Paris Air Show: Not Much of a Party

The mood is grim as global aerospace leaders gather for the June 15 opening of the Paris Air Show. And the scarcity of new orders is the least of their worries.

With passenger traffic worldwide expected to decline 8% this year, aircraft buyers are canceling or delaying orders, forcing airplane makers and their suppliers to curtail production and furlough workers. The cutbacks affect nearly every sector of the business, from small private planes to corporate and commuter jets, to the big Boeing (BA) and Airbus (EAD.PA) widebodies flown on international routes.

Things probably won't start to improve before 2011, says Randy Tinseth, vice-president for marketing at Boeing's commercial airplane unit. "There are fewer planes flying now than a year ago," Tinseth said at a Paris briefing, calling the situation "the most difficult we've seen in years."

Adding to the gloom are costly production delays on aircraft, including Boeing's 787 Dreamliner and the A400M military transport plane that its European rival Airbus is building. All this, while three major players in French aviation are dealing with tragedy: the still unexplained May 31 crash of an Airbus A330, killing all 228 people aboard, on an Air France (AIRF.PA) flight from Rio de Janeiro to Paris. Airspeed sensors known as pitot tubes, made by French defense electronic group Thales (TCFP.PA), have been identified as a possible factor in the accident.

Cancellations Galore

As the air show opens, Airbus is slightly ahead of Boeing on orders for the year. Since Jan. 1, the European planemaker has booked a net total of 11 orders, after 21 were canceled. Boeing has netted only 7, after 66 cancellations, including 45 cancellations of the forthcoming 787.

The numbers are paltry—but racing to win more business could be risky. Any airlines shopping now—such as United Airlines (UAUA) is reportedly doing—are likely to demand rock-bottom prices. "The game is no longer about orders; it's about backlog management and program execution," says Richard Aboulafia, an aerospace analyst with Fairfax (Va.)-based Teal Group.

Indeed, both Airbus and Boeing look vulnerable to further erosion of their current order books. At least two customers of Airbus' A380 mega-jet—Thai Airways and U.S.-based International Lease Finance Corp. (ILFC)—have said they are thinking about canceling orders for the plane, while the A380's biggest customer, Emirates Airline, has said it may delay some of its order.

That could cut deeply into the 200-plane order book for the double-decker, making it even harder for Airbus to sell the more than 420 it will need to break even on the plane, which cost more than $15 billion to develop.

Production-Delay Damage

Another potential money pit for Airbus is the A400M, being developed for European military customers. Mired in production delays, it has already cost Airbus parent European Aeronautics Defence & Space more than $3 billion in writedowns. On June 11 the A400M suffered another blow when the French and German governments said they wouldn't decide for another six months whether to proceed with the project. Because the A400 has missed production deadlines, customers have the right to cancel, which would force EADS to absorb billions in additional costs.

Boeing, meanwhile, faces ongoing problems with its new 787, which is already two years behind schedule. The company says the all-composite plane will make its first test flight before the end of June and will enter service in 2010. But buyers, including ILFC, the plane's biggest customer with 74 on order, are warning that the first 787s to roll off the assembly line will be overweight and won't deliver promised fuel efficiencies, a key selling point. "In the long run, this will be an excellent aircraft, but I pity the airlines that get the first ones," ILFC chief Steven Udvar-Hazy told an industry conference in March.

As tough as things are for Boeing and Airbus, they're far worse for manufacturers of smaller planes. The market for private jets is so abysmal that the two biggest U.S. manufacturers, Cessna (TXT) and Gulfstream (GD), are skipping the Paris Air Show entirely this year.

A Turn to Turboprops

Brazil's Embraer (ERJ), a manufacturer of regional and corporate jets, has seen its order backlog shrink from more than 500 last year to 393 at the end of March 2009, as customers canceled or deferred orders. The backlog of its Canadian rival, Bombardier (BBDB.TO), fell by about 50 planes during the same period. Besides the broader industry slump, the regional jet business has suffered from high oil prices in recent years, as some carriers have opted to switch to turboprop planes that are more fuel-efficient than jets.

It adds up to an unusually subdued celebration of the air show's 100th anniversary this year. But the aviation business has been through brutal downturns before, most recently in 2001 when air travel plummeted 12% after the September 11 terrorist attacks. As in past downturns, it took about three years to recover—but soon enough, growth was soaring again.

Boeing, releasing its 20-year market forecast on the eve of the show, predicts air travel will average 4.9% growth over the next two decades, not much less than the average 5.3% over the past 30 years. Says Boeing's Tinseth: "One thing we know about this industry: It's resilient."

For a look at the spirited 40-year rivalry between Boeing and Airbus, see our slide show.

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