COMMENT: Financing another record year of aircraft output in 2012 could be a challenge

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Published: January 25, 2012

While storm clouds have been gathering across some of the world’s economies, it hasn’t stopped the airlines giving Airbus and Boeing an almost unprecedented shot in the arm. Last year, the “big two” airframers secured orders for more than 2,200 airliners, which means that despite the current doom and gloom, airlines and leasing companies have signed up for more new aircraft in a single year than almost ever before.

Production is also at record levels, and set to go even higher. A look back over the numbers for Airbus and Boeing during the past decade shows that since 2003, their output has been steadily rising – albeit with the occasional flat spot – despite volatile oil prices, widely fluctuating airline fortunes and a global credit crisis.

As Airbus’s ebullient salesman John Leahy noted at its annual press gathering in Hamburg: “This industry is referred to as being very cyclical. They say that production ramps up and ramps down – but I don’t think so.”

What Leahy is referring to is the fact that for the past 10 years, Airbus production has been going only one way. Output in Toulouse, Hamburg – and recently from Tianjin in China as well – has risen steadily from 300 units in 2002 to more than 530 last year.

And while Boeing’s shipments have ebbed and flowed in reaction to the various industry “shocks”, the Airbus production philosophy has really been the bedrock to the industry’s sustained rise in output, which has grown from 590 in 2003 to an estimated 1,100 aircraft this year.

But this strategy, to stick to the production guns in the face of global financial woes, has been much to the chagrin of certain sections of the market. The lessors were particularly vocal about the need for production to be slashed in the wake of the credit crisis. But these calls – described by one manufacturer’s executive as “self-serving” – apparently fell on deaf ears.

Economists often talk of cracking the boom-bust cycle, only to be proved wrong. But has the airline industry really succeeded where others failed and found equilibrium in a boom-boom environment? Leahy puts Airbus’s success down to how it manages its order backlog and moves delivery slots between customers to adjust for the different speeds of economies across the world. Boeing, of course, plays a similar game.

So despite the fact that several of the world’s major economies are on health watch, in 2011 the airlines introduced – and secured finance for – 1,000 new Airbus and Boeing aircraft. At least 1,100 more are set to come into the fleets in 2012, which must be making the eyes of a few airline CFOs water as they wonder how they will find the necessary finance (and passengers to fill them), as a prime funding source – the European banks – faces a liquidity crisis.

The official line from the manufacturers is that while 2012 won’t be a cakewalk, fears of another funding gap like the one in 2009 are wide of the mark. Boeing Capital’s Kostya Zolotusky admits the industry is “rolling its sleeves up” for a tough 2012 but expects any void to be filled by other financing participants such as the lessors or new entrants. This chimes with the view from Europe, where Hans Peter Ring – CFO of Airbus parent EADS – does not expect delivery financing to be a “severe problem” in 2012.

But we are unlikely to see a repeat of last year’s buying spree in 2012. Indeed Airbus, which was head and shoulders above Boeing with its 1,419 orders, expects half that in 2012. Seattle should be set for a stronger year as it is now fully armed with its 737 Max to fight back against Airbus’s A320neo.

But don’t be too fooled by the modest outlook, as both airframers will be looking to shift the last batches of their current-generation narrowbodies. And we may even hear about the first of these deals at the Singapore air show in mid-February.


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