Guess The Cancellations
January 16th, 2009
Airbus released its final year end tally for 2008 earlier this week while rival Boeing already reported its figures last week, marred largely by the decline in deliveries due to the strike by IAM members lasting almost two months.
The big question on many analysts lips is how bad 2009 will be.
There isn’t a simple answer to that, and in any “guess-timation”, the propensity to get it wrong is all too high. During the order boom of 2005 through to 2007, a decline in orders was all but inevitable – on the face of it, Boeing’s 662 orders captured during 2008 is nothing to be scoffed at. Equally, Airbus’ tally of 777 is a darn good showing for a somewhat turbulent year.
Critically, of the 3,700+ jets on Boeing’s books, the bulk of them are for the 737 family. Airbus too, with a similar backlog has the A320 family comprising the majority of its order book.
Image courtesy of Rick Schlamp
Oil too played its part in 2008, causing the likes of Skybus to fold, along with the likes of Maxjet, EOS and Silverjet amongst the most notable casualties of the highest oil prices ever seen. The 737 and A320 backlogs both sport airline customers with a dubious, if not outright junk credit rating. In a climate where financing some of these long lead deliveries is challenging because of the wider economic collapse and freefall of various financial institutions on both sides of the Atlantic, the risk to these two models in inherently clear.
Widebodies too, have seen their fair share of woes too, and that’s not least because of a massive decline in premium traffic, witnessed by the double-digit drop seen by British Airways. Thai Airways and Cathay Pacific are carriers seeking to defer A330 and 747-400ERF deliveries as they battle the downturn. IATA’s summing up of the cataclysmic environment for airlines shows the fragility of the entire system.
Image courtesy of moonm
While most analysts agree cancellations will occur, it is these higher volume production rates of the 737 and A320 that will suffer first and foremost if deferrals lead to cancellations as airlines fold. Uniquely, where 2008 was synonymous for bankruptcies because of high fuel costs, 2009 will see airline collapses due to insufficient traffic, despite a fall off in fuel/oil costs. Prices are tumbling across the board, yet the premium market is suffering the biggest slump in almost a quarter of a century.
That doesn’t bode well for airlines with vast sums of money ready for future capital expenditure, nor does it solve their problem of how to generate revenue from falling yields. System capacity cutbacks have failed thus far to shore up demand and the knock on effect from the previous few years of boom-time ordering means deferrals will be the first step on the path to contractual termination, if they survive the traffic fallout.
At risk, well, you could argue that around 30-40% of the firm backlogs for the 737 and A320 are primed for long term deferral. An equal number of those jets will be terminated over the next 5 or more years. Its completely unfeasible to coalesce the dive in traffic with demand while capacity cutbacks and fleet renewals are painfully slow.
Image courtesy of Soumik Kar
While large jets take longer to build, the risk they have is equally stark – Airbus’ plans to increase A330 production has fallen flat on its face. Boeing’s saving grace was the IAM strike, however, both will wait with baited breath as to which customers seek deferrals of these high value airplanes (777, 787, 747-8I/F, A380, A330 & A350XWB).
Going full circle, the delays to the 787 too seem like a “manna-from-heaven” God-sent saving grace too, given that the need to expedite fleet replacement of long haul jets is slowed by yield erosion and traffic numbers falling.
That said, this is the first time where pricing and demand are both falling and the bottom of the cycle seems as distant as ever.
While the cockpit may alert the pilot to “Pull Up”, no such mantra exists in the intertwined aerospace/airline industries. The first sign we get of a recovery?
You’ll know when air fares go up, driven not by oil price, but because there won’t be enough airplanes to accommodate all the traffic.
There’s a long wait for that, so enjoy your time in that airport lounge!
7 Comments Add your own
1. boeing investor | January 16th, 2009 at 17:48
Yes there will be some orders lost, but the big worry is what orders will be won?
The A380 and 747-8-I already look like market outcasts.
2. Aurora | January 16th, 2009 at 17:55
“. . .around 30-40% of the firm backlogs for the 737 and A320 are primed for long term deferral.”
I’d be hard pressed to take issue with this statement. More worrisome is the wide body backlog. Given the declines in pax numbers–especially the premium market–along with the cost of fuel, will airlines be clamoring for those planes?
The winners in this could be — United Airlines (!!!), who were unable to order during the boom years. Maybe the Obama administration will bail them out, too, with the provision that they buy Boeing and keep all their employees on the payroll? Of course I’m jesting, but then again, I never thought that the U.S. government would get into the banking and auto business….
It seems there are no longer untoward consequences for bad management. It has turned the old saying “no good deed goes unpunished” on its head!
3. Graphite Epoxy | January 16th, 2009 at 18:52
One must be very, very careful here.
There is a wide distiction between a delivery, and a production slot.
We KNOW that at some point, fuel prices are going to go back up, and probably exceed last summer’s highs.
If an airline wishes to survive in that environment, it had better have the latest equipment, and airlines know this. “Fleet renewal or death” will be the motto in the economic recovery.
What we have before us now is a massive poker game.
Give up the slot, or not? Raise? Call? Fold? Those aircraft your needed, and will need, but don’t need when you thought you would, vs handing that delivery slot over to a potential competitior. Neither Airbus nor Boeing has good history when it comes to rapid production rate increases. Both usually botch them severly.
Hmmm.
Are you long or short the global economy?
My guess is you will see airlines try to hold those delivery positions until it absolutly causes so much pain they have to defer or cancel.
You may well see those positions snapped up by healthy (er) carriers with the idea of burying the sick ones on the recovery. This is happening on a small scale now.
Looking at it historically, the airlines should be panicing and cancelling left and right, and should have been doing so for months now. But like everybody else, they are trying to predict the bottom. I doubt you will see many moves until that bottom can be forseen with some accuracy.
Then you will see a sudden, sharp burst of defferal activity as things shake out. How deep depends on how far out economic recovery is predicted to be.
Airlines place big bets. The fuel hedging activity proved that.
Add to that the known fact that both Airbus and Boeing overbooked their production capacity by an unknown amount, and both had rate increases on the narrow bodies scheduald before the collapse.
Then it will be up to the manufacturers to deal with the ensuing staccato gaps in their master scheduals.
4. Chris C | January 17th, 2009 at 09:54
Boeing and Airbus will be focusing specifically on keeping what is sold, as sold, in 2009 and beyond, and while they’ll try their best to maintain order books, via deferrals or even having airplane models swapped for other variants, there’s inevitably going to be some major cancellations in orders.
The bottom has fallen out the very large airplane market, and both the 747-8I and A380 are going to be facing even tougher times in terms of garnering additional orders.
John Leahy has been as bold as to predict that he’ll sell 10 A380s in 2009, but seems to have forgotten that he said he’d sell 20 A380s in 2008, and only managed 9. Of course there’s always a possibility that Group Marsans firms their A380 order as well as Air Austral, but I wouldn’t hold my breath for this to happen anytime soon. If anything, I’d predict that Kingfisher and China Southern will cancel their A380 orders, and perhaps we’ll see some more A380 order defferals.
The 747-8I, due it’s 25% design release goal soon, is also set to have an even tougher battle in 2009 against the A380 and the world economic crisis. I don’t think we’ll see order cancellations for the -8I or -8F, but deferrals will be there, no doubt. I also wouldn’t hold my breath on Arik Air going firm anytime soon either, if ever?
5. Orack Babama | January 17th, 2009 at 16:07
The spin put out on the 787 fiasco is unbelievable.
6. Eric | January 18th, 2009 at 23:38
The spin put out on the 787 fiasco is unbelievable.
True but otherwise a good article, keep up the good work and post more often please.
7. Eric | January 19th, 2009 at 00:11
This is a very insightful article. Im interested in the impact of this on the engine makers. Particularly GE, who make the CFM-56 used by both Airbus and GE on the A320 and 737 exclusively.
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