A Sudden Updraft for Boeing and Airbus
By Stanley Holmes
Commercial jetmakers Boeing and Airbus are quietly ramping up production of their commercial airplane factories –- a strong signal that deliveries are picking up faster than expected. Demand for single-aisle Boeing (BA ) 737s and Airbus A320s is so strong that the two jetmakers could each produce 100 more airplanes in 2006 than what current forecasts show, analysts say.
Discounters such as Ryanair (RYAAY ) in Dublin, WestJet in Calgary, GOL Airlines (GOL ) in Brazil, EasyJet in London, Air Tran (AAI ), Virgin Blue, and Air Europa have either placed new 737 or A320 orders this year or have backlogs of existing orders, sources say. Some big carriers, such as Qantas and Continental Airlines, have also ordered new narrow-bodies or want their planes sooner. Finally, the two giant leasing companies -– International Lease Finance in Los Angeles and GE Capital -– are also burning through their backlog of existing 737 and A320 orders to fill the rising demand.
This unexpected appetite for smaller airplanes underscores the strength of the discount-airline model. While some of the world's largest full-service carriers such as Chicago-based United Airlines and Atlanta-based Delta Air Lines (DAL ) continue to struggle financially, low-fare outfits such as Dallas-based Southwest Airlines (LUV ) and New York-based JetBlue (JBLU ) continue expand their fleets. Even though Boeing and Airbus are building big new twin-aisle jetliners –- the 7e7 and A380, respectively –- the most popular and profitable part of their businesses continues to be smaller jets.
Most analysts had been predicting that airplane orders would pick up in 2005, followed by a sharp production hike in 2006. What makes these moves by Boeing and Airbus interesting is that both jetmakers have more than 2,500 existing orders between them that airlines had delayed because of the September 11 attacks and the recession.
Now, airlines that had previously delayed orders are pressing both companies to speed up production. Most of these carriers follow the low-cost model pioneered by Southwest. At a June 16 analyst conference, Southwest CEO James Parker said his company will grow about 8% in the third quarter, 10% in the fourth, and 10% next year. Record passenger-load factors in March, April, and May exceeded 70%, Parker said, adding that the combination of high loads and yields "has produced positive total unit revenue trends." Southwest Chief Financial Officer Gary Kelly said the carrier will expand the fleet by a net 29 aircraft this year and 29 next year.
Low-cost carriers typically buy one airplane type –- either Boeing's 737 or Airbus' A320. These jets can seat between 120 to nearly 200 passengers depending on the model size, but they share common cockpits and maintenance procedures that help keep operating costs as low as possible. JetBlue, which buys Airbus A320, recently converted 30 options into new airplane orders. JetBlue officials say they continue to see strong demand and have increased capacity 43% in the first five months of this year.
"Unless the world ends again, this is further confirmation that the airline recovery is gaining momentum," says Jim Beyer editor of Avmark, an aviation-industry newsletter. "The discount airlines want these airplanes now." By Stanley Holmes
"A CYCLICAL RECOVERY."
It appears that Boeing and Airbus will try to meet this unexpected demand sooner than later. It's likely they'll start raising production rates on their narrow-body airplanes late this year or early next. That would lead to higher-than-expected deliveries in 2005 and 2006. "We believe Airbus and Boeing will increase production of narrow-body aircraft by 40 to 60 aircraft (20 to 30 each) in '05 with even more increases in '06," writes Lehman Brothers aerospace analyst Joseph Campbell in a June 29 research report. "We also believe our '04 delivery estimates are low by a handful of aircraft."
A Boeing spokesman in Seattle said on June 28 that the company will deliver 285 planes in 2004 and has no plans to raise production rates this year. But in April, Boeing increased its 2005 forecast to 300 deliveries from 285, citing the stronger demand for its 737s. And an exec said on June 30 that business is starting to pick up. "We're seeing a cyclical recovery, no doubt about it," said Drew Magill, Boeing's director of market analysis. "The recovery typically picks up with smaller airplanes first and then continues with larger airplanes."
Airbus Chief Executive Noel Forgeard said earlier this month Airbus would boost production of its A320 line by 20% in 2005. An Airbus spokeswoman in Washington, D.C. said the company could increase rates even higher, but has made no further or more specific production rate predictions or announcements and has no plans to do so at this time.
Signs of a bigger recovery are evident at the airplane factories, too. Inside Boeing's cavernous Renton (Wash.) factory just south of Seattle -- where machinists assemble the popular 737 -- the company is improving the flow of its new moving line so it can handle higher production rates in the near future. It's adding a new station to give the "737 more staging areas to avoid bottlenecks," says one veteran factory worker with direct knowledge of the line upgrade.
Company officials are contemplating building two more moving lines –- one for additional commercial work and the other for the Navy version of the 737. Small numbers of hourly workers from the 767 airplane program at Boeing's Everett plant are being quietly sent to Renton to do "odd jobs" for the next few months. Says one longtime Boeing worker: "They only do that if there's going to be work in three months. Otherwise, they would lay them off."
Boeing officials have been telling workers and suppliers that 737 production rates soon will be going up. It's making about 16 737 airplanes a month and plans to deliver about 200 this year, according to Boeing's forecast. By yearend, the production rate should jump to 19 jets a month, say people familiar with the matter. "Boeing is expected to raise its 737 production rate by 50%," says Avmark's Beyer. "That should happen in 2005."
Next year, Boeing could boost narrow-body jet production to 25 or even 28 a month, depending on demand. But spokesman Todd Blecher says that number is too high, though he declined to be more specific. According to Lehman's Campbell, Boeing could make an additional 65 737s from 2004 to 2006. None of those planes are included in Boeing's current forecast. At a list price of $40 million per plane, that could bring in an additional $2.6 billion in revenue over the three years.
For Airbus, Campbell predicts the jetmaker will increase A320 output by 45 airplanes, from 2005 to 2006. Airbus is now running at about 20 A320s a month, and its current plans call for 223 A320 aircraft in the 2005-06 period. The company has the capacity to boost production rates to 25 aircraft a month or perhaps as high as 28, with minimal spending, Campbell says. At a list price of $45 million each, the additional 45 aircraft could raise revenue estimates by about $1.6 billion.
Another crucial factor favoring higher narrow-body production rates: Only a handful of 737s and A320s are among the planes the jetmakers parked and warehoused post-September 11, compared to numerous older 737 classics and McDonnell-Douglas' MD-80s and MD-90s. Low-cost carriers and recent startups have preferred buying new planes, rather than shopping for used jets to save money. "In the past, low-cost carriers and startups would grow with used airplanes," Boeing's Magill says. "We're seeing more of the upstarts demand new airplanes because they're more efficient and productive."
It's still early in the recovery. And certainly, high fuel prices and another terrorist attack could cause a setback. But for now, it appears Boeing and Airbus may be poised for some unexpected lift.
Holmes is a correspondent in BusinessWeek's Seattle bureau
Edited by Douglas Harbrecht