Boeing 787 Dreamliner

Boeing and Airbus: Approaching airplane market ‘bubble’?

Boeing 787 Dreamliner

Worries about a weakening global airline market aren’t being reflected in the continued strong demand for Boeing Co.’s 787 Dreamliner and other commercial airplanes, executives from the world’s two largest plane-makers said.

Boeing finance chief Greg Smith struck an optimistic tone during a recent investors conference. It was shared by an executive with chief competitor Airbus, who said this week that he doesn’t foresee an airline bubble occurring any time within the next five years.

That enthusiasm was countered by John Luth, chairman and founder of airline consultant Seabury Group, who said airline growth is faltering outside of North America. Luth told Bloomberg News that globalization is stalling and the economic recovery is faltering in many regions where airline demand should be strongest.

“The confluence of these events, plus likely higher interest rates, all beg for caution,” Luth told Bloomberg during this week’s International Society of Transport Aircraft Trading conference in Scottsdale, Ariz.

Those concerns also were noted in a Goldman Sachs report last month that downgraded Boeing’s stock to “sell” from “neutral.”

“After nearly a decade of undersupplying the market, Boeing and Airbus have caught up,” analyst Noah Poponak said in the report. “The traffic growth and replacement demand required to sustain medium-term planned production may prove tough to achieve.”

Boeing and Airbus remain undaunted.

“I would tell you the demand still remains strong,” Smith said during last week’s J.P. Morgan Aviation, Transportation and Industrials conference in New York. “Certainly, as we look at it, there is replacement and then there is growth.”

Smith said Boeing is ramping up production of its popular Dreamliner model — which is made at Boeing plants in North Charleston and Everett, Wash. — and the 737 over the coming years. France-based Airbus has announced a nearly 20 percent increase in production of its A320 narrow-body airplanes.

“It does appear that we have more than enough overbooking to comfortably cover rates above 50, perhaps above 60 (a month),” John Leahy, chief operating officer for Airbus, said during the Arizona conference.

The Bloomberg World Airlines Index, which tracks the financial performance of 29 carriers, fell 4 percent through the end of last week. It was the first time since 2011 that the gauge opened the year with a decline over that period, Bloomberg reported. The index was up 25 percent during the fourth quarter of 2014.

Among Poponak’s concerns, according to the Goldman Sachs report, is that cheap oil will cause airlines to delay retiring their fleet to purchase new aircraft.

Smith, however, told the JP Morgan conference that “there is really no correlation between oil and demand for airplanes.”

“I think some people forget that when we launched the 787, we were $40 a barrel (for oil) and you saw the success of that launch,” Smith said. “Customers should really look much more long-term and look at the overall operating expense of the airplane.”

The Dreamliner, which is made from lightweight composite materials, is Boeing’s most fuel-efficient plane. Smith said that has allowed airlines to open up direct-flight markets that previously weren’t possible, which he says is another selling point.

“We feel good about the marketplace, we feel very good about the production rates,” Smith said.

Boeing has a production backlog of about 5,800 commercial planes, including about 840 unfilled orders for Dreamliners. Airbus’ backlog was 6,332 aircraft at the end of February.

“If anything, we’re seeing customers wanting slots earlier,” Smith said.

Boeing’s book-to-bill ratio is hovering at about 2.0, which means the company is getting two orders for every one airplane it delivers. Smith said he expects the ratio to remain above 1.0 by the end of this year, indicating more demand than supply.

“Traffic remains strong, and I think just the overall economics of the airplanes that we’re offering into the marketplace continue to be very compelling around the replacement market as well as the growth that we’re seeing across the industry,” Smith said.

Source… http://www.postandcourier.com/article/20150310/PC05/150319928/1177/boeing-and-airbus-high-on-airplane-market-despite-warnings-about-x2018-bubble-x2019

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