Special Reports

February 28, 2013

Huge backlog may mean dip in commercial plane orders

Orders for new commercial airliners are expected to dip this year, a recent analyst’s report predicts.

Orders for new commercial airliners are expected to dip this year, a recent analyst’s report predicts.

“But so what?” asks Robert Stallard, an aerospace analyst with RBC Capital Markets, in the report.

Between them, planemakers Boeing and Airbus took a total of 4,260 orders for commercial aircraft in 2011 and 2012, Stallard notes.

The two manufacturers have a seven-year backlog of orders, and some popular models are sold out until the next decade.

The extended lead times and limited supply are driving the order decline, rather than any real decline in demand for new planes used for growth and to replace older models, Stallard wrote.

Boeing and Airbus have a combined backlog of more then 9,000 aircraft.

The backlog is nine times higher than it was in 2004, while annual delivery rates have nearly doubled, he said.

In response, Boeing and Airbus have been boosting production.

A strong commercial airplane market is important to Wichita, where Spirit AeroSystems builds portions of all Boeing commercial aircraft, including 75 percent of the 737 and parts of Airbus aircraft at other sites.

And smaller local suppliers also build parts for the aircraft.

Growth in commercial aircraft sales is likely to slow as production nears peak levels, excluding Boeing’s 787, and Airbus and Boeing have been building inventory buffers, Stallard wrote.

Last year, Boeing and Airbus took net orders for 2,036 airplanes, with Boeing taking 60 percent of the orders.

Sales of narrowbody airplanes — the Boeing 737 and Airbus A320 — made up 92 percent of the net orders last year, up from 85 percent in 2011.

Sales have been spurred by the launch of Airbus’ A320 Neo and Boeing’s 737 MAX, upgraded narrowbody airplanes that will have fuel-efficient engines.

“More important is that this year probably marks the order peak for this upcycle now that the Neo and MAX are well launched and no new aircraft are set to impact order behavior in the near term,” Stallard wrote.

The upcycle in commercial aviation has been strong.

“We’ve had all the orders we needed in the past five years,” said Richard Aboulafia, an aerospace analyst with the Teal Group.

Production has risen at a breakneck pace.

“Driving a lot of this is cheap cash and expensive fuel,” Aboulafia said.

Interest rates are low and fuel costs are high, and that combination has fueled airlines’ plans to buy new, fuel-efficient and environmentally progressive airplanes.

“Neither of those appear to be changing a whole lot near term,” said Cai von Rumohr, an aerospace analyst at Cowen and Co.

This upturn in commercial aviation is lasting longer than previous cycles, von Rumohr said.

Boeing has been carrying out a historic three-year production rate increase in all five of its major commercial airplane programs — 737, 747-8, 767, 777, and 787.

In January, Boeing announced it had achieved rate increases on its next-generation 737 single-aisle airplane from 35 per month to 38 a month.

The rate has been scheduled to increase to 42 a month in 2014 — that’s two every working day.

Two years ago, the company was building 31.5 Boeing 737s a month.

Airbus has been raising rates as well, moving to 42 a month for its competing A320 single-aisle airplanes.

Production increases have led to a busy supply chain, which is “kind of tapped out,” von Rumohr said.

In fact, Spirit AeroSystems doesn’t need demand to take yet another hike upward, he said.

The company has been increasing production rates and working on a number of new development programs.

“They need to get the work they have under control and get the costs rung out,” he said.

If the economy comes back, von Rumohr expects demand for commercial aviation to be relatively stable.

Aboulafia predicts a slight dip in deliveries in the 2015 or 2016 time period.

Last year was generally a good year for the airlines, Stallard said, even though traffic growth eased to 4 percent last year according to RBC’s survey.

Global traffic through November was up more than 5 percent for 2012 over the same time the previous year.

And load factors — how full flights are — have been steadily rising for the past 12 months, Stallard’s report notes.

That’s been good for airlines’ bottom lines, he said, “But U.S. airlines have arguably been undersupplying their domestic market — an approach that has belatedly been taken up by European carriers.”

The report predicts airlines will maintain their current path this year, assuming there are no abrupt changes in fuel prices or demand.

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