Bloomberg News

Boeing’s Air-Show Comeback May Be Tempered by Soft Economy

July 05, 2012

Boeing’s Air-Show Comeback Seen Tempered by Faltering Economies

A computer rendering of Boeing 737 MAX aircraft. Source: Boeing via Bloomberg

Boeing Co. (BA:US)’s chance to eclipse Airbus SAS (EAD) at the industry’s largest air show next week risks being overshadowed by a faltering economy and its European rival setting up a manufacturing hub in the U.S.

Orders at the expo starting July 9 in Farnborough, England, probably will trail the 441 announced jet purchases valued at $46.4 billion at the 2011 show as demand wilts amid Europe’s debt crisis and a Chinese slowdown. That’s the backdrop for Boeing to peddle its new 737 MAX after Airbus’s A320Neo dominated last year’s event in Paris.

“Boeing will want to come up with some big orders for the MAX, but I doubt they’ll be able to duplicate the Neo’s success last year,” said Adam Pilarski, senior vice president at consultant Avitas in Chantilly, Virginia. “The market is in a different position now. We’re in a bubble environment, and people may be beginning to realize that, so there may not be as much crazy buying as last year.”

Planemakers’ parity in single-aisle jets, the most widely flown models, tipped in Airbus’s favor in June 2011 in Paris, where the Neo won 95 percent of such orders. Boeing rushed so quickly to counter with the MAX that its board (BA:US) hadn’t even approved the plane when the first sale was announced in July.

Product Portfolio

Having the MAX gives Chicago-based Boeing three jets to trumpet this year that weren’t in its Paris lineup or were still mired in years of delivery delays. The MAX succeeds the 737 Next Generation, and the 787 Dreamliner and 747-8 jumbo jet have now both been handed over to customers.

“Boeing is heading into this year’s show with a much healthier product portfolio,” said Yair Reiner, an analyst with Oppenheimer & Co. in New York. “Last year, it had to do battle with a 737 NG that was long in the tooth versus the A320Neo.”

Airbus’s latest move in the Neo-versus-MAX contest came this week with the decision to build a factory in Alabama, its first in the U.S., to assemble A320s. The Toulouse, France-based planemaker has only 20 percent of the North American narrow-body market and seeks to give its jets a local flavor.

Replicating 2011’s air-show order success isn’t in the cards, Airbus has said, as the pace of Neo purchases slows. The planemaker also is still struggling to convince buyers such as Qatar Airways Ltd. that the largest variant of its A350 wide- body can take on Boeing’s 777.

Not Saving Up

Boeing is also playing down the significance of headline- grabbing orders at the event, saying Farnborough is rather an opportunity to connect with customers and suppliers.

“We don’t save things up for the air show,” said Randy Tinseth, Boeing’s vice president of marketing. “That’s just one week in 52.”

Airbus parent European Aeronautic, Defence & Space Co. has gained 66 percent since the end of 2010, when the company introduced the A320Neo. Boeing, by contrast, has gained 14 percent in the same period.

The shows in Farnborough and Paris are held in alternate years, forming the industry’s highest-profile showcase for planemakers, their customers and suppliers. Boeing will add its 787 Dreamliner to the daily flight display, vying for attention with Airbus’s A380 double decker. Airbus said today that it pulled the A400M military transport from the daily display because of issues with the engine gearbox.

Slowing Growth

The event marks a premiere for Ray Conner, who was Boeing’s sales chief until he replaced Jim Albaugh as president of Seattle-based Boeing Commercial Airplanes on June 27. Airbus has also shuffled management, with Tom Enders moving up to lead EADS, and Fabrice Bregier, Airbus’s former chief operating officer, succeeding him at the planemaker.

Conner won’t have the Neo’s 2011 economic tailwind. Boeing predicted on July 3 that growth in industry deliveries will slow in the next 20 years as demand wanes for jumbo jets and freighters, with the global fleet expanding at less than a fifth of the rate predicted in 2011. Boeing made the prediction as part of its annual 20-year forecast.

“In good times, when airlines are feeling buoyant, they rush to order planes,” said Zafar Khan, an analyst at SG Securities in London. “That may not be the case in the current economic climate.”

Global air traffic grew 5.6 percent in May, the smallest gain since January, the International Air Transport Association said July 2. Cargo traffic, which tracks the economy more closely than passenger travel, was down 1.9 percent this year through the first five months.

Gaining Market Share

Freighters make up almost two-thirds of the backlog of 86 planes for Boeing’s 747-8, which hasn’t won an order this year after sales of only seven in 2011. And until FedEx Corp. (FDX:US) agreed June 29 to buy 19 Boeing 767 cargo planes, the U.S. company had gone six months without a freighter order.

Wide-body models such as Boeing’s 767 and Airbus’s A380 haven’t been a source of strength this year. Net orders for Boeing among its 747-8, 767, 777 and 787 totaled only 12 planes through June 26, according to the planemaker’s website. Airbus’s tally for twin-aisle and jumbo jets was 10 twin-aisle jets until the end of May, the most recent month available.

“We shouldn’t be in an order race for Farnborough,” said Airbus sales chief John Leahy in an interview July 2. “The real contest should be measured over 24 month.”

Retaining Dominance

Leahy said Airbus’s goal is to have 60 percent of the world market for single-aisle planes within the next few years, with Boeing having 40 percent. Tinseth predicted Boeing’s 737 MAX model, revamped with new engines, will be good enough to keep market-share parity with Airbus’s A320Neo.

Boeing will probably retain 60 percent of the wide-body market given the success of its 777 and 787 models, until Airbus gets its A350-1000 into service, Leahy said. That plane is scheduled to enter service in 2017.

Military sales won’t provide much of an industry lift this year either, as cuts to the U.S. defense budget, the world’s largest, threaten to overwhelm any boost from governments buying new hardware.

Northrop Grumman Corp. (NOC:US), the contractor whose products include the B-2 bomber, isn’t sending top executives to Farnborough, which is 38 miles (61 kilometers) southwest of downtown London. Honeywell International Inc. (HON:US), the avionics and parts supplier, is also sitting out the event.

Even if new sales lag, the planemakers are busy filling their existing orders, said Alex Hamilton, an EarlyBird Capital analyst in New York. Boeing is boosting output by 40 percent in three years to cut a 3,953-plane backlog. Airbus will increase production 13 percent over two years as it tackles a backlog of 4,341 planes.

Playing Catch-Up

“I don’t have many expectations because we’re at or near a peak in terms of orders,” Hamilton said. “Look at the backlog of Boeing and Airbus. They have more than they can handle right now.”

With 451 orders, the MAX is playing catch-up to the Neo, which has amassed 1,425 orders since its unveiling in December 2010. Boeing disclosed its intent to build the MAX in July, as the company rushed to share a 460-plane order with AMR Corp. (AAMRQ:US)’s American Airlines.

“The 737 MAX was our move, our decision to position ourselves to split the future single-aisle aircraft” market, Nicole Piasecki, Boeing vice president of business development, said last month in a presentation to reporters.

Boeing has said it expects orders of 1,000 planes this year, which would mark the first time it outsells Airbus since 2008. Airbus has forecast orders of 650 planes.

Higher Orders

“The expectation clearly is that Boeing is going to see higher orders relative to Airbus this year with the 737 MAX,” said Chris Wolters, a managing director at Epoch Investment Partners in New York, which owns Boeing shares.

Order announcements at the show typically cap months of talks. The question in Farnborough will be how many buyers consummate those deals amid a slowing global economy.

“Clearly the show is going to be a lot more challenging than it would have been under a healthier macro-economic condition,” Oppenheimer’s Reiner said. “When all of a sudden you begin to think that global growth is going to be a percent or two lower over a multiple-year period, you suddenly need a lot fewer planes several years out.”

To contact the reporters on this story: Thomas Black in Dallas at tblack@bloomberg.net; Andrea Rothman in Toulouse at aerothman@bloomberg.net

To contact the editors responsible for this story: Ed Dufner at edufner@bloomberg.net; Benedikt Kammel at bkammel@bloomberg.net


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