Order levels remain buoyant with Boeing cashing in as Airbus acts to rebuild market confidence, says Chris Tarry of CTAIRA.
At July's Farnborough Air Show there seemed no shortage of observers suggesting that the industry - airframers in particular - is still on the upswing phase of a "super-cycle". It is unlikely last year's record order intake will be matched in 2006, but some 1,200-1,500 orders could still be logged.
By the end of September over 950 orders had already been booked. In the first nine months of the year gross orders for Airbus have totalled 226 units (204 net), of which 190 (172 net) are for the A320 family. Over the same period Boeing announced 736 gross orders (723 net) of which 114 (111 net) were for the Boeing 787, 24 (gross and net) for the Boeing 777 and 549 (539 net) for the 737 family, of which 14 were for the BBJ programme. Almost a quarter of Boeing's orders seemed to represent option conversions.
Some of Europe's majors are back in the market. In addition to the announced orders there have also been decisions from Lufthansa for 30 firm plus 30 options for the A320 and for five A330s. Most recently British Airways has announced a competition to replace some of its long-haul fleet.
For any airline the placing of an order or an option represents a statement of intent. The realisation of that intent depends on the ability to finance the order when the time comes. Carriers must be confident that their return on investment in capacity, which depends upon prevailing market conditions when the delivery is made, matches its forecast when the order was placed.
This is true of all types of carrier. In the narrowbody market, it has been low-cost carriers that are the most active. In the 150-seat segment so far this year low-cost carriers have accounted for some 50% of all 737 orders, with lessors making up 11%. At Airbus, the split for the A320 is 37% from low-cost players and 15% from lessors. These ratios are broadly the same as the full-year outcome for 2005.
To date, concerns over the ability of low-cost carriers to keep ordering have not materialised. They underpin the order books of both manufacturers in the narrowbody market. Time will tell how realistic these statements of intent in aggregate will turn out to be.
The key statistics to watch are the relationship between gross and net orders at an industry level. The focus is on whether the gap widens, as well as tracking option levels, outright cancellations or delivery slippages.
The continuing headlines about the A380 demonstrate, if nothing else, just how much of a "sporty game" the design, development and production of a new aircraft is. The manufacturer still has to bet the company's net worth and its reputation on the success or failure of the programme.
In almost every one of the past six months the problems associated with the A380 appear to have got worse as more has become known. Financially there are the costs associated with fixing the programme, as well as the compensation that will need to be paid to those who have ordered.
In cash terms, the original projections of Airbus clearly went out of the door some time ago and the outflow will now be much greater than expected for longer. Although relatively small in the totality of the change, it is almost inevitable that in addition to the compensation for existing customers, potential customers may well be able to get "relaunch" terms that will further impact upon cash flow.
The need to divert attention and resource to solve the A380's problems clearly poses timing issues for the proposed A350, for which there were 13 orders (net) in the first half but none in the latest quarter. The challenge for the stretched design and development departments at Airbus could even be worse if, for example, Boeing decides to give the go-ahead for a new-generation 150-seater to replace the 737 within the next five years or so.
The success of the 737 could give Boeing little reason to do so. The company recorded 549 gross orders (539 net) for the 737 in the first nine months of 2006. It has an order backlog of some 1,400 737s. Airbus has a backlog of just under 1,600 orders for the A320 family.
Given that the view of the airframers appears to be that the launch of a new aircraft in this category is dependent on developments in engine technology that are not yet evident, this means Airbus can focus on its need to fix the A380 problem and rebuild market confidence. Both will take time, cost money and absorb cash.
Source: Airline Business
