Analysts differ on whether lower fuel prices could affect new aircraft sales

Analysts are mixed on whether the drop in fuel prices might lead airlines to cancel some of their orders for new commercial airplanes.

On one hand, analysts say lower prices make older aircraft more attractive to operate.

Others say that planes needed for global expansion, low interest rates and other factors make new planes attractive.

So far, lower fuel prices have not led to meaningful changes in airlines’ schedules or plans for their fleets.

But it could make markets that previously would have lost money as well as older aircraft more attractive, David Strauss, an analyst with UBS Investment Research, wrote in a note to investors.

If fuel prices remain at today’s lower levels for the next few months, airlines may reconsider their purchases, Strauss said.

“We believe airlines could begin to look to defer current generation aircraft on order if fuel remains at these lower levels for 6-12 months,” Strauss wrote.

The group’s analysis indicates that with the current lower prices of fuel, used narrow-body airplanes that are 10 to 15 years old are 10 to 15 percent more cost effective than the new current generation of planes, Strauss wrote.

And they’re 5 to 10 percent more cost effective than the next generation of narrow bodies.

Airlines have placed record orders with Boeing and Airbus for new single-aisle aircraft, which include the 737 and 737 Max and the A320 and A320 neo.

“We see the potential for airlines to extend the lives of older aircraft and increase their utilization,” Strauss wrote.

That benefits engine manufacturers, the aerospace aftermarket and lessors with significant near-term lease expirations, he said.

Stifel, Nicolaus & Co. analysts say that concerns about potential order cancellations are overstated.

About half of the commercial airplanes on order – about 11,780 – are for global fleet expansion and not for replacement of older planes, Stifel, Nicolaus analyst Stephen Levenson wrote in a report to investors.

And low interest rates make financing for new aircraft more favorable today than they may be in the next several years, Levenson wrote.

“There is more to retirement of current fleet aircraft than simply fuel burn that now costs less,” he said. “We aren’t going to try to predict where oil prices will be a year or two from now, but there are other considerations besides fuel costs, such as maintenance expenses, metal fatigue, environmental issues and capabilities – or lack of.”

Boeing’s composite 787 Dreamliner, for example, was launched when oil was trading at $40 a barrel, he noted. Between 2005 and 2007, when oil traded from $50 to $70 a barrel, orders exceeded 1,000 planes a year on average.

The 787 connects more city pairs than other planes of its size could connect, Levenson wrote.

“Every airline that operates 787s is developing service strategies that take size and range into account to compete more effectively,” he said.

Order backlog for commercial airliners is about eight years of production.

Based on deposits that could be lost and the inability to get a new delivery slot in a reasonable time period, “we don’t think cancellations or deferrals will be material,” Levenson wrote.

It’s difficult to say what will occur, said Teal Group aerospace consultant Richard Aboulafia.

“What we’ve seen over the past five years is this highly unusual, never in my career, never in my lifetime, combination of really cheap cash and really expensive fuel,” Aboulafia said.

“There’s been a shock to the system because of that.”

Now, of those two drivers, expensive fuel is changing.

“But I don’t know how the market will react,” Aboulafia said.

There is no mathematical formula.

“If I were the ... jet builders, I would keep a lid on rates. Be conservative. Don’t panic,” Aboulafia said. “But don’t keep going with this aggressive ramp-up. Something is changing.”

After a decade of record-breaking growth in commercial aerospace, “maybe it’s time for a little breather. ... Let’s be conservative. This is changing faster than anyone can do any math.”

Reach Molly McMillin at 316-269-6708 or mmcmillin@wichitaeagle.com. Follow her on Twitter: @mmcmillin.