Analysts expect widebody jetliner slump will persist

Turbulent times are ahead for the makers of widebody jetliners and, by extension, suppliers such as Spirit AeroSystems.

In fact, waning demand for them is well underway, analysts say.

A widebody jet is generally considered an airplane with two aisles of seating for more than 250 passengers as well as the ability to fly longer distances than single-aisle, or narrowbody, jetliners.

The slide in widebody demand began two years ago, analysts say, after jetliner orders between Airbus and Boeing reached a historic peak in 2014 of 2,879 airplanes.

According to data from Airbus and Boeing, commercial jet orders between the two companies fell 51 percent in 2016 and 37 percent in 2015 from the 2014 peak.

“This is your normal bell curve cycle, and we started on the downward side of the bell curve in 2015,” said Scott Hamilton, managing director of aerospace consultancy Leeham Co. and editor of Leeham News and Comment.

But Hamilton and other analysts say that because of the timing of the down cycle, it could be especially problematic for Boeing on at least one widebody aircraft program and maybe even two.

And that could be a further drag on Spirit, Wichita’s largest employer with nearly 11,000 employees. In 2015, Spirit earned about 84 percent of its $6.64 billion in net revenue from Boeing, for whom it manufactures major parts of all its jetliners.

Warnings of slumping demand for widebody jets began as early as two years ago. But it really took concrete form in 2016, when in January Boeing said it would cut its 777 production rate from 8.3 airplanes a month to seven in 2017. And then in December, Boeing officials announced a further lowering of the 777 rate to five airplanes a month beginning in August 2017.

That was in addition to a previously lowered monthly production rate on its iconic 747 jumbo jet, a double-decker widebody that’s suffering declining demand mostly because of its inefficiencies from having four engines and a nearly 500-passenger capacity.

Officials from Spirit, which manufactures the 777’s forward fuselage, nacelles and struts, noted in a statement Wednesday that lower widebody rates could be at least partly offset by rate increases on other programs including the narrowbody 737, the rate of which is set to increase from 42 a month to 47 in the third quarter of 2017.

“Spirit has a strong history of supporting rate fluctuations in both increasing and decreasing rates,” the company said in an e-mailed statement. “Employment impacts for these transitions continue to be evaluated in conjunction with announced rate increases on the 767, 737 and other programs.”

‘Something had to give’

Analysts attribute a number of factors behind the down cycle in widebody aircraft.

A Jan. 17 report from aerospace analysts at Bank of America Merrill Lynch contends that Airbus and Boeing manufactured a surplus of widebody jets in the recent past.

The report said both manufacturers “increased production rates to burn off record backlog. However, as order activity slows and global economic uncertainty increases, there is downside risk to widebody production rate for the industry.”

Leeham’s Hamilton attributes the current down cycle to economic weakness and fuel prices that, despite recent increases, remain relatively low compared with a decade ago.

“The global economies are just starting to soften, so you’re seeing that affecting it,” Hamilton said. “And low fuel prices are lessening the need to place orders.”

And with large backlogs “there’s really not a lot of pressure to place orders today,” he added.

Richard Aboulafia, Teal Group vice president of analysis, said widebody jets for at least half a decade “enjoyed incredible growth.”

It was growth brought on largely by pent-up demand and rising fuel prices creating a need for newer jets that were more fuel efficient than what airlines had in their fleets, Hamilton said.

Once airlines got past the Sept. 11 terrorist attacks, the war in Iraq and disease outbreaks such as severe acute respiratory syndrome, or SARS, in 2003 in Asia and returned to profitability, global orders for widebody jets surged. Airlines needed more widebodies because demand for international flights was growing fast, not to mention that those routes were airlines’ most profitable.

Airbus and Boeing were the benefactors.

“All of them were getting used to record numbers,” Aboulafia said of manufacturers and investors in those companies’ stocks. “And it’d been growing double digit for years. Something had to give.”

‘More work to do’

Following a few more years on the downside of the bell curve, Hamilton thinks widebody demand will begin to return around 2020.

In the meantime, he and other analysts think Airbus and Boeing are in for a rough patch.

“Widebody sales for everybody have pretty well dropped off significantly,” Hamilton said, including Airbus’ newest entrant in that category of commercial aircraft, the A350.

This down cycle, however, may be a little tougher for Boeing. That’s because in the midst of the down cycle Boeing is attempting to transition production of the 777 to the new 777X. Neither Hamilton nor Aboulafia thinks that’s going to be a smooth transition.

The Bank of America analysts think Boeing will have to further reduce the production rate on the 777.

“Considering that Boeing only received 23 orders for the 777 in 2016, we believe rates could decline further to 2 per month,” they wrote in their report.

Production of the 777X will begin to ramp up after Boeing’s first delivery of the more fuel-efficient airliner in 2020.

“On the 777, you’re not going to see a recovery for the airplane until early next decade,” Hamilton said.

There also is growing concern among Hamilton and his peers over Boeing’s newest widebody, the 787 Dreamliner. Spirit manufactures the 787 forward fuselage and engine pylons at its South Oliver plant and the wing fixed leading edge and moveable leading edge at its plants in Tulsa and in Subang, Malaysia.

Aboulafia said he thinks Boeing’s planned rate increase from 12 to 14 787s a month won’t materialize.

And the Bank of America analysts think the current rate of 12 a month could decline to 10 a month in 2019 and eight a month in 2020.

“Considering the book to bill for the program has been less than one since 2014, we are concerned about the sustainability of this rate,” they wrote in their report. “In our view, weakness in the 777 may spill over to the 787 program.”

During Boeing’s fourth-quarter 2016 conference call with analysts on Wednesday, CEO Dennis Muilenburg said the company had 700 firm 787 orders at the end of the year, but acknowledged it will need more of them to reach a higher production rate.

“Securing additional 787 orders to solidify the 14-per-month production rate at the end of the decade remains a priority,” Muilenburg said on the call. “We’ve booked several new orders in 2017, but there’s still more work to do.”

This story was originally published January 25, 2017 at 3:29 PM with the headline "Analysts expect widebody jetliner slump will persist."