Boeing May Win in 2010 Orders as Airbus Waffles on A320
Boeing Co. may be headed for its first victory in aircraft orders in three years, buoyed by demand for the 737 jet as larger rival Airbus SAS defers a decision on whether to offer a new engine on its A320.
Boeing booked 480 net orders through October, compared with Airbus’s 369. Chicago-based Boeing’s total includes 432 for the 737, almost twice as many as Airbus’s 217 for the A320, and was boosted by another three jets in an update last week.
The 787 Dreamliner’s flight-test suspension after a fire last week spotlighted the importance of the 737, the world’s most widely flown jetliner. While the 787 has racked up record advance orders, it has lost four more than it won in 2010, and Boeing isn’t getting revenue because the first delivery is almost three years behind schedule.
“The 737 is a high-volume, high-profit machine,” said Richard Aboulafia, an analyst at Teal Group, an aerospace consulting firm in Fairfax, Virginia.
Delivery of the 787 has been delayed six times, and Sanford C. Bernstein’s Doug Harned predicted a seventh, which he said will pressure Boeing’s earnings margins. The New York-based analyst, who rates the company’s shares “market perform,” told clients in a note last week he expects Boeing to keep boosting 737 output and post higher profits on the plane.
Airlines are responding positively to Boeing’s firm signal that it will develop a new plane rather than extend the 737’s life with a new engine, said Aboulafia. Airbus has said for more than a year it wants new engines on the A320 as an interim step until the technology is ready for a replacement, without making a commitment.
Boeing’s stiffer stance “just might win some market share until all the confusion is cleaned up,” Aboulafia said “It’s OK to have that uncertainty for a couple of weeks, but do this all year? That’s what gives the other guy a big advantage.”
Airbus, based in Toulouse, France, has held back on committing on the A320, saying it’s not sure it has the resources while engineers work on the super jumbo A380, twin- aisle A350 and A400M military transport.
Chris Jones, vice president of sales for Airbus in North America, said the company intends to decide on the A320 by the end of December. He said that deliberations won’t stretch into 2011, as United Technologies Corp. Chief Executive Officer Louis Chenevert on Nov. 3 said could happen. United Technologies’ Pratt & Whitney unit makes engines for the A320.
Airbus has delivered more jets than Boeing every year since 2003, making it the largest commercial-plane manufacturer.
While Boeing hasn’t officially decided on the 737 either, executives have said since at least March that they’d prefer to focus on developing a new narrow-body aircraft, the backbone of the air-travel industry, because airlines see a weak business case for the current jet with a new engine.
Both the 737 and the A320 are twin-engine models that seat about 125 to 185 people. List prices for each plane range from about $65 million to $95 million, depending on the version.
Boeing also has stressed this year that the 737 is still viable as it is. The plane’s fuel efficiency is set to improve by about 2 percent starting in 2011 with a group of tweaks. Engine maker CFM International, a venture of General Electric Co. and Safran SA, is smoothing out the 737 power plant’s air flow, and Boeing is reducing drag by re-engineering parts including the flashing red light on the jet’s belly.
For its part, Airbus plans to offer so-called sharklets for an A320 version’s wings in 2012 to boost range and payload.
About half of the airlines with 737s on order are paying to switch to the new Sky interior, delivered to the first customer two weeks ago, which draws from a decade of studies by psychologists and architects for Boeing’s 787 Dreamliner.
With a backlog of more than 2,100 737s, Boeing has pushed production of the plane to a record 31.5 a month and plans to boost that in steps to 38 by 2013. Airbus has more than 2,200 unfilled orders for its A320, which it builds at a rate of 36 a month. Boeing executives are considering another increase, to 40 737s a month.
“I can’t quote delivery positions before 2015, even at those production rates,” Boeing’s sales chief, Marlin Dailey, said at a briefing last week. “We have a brilliant airplane.”
Boeing also benefits from its wide-body 777, which Aboulafia said is “low volume but it absolutely dominates the market, so it has strong profits.”
Airlines don’t seem to be interested in a 737 with new engines because it would add complexity to their fleets, Nicole Piasecki, Boeing’s vice president of business development, said on Nov. 3. Different engines on the same model make maintenance more complicated.
‘Bread and Butter’
“There are virtually no customers I can name off the top of my head, throughout their executive suites, that are pushing us to re-engine,” Piasecki said. “Right now, there is so much demand for the 737 and 777 that our primary focus, after delivering the 787 and 747-8, is getting production up.”
The 737 is Boeing’s “bread and butter,” in Piasecki’s words. The company needs the jet’s steady revenue stream to fund other projects, especially amid the 787’s three-year setback.
Boeing will decide “within the next several months” on what to do with both the 737 and the 777, which will be threatened by Airbus’s A350, Jim Albaugh, president of the company’s commercial-airplanes unit, said at an American Bar Association conference on Oct. 27.
‘What’s the Rush?’
“I suspect Boeing will look to a 777 replacement first, rather than the still strong-selling 737,” said Doug Runte, managing director at Piper Jaffray & Co. in New York.
“If this thing is going gangbusters, and people love the airplane, and they can pump out 35 a month with their eyes closed, what’s the rush to re-engine or replace it?” Runte said. “I don’t see it.”
Airbus parent European Aeronautic Defence & Space Co. fell 13 cents to 18.03 euros in Paris trading and has gained 28 percent this year. Boeing, which dropped 11 percent last week, rose 52 cents to $63.61 at 4:01 p.m. in New York Stock Exchange composite trading. The U.S. company’s shares have increased 18 percent this year.
Robert Stallard, an analyst at RBC Capital Markets in New York, said in a report today that Boeing shareholders shouldn’t overreact to the 787 fire and recommended buying the stock.
“The major driver of the Boeing stock price is the aerospace cycle,” he wrote. “With this end market still robust, we think the outlook for new orders in encouraging, and build rates are set to go higher.”
Airlines are expanding as the economy recovers and are placing orders for single-aisle jets now to reserve production slots, which are sold out for the next two to three years, said Howard Rubel, an analyst at Jefferies & Co. in New York. Some have contracts to let them switch to a new engine, if one ends up being offered, he said.
“There are a few airlines holding out to wait and see how this all plays out,” Rubel said. “The market is still growing faster than anybody can meet it. The things that work are selling.”
Airbus’s Jones said the indecision hasn’t hurt A320 sales, because it’s a matter of resource management, not credibility. He spoke in an interview Nov. 3, a day before the company narrowed Boeing’s lead by selling 50 A320s to Chinese airlines.
“We’re not done with the year yet,” he said.
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