Sure, airplane jet orders are booming — but can airlines pay for it?
MetalMiner covered the aerospace market and its impact on metals demand last summer, when major OEM Boeing forecast booming airplane demand in the next several decades. Now, it looks as though the state of the economy and its effect on airlines’ orders may be at odds with Boeing and Airbus’ lofty outlooks and production goals.
More recently, last November, my colleague Stuart wrote about India, Japan and Brazil’s proactive moves to secure product. In addition, “the governments of Qatar, Oman, South Korea, Denmark, Switzerland, Turkey, Romania, Malaysia and Bulgaria…are all also reportedly considering acquiring aircraft. So on both the civilian and military aerospace front, Boeing, Lockheed Martin and European consortium EADS/Airbus, not to mention their component and subcontractor supply chains, are likely to remain busy well into the middle of the decade meeting the demand.”
If we’re to take some of the most recent reporting on the topic to heart, it’s already happening. According to Industry Week, Boeing forecasts global demand for 33,500 new commercial jets over the next 20 years, while Airbus sees the need for 27,800 new jets over the same time period. (Crain’s Chicago Business noted that Boeing alone “has orders from 60 customers for 873” of the recently-FAA-approved 787 with GE engines.)
However, this boom, while initially good for the business of the OEMs’ Tier 1 suppliers, such as Florida-based B/E Aerospace and Iowa-based Rockwell Collins Inc., will inevitably strain the supply chain.
The IW article quotes the US aerospace and defense leader for PWC, Scott Thompson, as saying that Boeing and Airbus have eight years of backlog; after analyzing the OEMs’ suppliers’ “operational” and “financial” readiness, a recent PWC report found that 21 percent of suppliers face a high risk of falling behind on the demand — in no small part due to the fact that the OEMs have moved much of the design and manufacturing work onto the suppliers’ shoulders.
A lot of this jet production ramp-up is due to overbooking, according to Henri Courpron, chief executive of International Lease Finance Corp., whose firm leases aircraft for certain carriers, as quoted in the Wall Street Journal. OEMs overbook because they know not all aircraft that are ordered will be delivered. The CEO of aircraft lessor AWAS was also quoted as saying that he thinks plane builders “are trending production rates too high, temporarily.”
The most telling passage of the WSJ article may be this:
“Addressing the recent spate of big orders of 100 to 400 airplanes by individual carriers, Mr. Courpron joked that they are ‘proof that there are still a number of egos running airlines around the world.’”
But can those egos put their money where their mouth — er, order slips — are? Find out in Part Two.