The Shape Of Things To Come

While the world awaits a ruling from the WTO on funding/subsidies to Airbus and Boeing, the European plane maker sought pledges from a variety of EU Governments to assist footing part of the $18bn+ bill of the new A350XWB family.

The German transport minister, Peter Hintze noted that any funding must conform to WTO legislation.

“Airbus should fund its operations in the commercial market,” said Ted Austell, Boeing’s vice president for international policy.

“This statement [by Hintze] at least acknowledges perhaps for the first time in 40 years that there is a set of disciplines that have to be adhered to,” he added.

Part of the problem is that there is growing consensus that lending money to EADS, parent of Airbus is risky given its exposure to the currency fluctuations against the dollar amidst a backdrop of a squeeze on credit and lending facilities the globe over.

“The market is viewing Airbus as a liability, rather than an asset,’‘ says Lehman Brothers analyst Joe Campbell.

That sentiment is being echoed in both demand and backlog for two of Airbus’ flagship products - the A380 and A320 families.

John Leahy’s admission that A380 sales for 2008 will drop by a third to just 20 predicted orders comes as no surprise.

Partly because the airplane designed for a niche market has seen nothing but dwindling demand from its inception to the slow, but steady rise in the number of airlines over the last two weeks that have (finally) decided to cut system capacity and flights to combat growing fuel costs - costs that have been responsible for a variety of carriers collapsing.

Images courtesy of Airbus

The decision by JetBlue to defer 21 Airbus A320’s as far out as 2015 earlier this week shows that the pinch on demand is starting to bite. In an ironic twist it has bit that segment of the market that has, for the best of the last decade seen explosive growth and driven airplane demand to record highs.

A plethora of carriers such as American Airlines, Qantas and British Airways have all come out and said that they’d be cutting back capacity in the wake of falling demand.

Leahy had already stated at the Berlin Air Show that the A320 family would likely be impacted most if airlines decide to defer or even cancel orders. By the same standard, the 737 would not be immune either - although privately Airbus officials are concerned about their exposure to airlines with junk credit ratings - not least because they have a bigger orderbook held by dubiously funded airlines than it’s US counterpart.

Compounding this worry further is the planned increase in production across the A320 families in Toulouse and Hamburg.

The Power8 cost saving plans have yielded nothing more than fancy lip service and the threat of order deferrals will jeopardise both any planned production cost savings and the long term future of these lines - this is particularly interesting since Airbus has the impending opening of the A320 line in Tianjin, China, which will also be churning out jets that may not be required.

So does the admission that the A380 lower order intake for 2008 signal perhaps that a bigger problem lies ahead?

On the one hand, the prospect of some airlines signing up for the 747-8I in lieu of the A380 production being rescheduled is an added possibility. Prior to Arik Air signing a letter of intent for 3 747-8I’s, this site named Etihad amongst the key candidates that will likely firm up an order too.

On the flipside, cutting capacity will almost certainly mean that large jets like the A380 and 747-8I will attract far fewer orders than they have already - with American Airlines taking the unprecedented step of charging customers for their first piece of checked luggage to claw back revenue in the wake of high fuel costs, other airlines are bound to follow suit while looking at other avenues to derive income. The lead time between ordering and receiving new airplanes means utilising less efficient ones today - with oil prices so high, any added income at the passengers expense will almost certainly dampen if not outright erode waning demand.

The switch to smaller aircraft (which in turn attract lower landing fees and airport ground services) and grounding of other jets to better match decreased demand means that until fuel costs drop by at least 30-40%, this system wide shoring up of capacity will ultimately determine which carriers make it through these rough times.

No one can say with any certainty how things will shape up in the future, but the rising risk of cancellations so soon after three years of record orders is growing. How Airbus and Boeing manage any fallout of both deferment and cancellations will probably set the benchmark of how the industry gears up for the next decade and the manner in which it places orders for airplanes.

Narrowbodies may have reaped much success these last few years, but they equally represent the biggest threat if more airlines either go bankrupt, defer or cancel their orders.

2 comments May 30th, 2008