Global Economics

At Air Show, the Worry: Too Many Planes?


As airlines cut back on services and lay off thousands, planemakers such as Airbus and Boeing are sitting on a record backlog of orders

International air shows, with their flashy aerial displays and throngs of onlookers, are a time-honored venue for airlines and aircraft makers to announce lucrative new orders. But the big question at this year's Farnborough Airshow, which opens July 14 near London, isn't how many new planes will be sold—it's whether airlines are really going to buy the ones they've already ordered.

The airline industry is in crisis, battered by record-high fuel prices and economic malaise. Airlines worldwide are expected to lose at least $6 billion this year. Already, many are curtailing services and laying off thousands of workers.

It doesn't sound like a good time to be splashing out billions on new planes. Yet Boeing (BA) and European rival Airbus (EAD.PA) are sitting on a record backlog of orders—some 7,300 commercial jets—while Canada's Bombardier (BBDB.TO) and Brazil's Embraer (ERJ) have between them bookings for 700 smaller regional jets. Aggressive carriers, ranging from Dubai's Emirates Airline to European discounter Air Berlin (AB1.DE), have ordered enough planes to more than double their fleets in less than five years.

How can they afford so many aircraft? So far, no airlines have announced major cancellations or delays. Tim Clark, Emirates' bullish president, says he still plans to take delivery of an average of two widebody jets a month for the next five years—including the airline's first Airbus A380 double-decker, set to begin New York-Dubai service on Aug. 1 (BusinessWeek.com, 7/11/08). Just last week, Hong Kong-based Cathay Pacific, which has 45 widebodies on order from Boeing and Airbus, reaffirmed its plans for rapid expansion.

Orders Deferred?

But some other orders look less certain. "There are about 2,000 too many aircraft in the backlog at the moment," says Chris Tarry, an independent British aviation consultant. "A number of orders are clearly going to be modified or deferred."

The biggest risk of cancellation doesn't come from the U.S., where most airlines have been too financially strapped in recent years to invest in upgrading their fleets (BusinessWeek.com, 6/2/08). Of 2,880 planes ordered last year from Boeing and Airbus, only 210 were from U.S. carriers. Middle Eastern airlines, by contrast, ordered 406 planes, while Asia-Pacific carriers ordered more than 600.

Which orders could be at risk? Analysts point to India, where airlines are expected to lose a jaw-dropping $2 billion this year (BusinessWeek.com, 7/7/08). Two of the country's biggest airlines, Air India and Jet Airways (JET.BO)—which together have 80 planes on order from Boeing—each are losing about $2 million a day. "It's very possible" that some of those planes will never be delivered, says analyst Peter Harbison of the Sydney-based Center for Asia Pacific Aviation.

Another Asian carrier that may have overreached is Malaysian discounter AirAsia (AIRA.KL), which has more than 130 Airbus A320s on order. Its shares have plummeted more than 70% in the past year, as investors fret over its exposure to soaring fuel prices.

Raising Doubts

In Europe, the region's No. 3 discount carrier, Air Berlin, recently issued a profit warning and has announced plans to reduce its fleet, raising doubts about its outstanding order for 110 Boeing 737s.

But many airlines are likely to stick to their order plans despite the economic turbulence. Some, such as Russian regional airline S7—which has ordered 40 Boeing and Airbus planes—are desperate to replace their fuel-guzzling Soviet-era planes with more-efficient models. Others figure that new planes will help them grab market share from weakened rivals. Still others simply want to avoid the penalties they'd have to pay Airbus and Boeing if they canceled or deferred orders.

And some airlines will go right on ordering new planes. One likely buyer: Abu Dhabi carrier Etihad, which has reserved a conference room at Farnborough for a major announcement on July 14. The show, after all, must go on.

Click here to see the slide show.

Matlack is BusinessWeek's Paris bureau chief.

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