For Airbus and Boeing, the Farnborough Air Show marks the halfway point of the sales calendar.
Over the past few years, Farnborough, along with other mid-summer air shows such as Paris and Berlin, has been a hotbed of sales activity.
It’s where deals ranging from the two-to-200-plane variety are announced.
But this year, buzz has been quiet. And rumours of potential megadeals have been virtually nonexistent.
At a time when airlines are experiencing great profitability and with air travel expanding rapidly, it looks like sales of Airbus’ and Boeing’s next generation of airliners are facing two significant headwinds.
The airline industry is a capital-intensive, high-cost, low-margin business. Airlines try to do whatever they can to cut costs. Generally, that means saving on their most significant expense — fuel. With state-of-the-art aerodynamics and fuel-sipping, high-bypass-ratio turbofan engines, Airbus and Boeing’s next generation jets such as the A320neo and the 737MAX offer airlines a way to do this.
However, they also require the airlines to make a significant financial commitment.
Boeing’s most affordable next-generation jet — the 737MAX 7 — carries a list price of $90 million, while the top-of-the-line 777-9X wide-body lists at $400 million. Airbus’ low-end A319neo comes with a $98.5 million sticker price, while the top-end A350-1000 twin-aisle jet $355.7 million.
Even with significant bulk-order discounts common in major orders, the investment for an airline still runs in the billions of dollars.
Unfortunately for aeroplane makers, at just over $46 a barrel, oil is the cheapest it’s been in years. All of the sudden, Airbus and Boeing’s most important customers are reporting 40% to 50% reductions in fuel costs — much more than the roughly 20% improvement its planes could deliver.
As a result, customers are shying away from booking new orders for the pricey, but more efficient jets. Instead, airlines are gravitating t0 less efficient, but more cost-effective, current-generation jets: the Boeing 737NG and the Airbus A330.
Last month, Southwest Airlines, the Boeing 737’s largest and most important customer, pushed back the delivery of 67 737MAX jets by as long as six years — allowing the airline to delay spending $1.9 billion. At the same time, Southwest bumped up the delivery date of six current-gen 737-800 from 2018 to 2017.
Although Southwest will remain the 737MAX’s launch customer when it enters service next year, the airline’s decision is indicative of the hurdles aeroplane makers face.
“With fuel where it’s at, the current 737NGs are perfectly economical, and Southwest sees a way to boost profits and cash flows by a few billion dollars,” Airways senior business analyst Vinay Bhaskara told Business Insider.
“Even though (Southwest CEO) Gary Kelly will bluster about the pilots and the 737 Classic issue being the rationale, this is the primary driver,” Bhaskara added, noting the airline’s ongoing labour dispute with its pilots and need to replace old aircraft.
Airbus seems to be encountering the same issues. While the A320neo is outselling the current-gen A320ceo 68 to 18 this year, the current-gen A321ceo is beating out the A321neo 52 to 21. At the same time, the current-gen A330ceo is outselling the next-gen A330neo 24 to 14.
Compounding the difficulties posed by cheap fuel, Airbus and Boeing may also be victims of their own success. Over the past few years, Airbus’ and Boeing’s sales teams have been firing on all cylinders — sales record after sales record has fallen.
As a result, Airbus now has a 6,716 aircraft backlog while Boeing’s backlog currently sits at 5,693 planes. Even with Airbus and Boeing delivering a record-setting 635 and 762 planes respectively in 2015, customers will have to wait on their orders.
Based on last year’s rate of delivery, it would take Boeing seven and a half years to clear its backlog. At the same time, it will take Airbus more than a decade to work through its waitlist.
So airlines are becoming increasingly hesitant to tie up their cash in planes that will take up to a decade to arrive. In addition, carriers also run the risk of having the market, the economy, and demand for their services change drastically in the time between the order and delivery of aircraft.
While it is likely Airbus and Boeing will book orders at Farnborough in 2016, don’t expect a repeat of the monster 100-plane deals that have become common over the past few years.
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