by J. Kasper Oestergaard, European Correspondent.
Airbus comfortably won the orders race at the Farnborough International Air Show with 279 orders and commitments, ahead of Boeing’s 182. Both companies stated they were on track to meet their targets of matching orders with deliveries this year as the industry prepares for a period of flatter growth after the order boom in recent years.
Orders, Deliveries and Backlog
Boeing and Airbus delivered 74 and 64 commercial jets in June 2016, respectively, compared with 71 and 61 in the same month last year. As of June 30, 2016, Boeing and Airbus had almost closed the gap, but they are still trailing last year’s delivery figures, with 375 (381 in 2015) and 298 (304 in 2015) commercial jets delivered, respectively.
Boeing and Airbus delivered 57 and 41 commercial jets, respectively, in July 2016, compared to 58 and 49 in the same month last year. As of July 31, 2016, Boeing and Airbus were still behind last year’s delivery figures with 432 (439 in 2015) and 339 (353 in 2015) commercial jets delivered, respectively.
In 2015, Boeing delivered 762 aircraft, ahead of Airbus’ 635, and both companies beat their 2015 delivery targets of 750-755 and ~630 aircraft, respectively. In 2014 and 2013, Boeing delivered a total of 723 and 648 jets, respectively, compared with Airbus’ 629 and 626. In late July, Airbus reaffirmed its target of delivering at least 650 commercial jets in 2016, an increase of 15, or 2.4 percent, from 635 last year. Boeing, in contrast, has announced that deliveries could drop by 22, or 2.9 percent, to 740 from last year’s record of 762 deliveries. Boeing has been able to increase deliveries significantly in recent years, mainly due to the ramp-up in production of the 787 Dreamliner (135 delivered in 2015).
In June 2016, Boeing delivered 45 737s, one 747-8, three 767s, 11 777s, and 14 787s. In July, the company delivered 36 737s, one 747-8, one 767, five 777s, and 14 787s. Boeing currently plans to raise its 737 production rate from 42 per month today to 47 and 52 in 2017 and 2018, respectively. In January 2016, Boeing’s CEO, Dennis Muilenburg, announced that demand supports a further increase to 57 737s per month in 2019. Airbus is slowly ramping up deliveries of its A350 XWB and this, combined with a higher A320 production rate of 46 per month (commenced Q2 2016), means that the company will soon begin to narrow the gap in the deliveries race. In June 2016, Airbus delivered 52 A320s, six A330s, three A350s, and three A380s. In July, the company delivered 36 A320s, two A330s, and three A350s.
With six A350-900 deliveries during the months of June and July, Airbus has now delivered 30 aircraft of this type to date (first delivery in December 2014). The company expects to deliver more than 100 A350s in 2018, when the production rate hits 10 per month. In 2016, however, Airbus still has to deliver 35 of the new long-haul jets to reach the target of 50 for the year. After a slow start blamed partly on shortages of seats and lavatories, Airbus has only delivered 15 A350s to date this year. According to Airbus’ president and CEO, Fabrice Bregier, “The target remains a challenge because some of our industrial partners are experiencing difficulties.”
In the orders race, after a terrific month of May with 113 net new orders, Boeing had a weak June with just 12 gross orders and 18 cancellations (net of -6), including an order from FedEx for six 767 freighters. In July, Boeing landed 73 gross orders (71 net), including a Malaysia Airlines order for 25 737 MAX jets. During the month, TUI Air Lease Corporation and three unidentified customers ordered another 32 737 MAX jets. The order total also included three orders for a combined seven 737-800s plus an order from Ruili Airlines for six 787-9s. Like Boeing, Airbus had a weak month in June and landed 21 net new orders (27 gross orders minus 6 cancellations). All 27 orders were for the company’s successful A320 family of narrowbody jets. In July, Airbus had a strong month, mainly thanks to the Farnborough International Air Show, and landed a total of 146 gross orders (140 net), including an order for 62 A320neo jets placed by Synergy Aerospace Corporation, the largest shareholder of Colombia-based Avianca. Other orders booked include a combination of 15 A321ceo and 15 A321neo jets ordered by JetBlue, 25 A320neos purchased by Berlin-based Germania, and 12 A320ceos ordered by U.S. carrier Allegiant Air – see full list of orders in data table below.
In 2015, Airbus booked a total of 1,036 net orders, while Boeing finished the year with 768 net new orders, or 268 fewer than booked by Airbus. In both 2014 and 2013, Airbus won the orders race with 1,456 and 1,503 net new orders, respectively, ahead of Boeing with 1,432 and 1,355. In 2015, net new orders for both Boeing and Airbus were significantly down from 2014 levels, due, among other factors, to the sharp decline in the price of oil. Cheaper oil makes it financially more attractive for airlines to keep operating older, less fuel-efficient aircraft. On January 20, the U.S. WTI oil price closed at $26.68/barrel, the lowest level since May 2003. As of Monday August 8, the price of WTI crude (NYMEX September future) is trading at $42.86.
Airbus’ order backlog as of July 31, 2016, stands at 6,815 jets (of which 5,558, or 82%, are A320 family narrowbodies), ahead of Boeing’s 5,697 (of which 4,404, or 77%, are 737 narrowbody jets). The number of Airbus aircraft to be built and delivered represents a 10-year backlog (10.7 years of production). In comparison, Boeing’s backlog would “only” last 7.5 years at the 2015 production level.
An important question for the industry is whether the massive backlogs peaked in 2015 or will continue to grow throughout 2016. Despite a decent haul at Farnborough, Airbus is still 44 net orders down so far this year compared to January-July 2015, while Boeing is down 84. The end result is still too early to call, but it is the author’s firm belief that backlogs at both companies will decline in 2016, due to slower GDP growth and low oil prices. According to both Airbus and Boeing, the demand for passenger aircraft is tied to the growth in worldwide revenue passenger miles (RPMs), which again is highly correlated with global GDP growth. The decline in orders should not be a major source of concern for jet makers, however. Backlogs remain at near all-time highs and provide stability and growth for years to come. The main concern for both companies continues to be the management of extensive global supply chains.
A320neo vs. 737 MAX
The A320 and 737 narrowbody families are Airbus’ and Boeing’s bread and butter and account for the vast majority of deliveries. Airbus had 4,673 A320neo jets in backlog as of July 31, 2016, well ahead of Boeing’s order book of 3,278 737 MAX aircraft. Closing this gap is a top priority for Boeing in the coming years. Currently, the 737 MAX 9 is being outsold by a five-to-one margin by the A321neo, which is a major concern for Boeing. At the end of May it was reported that Boeing is considering a plan to put a larger engine on the 737 MAX 9. In so doing, Boeing would add range to the aircraft while lengthening it to fit approximately 12 extra passengers (from 178 to 190 seats) and thereby gain a capacity advantage over the 185-seat A321neo.
Both Airbus and Boeing have been unsuccessful in securing solid order books for their smallest aircraft, the A319neo and 737 MAX 7. Boeing is currently considering a larger version of the 737 MAX 7.
In the Middle of the Market (MoM) segment, the A320neo competes with the 737 MAX 8 and the slightly larger 737 MAX 200. Boeing is trailing Airbus’ order book of 3,425 A320neo jets by about 400-450 aircraft.
Boeing 777 Rate Cut
Boeing and Airbus are both facing challenges going forward. Boeing is struggling to bridge the gap in production between its current-generation 777 (777F and 777-300ER) and the future 777X to maintain the current production rate of 8.3 per month (100 per year). The 777 is a very profitable aircraft for Boeing and an important “cash cow.” In 2015, Boeing only booked 38 orders for the 777 (16 777Fs and 22 777-300ERs). We made the case in 2015 that “Boeing will likely cut the rate to first seven per month (84 per year) and later six per month (72 per year).” On January 27, in connection with the presentation of the company’s 2015 financial results and forecast for 2016, Boeing’s CEO Dennis Muilenburg announced that the company will reduce the 777 production rate by 16 percent in 2017 to 84 aircraft per year. Boeing also indicated that in 2018, as it begins to build the first of four 777X test aircraft, production of the current-generation 777 will likely sink below seven per month. We would like to emphasize that without a large increase in orders, Boeing could very likely be forced to cut the rate to six per month as early as 2017. Boeing has remained upbeat on the 777 order intake for quite some time, but orders are simply not coming in fast enough and in sufficient quantities. As of July 31, 2016, Boeing had landed just eight net new orders for the 777 while delivering 56. Boeing now has only 170 current-generation 777s in backlog (135 777-300ERs and 35 777Fs).
A380 Uncertainty and Recent Production Cut
A major challenge for Airbus centers on the future of the A380 as the company considers launching NEO and stretch variants of the aircraft. The company has to make a tough choice: either 1) invest billions in developing the NEO and stretch to reduce the aircraft’s cost per seat mile; or 2) phase out the platform and terminate production when orders run out in four or five years. More recently it appears that Airbus has found a third way: do what Boeing has done with the 747-8 and keep the production line running at a minimum rate for as long as possible (knowing that cheap oil extends the economic life of the platform). At the Farnborough International Air Show in July, the company announced its decision to cut the A380 production rate from 2.5 per month today to just one – or 12 per year. We can therefore expect production to decline from 27 aircraft in 2015 to 20 in 2017 and then to 12 in 2018. As of July 31, 2016, the A380 backlog stands at 126 aircraft.
Adding further insult to injury, Boeing is reportedly contemplating a stretch to its future 777X. Boeing has approached several carriers, including Dubai-based Emirates, the world’s largest operator of both the 777 and Airbus A380. The proposed 777-10X would carry about 450 passengers, bringing it well into A380 territory.
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