Go Let It Out - Airbus, Boeing, OPEC…

While critics relish every opportunity to drive the stake through the heart of Boeing, its stock price and its unknown future, with global market volatility, the bigger industry concern is not that of the quality of Boeing’s order book or its backlog, but rather the more precarious and less discussed issue of Airbus and its fortunes.

Before the financial crisis swept across the US and Europe, Goldman Sachs rescinded from its target price of over $90 a share for Boeing to just $40 basing much of its scepticism of the company solely on the delays to the 787 Dreamliner.

Even for neutral observers, this relentless barrage of anti-Boeing sentiment is now getting tiresome.

Image courtesy of Boeing

Just weeks after the 149th meeting of the Organization of the Petroleum Exporting Countries (OPEC) in Vienna, Austria, OPEC is to convene again on November 18, 2008 to discuss what it calls “the deteriorating economic conditions with contagion risks.“

In September, OPEC agreed to slash oil output by some half a million barrels a day in a bid to both shore up prices that had dipped below the once eye-watering $100 a barrel threshold and also due to decreased demand. It is all but a foregone conclusion that next months extraordinary meeting will see yet more cuts in production to push prices up, and that means wholesale fuel increases for airlines across the board.

“At this meeting our country’s request (for the Organisation of Petroleum Exporting Countries) to cut production and the members’ crude quotas will be submitted,” said Iran’s Oil Minister, Gholam-Hussein Nozari.

At a time when many airlines are grounding older, less efficient airplanes, cutting back system wide capacity and introducing a superfluity of charges to passengers, decreased demand and declining load factors are already pressurising the bottom line without having to have the additional misfortune of seeing the fuel bill rise just as the Christmas period commences.

Looking back in April 2008, the first high profile casualty was Skybus, which buckled under oil prices at that time of $100 a barrel, coupled with one of the most ridiculous strategies of selling seats at $10 a go expecting to make money. Skybus’ death also brought with it the death of over 50 outstanding orders for Airbus’ A319 airplane. Of course, there have been notable carriers fold flying Boeing jets, but none of the carriers that have hit the wall  had outstanding orders of comparable magnitude and its bizarre that in a year of such calamities why Airbus’ greater exposure to carriers sporting dubious junk credit ratings is not being discussed or even examined.

The recent decision by Kingfisher to swap orders for the A340-500 for A330’s and defer deliveries of A320’s points to more of Airbus’ customers seeking deferrals during the economic downturn than that of Boeing, despite CEO Jim McNerney stating that no customers had yet approached the company for financing purposes.

Image copyright/owned by FleetBuzz Editorial.com

Speaking exclusively to this site, Doug McVitie, Managing Director at Arran Aerospace notes a range of factors that jeopardise Airbus’ backlog.

“Airbus’ backlog is undoubtedly more fragile than the manufacturer admits or possibly even realises, given the non-commercial compensation basis on which most of its widebody orders have been secured in recent years (Kingfisher Airlines being a case in point — supposedly the harbinger of high-volume profitable business for A380 customers as well as an endorsement of the proposed A350, but in fact the airline is already stalling and is now unable even to take delivery of its optimistic quota of more downturn-resilient A320-family narrowbodies). Airbus will soon face increased order cancellations as too much of its orderbook is of suspect quality,” he said.

Kingfishers expansion plans are frighteningly similar to the unrealistic growth targeted by Skybus. One only need look at the carriers decision to potentially scrap its international flights so soon after coercing the Indian Government for months to amend flying rules in the wake of its takeover of ailing Air Deccan points to Airbus facing yet more production problems of long haul jets being made with nowhere to fly.

“[Kingfisher] started its daily flights with an A330 from Bangalore to London Heathrow last month with dire load factors–an average of 35 passengers per flight.” (Aviation Week)

Of course, this is but one example, but there are a litany of disasters waiting in the wings. Already, United Airlines said in a regulatory filing just a few months ago “that it is highly unlikely that it will take future delivery of these [Airbus A319/A320] aircraft.” As of yet, the orders have not been removed from Airbus’ backlog pending formal termination of the contract.

Aerospace analyst Harry Nourse noted that “with a $271bn backlog, Boeing should be able to shuffle slots between customers in the event of deferrals and cancellations and will aim to hold production rates steady, thereby reducing cyclicality and the downside risk to multiples.“

Of course, the same situation is prevalent for Airbus, but given that the European planemaker comprises over 80% of earnings for parent EADS, it doesn’t take a rocket scientist to establish which of the two firms stands to lose out in the wake of cancellations.

Click to enlarge / courtesy of Yahoo!

In the wake of the recent global financial crises, both EADS and Boeing stock has been hammered. While neither company derived much benefit in the wake of the tanker competition being deferred until the next US Administration takes office, EADS’ plans to set up a manufacturing base in Alabama and its desire to use US taxpayer money to subsidise the aging A330 line is now unlikely ever to materialise. Coupled with the ongoing debacle that is the A400M with a capricious “threat” to terminate the whole programme, EADS’ business as a whole is far more subject to volatility than is Boeing.

Perhaps now we can do away with the anti-Boeing verbatim that has reverberated for the past several weeks in the wake of the IAM industrial dispute and instead focus on letting out the demons hidden with Airbus.

Better yet, why not encourage OPEC to go let out more oil supplies to suppress the price and provide some much welcome and needed lower fuel cost relief to encourage people to fly…

14 comments October 13th, 2008