The Wall Street Journal-20080111-As Orders Soar- Flight Check Begins- Boeing- Airbus Risk a Glut of Jets- Capacity if They Misjudge Customers
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As Orders Soar, Flight Check Begins; Boeing, Airbus Risk a Glut of Jets, Capacity if They Misjudge Customers
Three years of strong jetliner sales have led to flush times for Airbus and Boeing Co., which have combined orders for almost 7,000 planes and order books valued at more than $750 billion before discounts.
Now, they face a tough question: Have airlines and their other customers ordered more planes than they can afford?
Airbus and Boeing hope to rev up production to meet the surge in orders. But they also must take into account the fact that some buyers will renege or disappear before the planes are made. Both risk adding excess factory capacity or too many planes in the market if they misjudge the dependability of their customers.
Part of the answer will come this year. Both manufacturers are predicting that orders this year will fall to a more normal pace of about 1,000 planes, split roughly evenly between the two. If that happens, it will be a sign that airlines' frenzy to grab a place in line is cooling. Calm would permit the manufacturers to let market forces sort out the winners and losers.
Still, officials at both manufacturers a year ago predicted that 2007 would be a ho-hum year compared with 2006, which they also incorrectly forecast would be slower than a surprisingly robust 2005.
"My credibility is about zero when it comes to predicting order numbers," says Scott Carson, chief of Boeing's Commercial Airplanes unit, in December. "But it's got to slow down some time, and we think it's 2008."
Mr. Carson said Boeing is trying to achieve the balance that will allow it to increase production rates gradually to meet demand but not so much that it gets stuck with costly overhead if the market goes south. "We have been cautious about taking rates higher in anticipation that there could be a cooling off," he said yesterday. "That said, we continue to see surprising strength in the market."
Both companies have raised prices. But demand remains strong, and the weak dollar -- the usual currency for purchasing jetliners -- has given customers more purchasing power.
With order inflow far outpacing jetliner output for three years, backlogs have ballooned at Boeing and Airbus, a unit of European Aeronautic Defence & Space Co. The wait for delivery of popular models stretches up to six years, far longer than most airlines plan, so it makes sense the industry will slow down.
But many big airlines haven't yet entered the game. Major U.S. carriers, including AMR Corp.'s American Airlines and Delta Air Lines Inc., have hesitated to replace their huge, aging fleets because of financial and labor-relations concerns. If they order now, 2008 could become another strong sales year, increasing pressure on Airbus and Boeing to boost output.
Boeing and Airbus now aim to accelerate manufacturing, or build new plants, only if they are fairly certain orders will really turn into deliveries.
During peak periods, "many of these orders never materialize, but it's impossible to predict which ones those will be," says John Leahy, chief operating officer for customers at Airbus and its top salesman. "Most of us would have thought Swissair would have been one of the last airlines standing, but it was one of the first to go after Sept. 11."
Steven Udvar-Hazy, chairman and chief executive of aircraft-leasing giant International Lease Finance Corp., estimates over the next three to five years between 15% and 20% of the orders on the major manufacturers' books will be postponed, canceled or redistributed to other carriers as part of the normal course of the airline business.
A number of factors make assessing the situation tricky, including the credit crunch, record fuel prices and the weak dollar. Many of the recent orders were placed by new carriers and leasing companies that didn't exist a few years ago, or came from countries experiencing a surge in air travel, such as China and India.
So far, industry officials say they are cautiously optimistic there won't be a glut of airplanes, even if significant numbers of orders fall through in the coming years.
Due to production constraints, planes are on the order books for years before Boeing and Airbus start receiving any serious payments or begin building the first pieces. Most planes being delivered today were ordered around 2004. As a result, little would change inside Airbus and Boeing factories if most orders placed in 2007 evaporated tomorrow.
That makes airplane orders a different market barometer from housing starts, new-car sales and many other cyclical indicators. Unlike houses, airplanes almost never leave the factory without an owner waiting to take the keys and financing arranged. How Airbus and Boeing react to orders is more significant than how many planes are ordered each year, so industry officials focus on airplane deliveries.
"If the manufacturers start increasing production and building factories to meet all this speculative demand, they'll be in trouble," says Christian McCormick, chief executive of transportation finance at French bank Natixis SA, a top funder of new airplane purchases.
For now, Boeing and Airbus are increasing production gradually. Boeing last year delivered 441 planes, its highest level since 2001. Airbus will announce its 2007 deliveries Wednesday, and managers have said the figure will be around 450 planes, up from a record 434 planes in 2006.
Still, total combined production in 2007, at almost 900 planes, remained within the industry's historical trend. The previous record total of 914 deliveries was set in 1999, at the last cyclical peak.
The big question, then, is what comes next, as the two giants boost output. Boeing has said it expects to deliver around 485 planes this year. Airbus says it expects to deliver around 500 planes this year and 525 in 2009. To go much beyond that level, the manufacturers would need to start investing in new production facilities. Even if they wanted to do that, it would be difficult.
Most aviation suppliers, which make components ranging from rivets to windows, also are stretched to capacity. So the main factor preventing a glut of airplanes may ultimately be a lack of parts. If production remains fairly steady over coming years and orders trail off, Boeing and Airbus will simply have booked orders years earlier than in the past.
