Reality Check
This year has wrought pressure and near cataclysmic fatalities to a variety of airlines - oil woes, price hikes, charges increased, bankruptcy, capacity cuts, price falls, demand declines - you name it, 2008 has likely had it in one form or another.
Both Airbus and Boeing face growing exposure to once thought safe havens, such as China, Asia and the Middle East.
News then that China wants its airlines to defer deliveries will not go down well with either jet maker, but as Cowen & Co. noted in their research notes last week, Boeing’s recent industrial dispute has probably inadvertently helped the company to potentially avert numerous outright cancellations given that its output for 2009 will slip due to missed deliveries this year.
That’s not to suggest Boeing will avoid contract annulments altogether, because the reality is that there are airlines who will go bust next as well as some which will survive only by cutting their exposure to capital outlays by cancelling orders.
Image courtesy of birdlike
For Airbus, exposed not only by a bigger backlog and a dubious production line stuck in Tianjin, even the most upbeat assessment by bosses will have airline executives cringing.
“I have to say I don’t think we will escape the crisis, but there’s no reason to panic,” said EADS CEO Louis Gallois at a recent investor conference.
Others are sceptical of Gallois views.
“Gallois is right in one thing. There is no reason to panic, since French president Sarkozy has already declared Airbus has the status of a ’strategic’ industry for France, essentially meaning it will not be allowed to fail. This govenment-intervention tactic was hurriedly introduced in 2005 by the French administration of former president Chirac to block a potential take-over of French food company Danone.
So, if yoghurt is strategic in France, the Airbus widebody future is government-guaranteed.
No reason to panic, indeed,” states Arran Aerospace’s Doug McVitie.
IATA’s Director General and CEO Giovanni Bisignani painted a downbeat picture for 2009’s fortunes.
“The outlook is bleak and the chronic industry crisis continues as we face the toughest revenue environment in 50 years. Alone airlines cannot overcome the industry’s structural sickness,” he said. Despite the recent easing of fuel prices, IATA still predicts a hefty $5bn industry-wide loss this year.
OPEC too will play its part - as noted on this site over the past few months, cuts in production will continue and become much more severe as OPEC members aim to reinvigorate prices after their sharp decline over the past quarter.
“The expectation of an OPEC cut is going some way toward curbing the downward momentum in prices,” said Commodity Warrants analyst Toby Hassall.
“A cut of 1.5 million to 2 million barrels a day seems like a reasonable range. We’re probably in the early stages of forming a base at the moment, and the price will likely edge up toward $60 or $70 by the middle of next year,” he noted.
OPEC meets December 17 to discuss a new range of widely expected production cuts.
Boeing has said that it’d match production closer to traffic realities, cutting down its exposure to rapid declines demand - for Airbus, its planned 2009 production increases that are now on hold means any cuts it makes will affect customers who had envisaged deliveries next year and beyond.
Image courtesy of Airbus
Just whose deliveries could they or would they cut to stave off undelivered/surplus to requirement airplanes?
“If pattern follows tradition, Airbus already knows which airlines will cancel deliveries in the second half of 2009 but is simply sitting on the info to try to give the impression orders for its aircraft are somehow immune to the current global economic malaise. That didn’t work with the A380 when Kingfisher recently opted out of its 2009 deliveries and it’s unlikely to work either for next year’s A330s, while government-driven deferral news from China has negative implications for the A320. Good time to be building A320’s in China…,” says McVitie.
Credit availability from 2009 onwards will be challenging for the entire aerospace and airline sectors. With Airbus and Boeing readying their war-chests to finance customer purchases although neither company would want to provide such a facility for any long term period.
“We are at the lowest point in aircraft financing now in something like 20 years,” says Airbus CEO Tom Enders.
“We’ll watch, and…take further action [on production] if the situation deteriorates further,” he noted.
Giving the credit option isn’t a bad move - rather, the question is what purpose it will serve when customers have little choice but to lose deposits and cancel orders outright?
6 comments December 16th, 2008
