Who likes being manipulated? Eventually mass-populatins (us) get mad and strike back at those doing the manipulating.
The real-life planet earth economic-manipulators (about ten men) are so terrified of mass-populations finding out their little schemes that they will create wars, class-warfare and civil unrest to keep mass populations busy fighting each other, instead of the manipulators.
What I really HOPE happens in this new 2008 global economic collapse is that some good FBI type detective action is occuring, and finds these manipulators and puts them in jail, thus saving us from needing a revolution.
The economic-monster (mass-populations) would not be so ferocious if it wasn’t being manipulated all the time.
But if no jailing action takes place, then revolution is likely the only next step.
Like I say, I’m just watching this very unfunny cartoon play out… in 3-D.
11. mike j | October 28th, 2008 at 12:59 pm
For Bloggers 6, 9 and 10, I wanted to clarify the Scooby-Doo theory:
A few episodes the “monster” in Scooby-Doo was real, and the ‘hidden-economic-manipulator’ (the schmuck) tries to manipulate the monster but the monster eventually gets angry and eats the schmuck… thus ends the mystery all the same, (the monster not particularly bad, just got tired of being manipulated).
I have a feeling that the Emergency Bailout $850B was to payoff some of the monster’s apetite temporarily. Because the “monster” I think is “us-the-mass-populations-boiling-mad” and we’re starting to get a bit angry at being manipulated (and hungry), and once enough mass populations get too boiling-mad and too hungry, watchout!
I’m accually hoping our real-life-planet-earth-economic-manipulators get eaten, thus solving all the trouble. Because I doubt the top schmucks have the sense to become honest and straight all by themselves, so eating them might become necessary. I don’t know how this will play out…
Scooby-Doo cartoon, wow, never thought it could relate to real-life economic scenarios but it seems to be simplistic and spot-on for the basic factors.
This “global ecomomic meltdown” problem could be a topic for another day. But I don’t think the ‘meldown’ would’ve happened if the top schmucks weren’t manipulating it in the first place.
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