The planemaker hopes high fuel costs will drive sales of its new fuel-efficient jets. But airlines may not be able to afford them
U.S. carriers are mothballing planes as the airlines crumple under the weight of soaring fuel prices. But Boeing (BA) is counting on the energy crisis to boost demand for its new generation of fuel-efficient jets, CEO James McNerney told analysts on May 21.
McNerney's comments to the company's annual investor conference came hours after Fort Worth-based American Airlines announced it would cut its domestic routes by 11% to 12% and retire about 75 aircraft, including some of its older, gas-guzzling MD-80s, which were grounded last month (BusinessWeek.com, 4/10/08) because of Federal Aviation Administration safety inspections. However, Boeing projects that 10,400 replacement planes will be needed, as the world's airline fleets double, to 36,400 planes, by 2026.
The fleets of the U.S. carriers are particularly old, says Scott Carson, chief executive of Boeing's Commercial Airplanes Div. He told analysts that domestic carriers by 2015 will have 919 planes that are 25 years or older, compared with only 146 planes of that vintage this year.
"The U.S. market has been slow to come to the party," Carson said.
Buyers with Empty Pockets
Investors, however, appear to be more concerned that airlines won't have any money to buy more planes for a long while. On a day when oil surged above $133 a barrel for the first time, Boeing's share price dropped $3.95, or nearly 5%, to 81.19.
"It's a point of concern, but nothing unexpected," McNerney said of the consolidation in airline capacity as a result of the oil runup. However, a spokeswoman for Chicago-based United Airlines (UAUA) said: "Our business plan does not include purchasing new aircraft." Last month, United said it plans to take 30 older 737s out of service.
Boeing asserts that the 787 Dreamliner, which is supposed to begin deliveries in the third quarter of 2009, is perfectly positioned for a world of pricey petroleum. The plan will use 20% less fuel than today's models because of its lighter-weight composite fuselage, among other advances.
Dreamliner Nightmares Are Ending
However, the Dreamliner has been plagued by delays (BusinessWeek.com, 4/9/08) from complications in its far-flung supply chain. It currently is running 14 to 16 months behind schedule. Nevertheless, Boeing executives insist the program now is on track with the schedule the company unveiled last month. A critical test of power systems is to be completed in June. McNerney said the risk in the program has shifted from the supply chain to more routine steps involving flight testing and gaining FAA certification.
"The 787 is part of the solution, but a carrier has to survive to take delivery," quips George Hamlin, managing director of aerospace consultancy ACA Associates. Domestic airlines won't be shopping for some time while they downsize in what he calls a more dire environment than the one they faced immediately after September 11. At some juncture, Hamlin says, the market will stabilize and grow again. But "it will take some time to get there."
Carson noted that his division's order backlog—a healthy $270 billion, or more than seven times the unit's projected 2008 revenue of $35 billion—is well balanced. Less than 20% of the orders are from carriers based in North and South America, he said. Many of the nearly 900 orders for the 787 are from fast-growing airlines in Asia and the Middle East.
Consultant Hamlin agrees that demand from international carriers is holding up. But he says that it's only a matter of time before the rest of the world slows down, too. "Everyone is paying the price for higher oil," he says. "It's not restricted to the U.S."