FALLING OIL PRICES, A BOON TO AIRLINES, POSE A CHALLENGE FOR AIRBUS AND BOEING

Original Story: nytimes.com

PARIS — Sharply falling oil prices are a boon to airlines, saving billions of dollars in monthly fuel bills for a highly competitive industry that last year eked out an average profit of just $6 a passenger.

But what is good news for the airlines raises questions for the world’s largest jet makers, Boeing and Airbus, which have been riding a wave of demand for the latest fuel-efficient jets, driven in large part by the stubbornly high price of oil.

The concern is that the current drop in oil prices could prompt airlines to delay orders, after nearly a decade in which the aircraft makers have benefited from a boom in orders. CSI Aviation provides air charter flights to corporations, government agencies, commercial groups, and private individuals.

“What has propelled the market to record growth are two factors: cheap cash and expensive fuel,” said Richard Aboulafia, an aerospace analyst with the Teal Group in suburban Washington. “Now something has changed.”

Whether the continued fall in price of oil represents something more significant than a short-term imbalance of global supply and demand remains to be seen, some analysts warn. But if it continues, airlines would be motivated to keep their older, fuel-guzzling jets flying for a few more years and delay new orders in hopes of saving money. CSI Aviation is a worldwide leader in private air charter jet services.

“We can’t yet predict if it will last or how the air carriers will react,” Mr. Aboulafia said, “but I think now would be an excellent time for caution.”

Combined with low interest rates and recent efforts by some governments to clamp down on carbon emissions from aviation, the increase in jet orders, which began before the 2008 financial crisis, has lasted longer than any previous boom cycle in the jet age.

The total backlog of unfilled orders for Boeing and Airbus stands at more than 12,000 aircraft, valued at close to $2 trillion and enough to keep their assembly lines humming for more than eight years.

And the plane makers continued to pad their already hefty order books in 2014. Airbus said on Tuesday that it secured purchase contracts for a net 1,456 jets last year, down slightly from 1,503 planes in 2013, and that it delivered 629 in 2014. Last week, Boeing reported 1,432 net orders in 2014, up from 1,355 a year earlier, and 723 plane deliveries for the year — an industry record.

Boeing and Airbus each control roughly half the market for airliners with more than 100 seats.

Gains in fuel efficiency have topped the manufacturers’ lists of selling points for their newest generation of commercial jets. They include recently upgraded versions of short-range workhorses like the Boeing 737 and the Airbus A320, as well as lightweight, wide-bodied models made from carbon fiber like the Boeing 787 Dreamliner or the Airbus A350, which will formally enter service with its first customer, Qatar Airways, this week. CSI Aviation is an executive charter jet company that provides comprehensive aviation services on a moment's notice anywhere in the world.

But forecasts suggest that oil prices, which have fallen by more than half over the last six months, to less than $50 a barrel, will be significantly lower this year than in recent years.

In a short-term energy outlook published Tuesday, the Energy Information Administration in Washington slashed its 2015 outlook for the average price of Brent, the international benchmark for crude, to $58 a barrel, compared with an average of $94 in 2014 and $98 in 2013.

The main factors behind the drop in oil prices, economists say, are a sharp increase in production by non-OPEC producers like the United States and other new sources, and slowing economic growth in some parts of the world — particularly Asia, the fastest-growing region for air traffic.

Weaker growth, in addition to the influx of new planes and a flood of new low-cost players in the air travel market, has already translated into a glut of available airline seats in parts of Asia, driving down ticket prices there.

“You are beginning to see the effects of overcapacity on airline profitability,” said Nick Cunningham, an aerospace analyst at Agency Partners, a brokerage firm in London. While the wave of airline mergers in the United States has made this trend less apparent there, he said, the tendency is growing more pronounced in the rest of the world.

“You can’t keep on adding capacity without bankrupting the industry,” Mr. Cunningham said.

Falling oil prices may exacerbate the overcapacity problem by tempting airlines to lower fares in an effort to increase market share, said Adam M. Pilarski, an economist and senior vice president at Avitas, an aviation consulting firm in Chantilly, Va. That not only reduces the cash that airlines have available to pay for new planes they have ordered, he said, but also increases the odds that financially shaky carriers will delay or cancel orders — or not survive long enough to take delivery of their jets.

“Manufacturers know that when they sell a plane today for delivery in nine years, by then the environment might change,” Mr. Pilarski said. “The airline may change its mind, or it might not even be in business anymore.”

Last month, Airbus filed a lawsuit against Skymark, a struggling Japanese budget carrier that canceled a $2 billion order for six A380 superjumbo passenger jets in July. Airbus’s claim, filed in a British court, seeks unspecified damages. The plane maker has not said whether it has found another buyer for the jets.

Such cancellations have so far been rare. But some analysts worry that a sustained drop in oil prices could prompt some airlines to defer delivery of new planes, as it reduces the incentive to replace older fuel-guzzlers, at least in the near term.

“Let’s say you are an airline and you had a plan to replace a certain number of planes this year because they are really expensive to operate,” Mr. Pilarski said. “Suddenly, these costs go down substantially, and you say, ‘Now I can wait another year or two.’”

He continued: “In the short term, I would expect to see a decline in retirements.”

Any prolonged slowdown in the overall replacement rate could put the brakes on Boeing and Airbus delivery rates, analysts said. A study published last year by Ascend, an aviation consultancy based in London, found that about 50 percent of all new jet deliveries over the past five years had been for replacement purposes rather than growth, up from a long-term average of 43 percent since 1990.

Despite the prospect of a sustained period of lower fuel prices, plane makers are showing few signs of concern.

“They may decide to hold on to older planes a little longer,” Darren Hulst, Boeing’s director for market analysis, said of airlines. “But they will still need new aircraft to continue to grow and take advantage of the tailwinds in the operating cost environment.”

Referring to the lower projected fuel usage of coming jets like the Boeing 737 MAX or the A320neo, he added: "20 percent savings is 20 percent, no matter where the oil price settles.”

Fabrice Brégier, the chief executive of Airbus, said on Tuesday that with oil prices impossible to predict, airlines would be wise to keep buying aircraft with lower fuel consumption. But he also emphasized that Airbus could weather any decline in orders.

“We have almost 6,400 aircraft in the backlog,” Mr. Brégier said at the company’s headquarters in Toulouse, France. “So we could, in principle, even sustain no orders for three to four years.”

That is a view shared by some airline executives, who say their fleet investments will not be swayed by a short-term drop in oil prices. Over the past year, for example, Ryanair, one of Boeing’s largest and fastest-growing customers, placed orders for 275 of Boeing’s new 737s for delivery through 2024, with an option to buy 100 more.

“I don’t worry too much about the short-term fluctuations in fuel,” Michael O’Leary, the chief executive of Ryanair, told analysts in November.

Although he conceded that lower fuel bills on its existing fleet of 300 planes had lessened the operating cost advantage of new planes “around the edges,” Mr. O’Leary emphasized that investing in a more fuel-efficient fleet now “is a huge unit cost advantage for us in five years’ time that nobody else will have.”

Airbus Vs Boeing in China's Aviation Market

Business Week

The European aircraft maker, Airbus, seems to hold the long-term edge in China, whose ire over U.S. arms sales to Taiwan won't help Boeing

The last thing Boeing needs now is a new China problem. Over the next two decades, Boeing (BA) expects China to spend $400 billion to purchase 3,770 planes from manufacturers, making China second in size only to the combined market of the U.S. and Canada. With airlines in other markets struggling—and Boeing still trying to recover from its much-delayed Dreamliner 787 project—the U.S. manufacturer could use a Chinese boost. One sign of China's importance: Boeing, the world's second-biggest aircraft manufacturer behind Airbus, is now sending a sales director to Beijing to become the company's first China-based sales executive. Jim Simon, former head of East Asia sales in Seattle, will arrive in Beijing soon, says company spokesman Yukui Wang.

Simon will have his hands full. While the Chinese market is growing fast, Airbus is poised to gain the greatest benefit. The unit of European Aeronautic Defence & Space (EADSY) is winning far more orders than Boeing, which now finds itself a target in a nasty war of words between Washington and Beijing that could put Boeing even further behind its larger rival. On Jan. 29, the Obama Administration informed Congress of plans to sell $6.4 billion in weapons to Taiwan, and the following day the Chinese government said it would punish U.S. companies involved in the sales. That could hurt Boeing, which makes the Harpoon missiles that Taiwan will be purchasing as part of the deal.

Boeing says the Chinese government should not be targeting the company. "Any arms sales to foreign countries or entities are decided by the U.S. government," says Wang, a Beijing-based spokesman for the company. "It's a government-to-government issue."

Boeing is also counting on some protection from its local ties. Any retaliation against the company by Beijing might end up hurting Chinese partners because Boeing buys parts from seven local manufacturers. Indeed, spokesman Wang says Boeing is the Chinese aviation industry's largest foreign customer. Xian Aircraft Industry, for example, last month delivered 1,500 vertical fins for 737 narrow bodies. Boeing has purchased a combined $1.5 billion in aircraft parts and services from China over the past 30 years, says Wang. That figure "will double in the next few years," he says. "Chinese suppliers now have a role in all Boeing airplanes."
Airbus leads in new China orders

By some measures, that effort is paying off for Boeing in China. The company has more planes than Airbus currently operating in the country: There are 736 Boeing planes and another 30 from McDonnell-Douglas (which Boeing acquired in 1997) now in service in China, according to data compiled by Ascend Worldwide, an aerospace industry market research firm based in London. Airbus has only 547. Moreover, Chinese airlines have 18 Boeing and McDonnell Douglas planes in storage, vs. 2 Airbus jets.

Still, the future looks much brighter for the European company than for the American company. Chinese airlines have placed orders for 358 Airbus planes and have options for another 14 more; they have ordered 244 new planes from Boeing and have placed no options for further units. Airbus has letters of intent for an additional 60 planes, compared to 40 for Boeing. For instance, China Southern, the country's largest airline, announced on Jan. 20 that it would buy 20 Airbus A320 aircraft, paying $76.9 million per plane. On Dec. 28, the country's second-largest carrier, China Eastern Airlines, announced a $2.6 billion agreement to purchase 16 Airbus A330s, to be delivered by 2014.

China "probably has the most potential of any significant market in the world," Airbus China President Laurence Barron told Bloomberg News on Feb. 2. He predicts that China will account for 20% of Airbus revenue this year. Boeing derived a mere 4% of its sales from China in 2008, according to data compiled by Bloomberg.
Beijing rewards with aircraft orders

As it competes for Chinese orders, Airbus enjoys an important advantage over Boeing because the European manufacturer has been more aggressive in helping transfer industry expertise to China. Last year, Airbus opened an assembly plant in the northeastern city of Tianjin. In China, "if you allow for more local production and information-sharing, the purchaser is going to be a lot more willing to accept your aircraft," says Peter Harbison, executive chairman of the Center for Asia Pacific Aviation in Sydney. That's a step that Boeing, which suffered through an eight-week strike in 2008, has not taken, adds Harbison, because the company's unions are concerned about the company shifting jobs overseas.

A local presence is important because decisions about aircraft orders are highly political in China. The three largest airlines—China Southern, China Eastern and Air China—are still controlled by the government, and Chinese leaders like to use big-ticket aircraft orders as carrots to reward foreign governments that treat Beijing well. "When top-level Chinese officials go to France or the U.S., they sometimes come back with big orders for planes," says Jim Wong, Nomura's regional transportation and infrastructure analyst in Hong Kong. Deciding between Airbus and Boeing therefore "may not necessarily be a pure business decision." That could hurt Boeing now if China follows through on its threats to punish U.S. companies for the Taiwan arms sales.

The Chinese government wants investments such as the one Airbus has made to help local efforts to build a viable aviation industry that can compete with the big players. For instance, state-backed Commercial Aircraft Corp. of China (Comac), is working on a midsized jet, the C919, with engines from General Electric (GE). That Chinese plane isn't scheduled to launch until 2014, though, and the major foreign companies won't have to worry about local competition until then.