The airlines are suffering, but the order books of Boeing and Airbus are bulging

IT IS usually axiomatic that when your customers are in trouble, you are too. But at this week’s biennial Farnborough airshow, the aviation industry’s biggest bash this year, that was not how it looked. With the exception of a few airlines from the Middle East, for which high oil prices are helping to fund an expansion, airlines are in deep trouble. According to IATA, their trade association, if fuel costs stay at present levels, the world’s airlines will lose over $6 billion this year.

The pain is greatest in America where competition is fierce, many planes are old and fuel has to be bought with weak dollars. But just about everybody is hurting. Martin Broughton, the chairman of British Airways, said this week that the airline was “up to its neck in perhaps the biggest crisis the aviation industry has ever known” and was responding by cutting flights. Even Cathay Pacific, one of the most efficient operators in the hitherto booming Asia-Pacific market, issued a profit warning on July 2nd. A number of Indian carriers also look vulnerable.
Yet despite the mounting crisis within the airline business, the mood at Boeing and Airbus, the two firms that own the market for large commercial aircraft, is oddly sanguine. During past downturns in what has always been a highly cyclical industry, the planemakers have suffered along with their customers. But this time, they think it might be different.

One reason is that both still have bulging order books with production backlogs that will take years to work through (see chart). Boeing’s head of commercial aircraft, Scott Carson, predicted this week that new orders would continue to outstrip production, so that its $271 billion backlog, the largest in its history, will continue to grow. The same is true of Airbus. Its total order backlog is more than 3,700 planes, the equivalent of about six years’ production. Its chief salesman, John Leahy, was hoping to end the week with another 200 orders in his pocket.

Both Boeing and Airbus insist that so far there have been virtually no cancellations. Airbus is even planning a 15% increase in production by 2010, though it says it is now reviewing that decision. Mr Leahy admits he has been calling customers to sound them out. “I don’t want to build a plane next year they don’t want,” he says. But his bleakest scenario is that the airlines’ woes could cut the backlog by 27%, which would still not affect production for several years.

One reason the planemakers are bullish is that neither is dependent on the hard-hit American market. “We’re fortunate because, unlike in other cycles, only 10% of our backlog is in America,” says Boeing’s chief executive, Jim McNerney. Another reason is that demand for new, more fuel-efficient aircraft has never been greater. The latest versions of the Airbus A320 and Boeing 737, the single-aisle workhorses for which demand is strongest, are up to 40% cheaper to run than the vintage planes some American airlines still use.

But the airlines want more from Boeing and Airbus. Although the current version of the 737 is only ten years old, it was designed to catch up with the now 20-year-old A320. And despite the industry’s boasts about technical progress, a new A320 delivered next year will be only marginally more efficient than one delivered in 1988. That is worrying for early A320 customers, such as Air France-KLM, which would normally expect to see a double-digit gain in operating-costs when it replaces a 20-year-old plane. Even the Americans, who are desperate to get rid of their old gas-guzzlers, are worried that they will be buying old technology.

Unfortunately for the airlines, Airbus and Boeing have recently confirmed that the date for producing successors to their single-aisle planes is receding. A year ago, the new aircraft looked as if they might enter service in 2015. Now, both are saying that 2018 is more likely, at the earliest—and their reasons for delay are almost identical.
First, there are those fat order books. As of July 1st, Airbus had an order backlog of 2,634 A320-class planes, and Boeing’s backlog of 737s was 2,243. Why replace an aircraft that you cannot make fast enough? Second, both Boeing and Airbus are having their financial and engineering resources stretched by other projects, which are also important to the airlines. For Airbus, the priority is to ensure that its larger A350 is delivered on time in 2013. Boeing has little spare capacity for anything other than getting the badly delayed 787 flying and into the hands of impatient customers as quickly as possible. Even when it manages that, it may decide to concentrate on updating the 777, which will be threatened by the 350-seat A350-1000, due in 2015.

The third reason is that neither manufacturer believes that the advances in technology have yet been made to justify the expense of developing a new narrowbody. Airbus talks about a “technology pot” that is still only “half full”; Mr Leahy says that they are “waiting for the engine guys to wow us.” Mr McNerney adds that the airlines want a 15% efficiency improvement over the very advanced 787—something that they cannot yet accomplish. Philippe Jarry, head of market development at Airbus, claims that airlines “could get a 15% efficiency gain tomorrow” if they ended their “frequency frenzy” by operating fewer flights. “We refuse to carry on our shoulders the misery of the industry,” he says.

Is the duopoly getting just a bit cosy? One new aircraft that was announced at Farnborough was the Bombardier CSeries, a 110- to 130-seat jet that will enter service with Lufthansa in 2013 and will compete with the smallest versions of the A320 and 737. With a fully composite wing and Pratt & Whitney’s new geared-turbofan engine, the CSeries should cut operating costs by 15% compared with similar-sized aircraft. Boeing and Airbus will have to decide whether they are willing to cede a small but important slice of the market to the Canadian interloper. The airlines will be hoping it is just the wake-up call they need.