United in the Market for 150 Wide Bodied Jets

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The aerospace market is all a buzz with United’s widely touted order for 150 new wide bodied aircraft which may yet turn out to be a lot of buzz about nothing. The company hasn’t actually placed an order yet. In fact, they haven’t even decided on what they want. They have essentially put out feelers to see what kind of deal could be done in today’s market, and there’s the rub – today’s market while keen to book new orders is strapped for finance.

The head of the IATA told   Reuters that plane orders could fall 30% in 2010. Airlines are taking planes out of service to try and match supply to reduced demand and at the same time pushing back taking delivery of new aircraft they have on order. They are doing a good job of matching supply to demand as anyone who has tried getting a bargain priced seat on some routes will tell you, but airlines can’t park planes indefinitely and still turn a profit. Airline revenues have been hit hard, business class travel is down significantly and the industry is definitely back in one of its cyclical downturns. IATA is projecting major carriers will lose $9bn in 2009, up from a $4.6bn loss last year.

So what is United up to if the market is in a downturn? Playing the long game is the answer. In what will probably turn out to be a far sighted move, United is taking advantage of a reduction in aircraft makers’ backlogs and lower raw material costs to see what the manufacturers are willing to put together in terms of a financial package. United is reported to be looking to replace 150 wide bodied aircraft (they fly 26 Boeing 747-400 planes that seat about 350 people according to an article in the Chicago Tribune). But the airline is reported to not be looking at four engined aircraft like Boeing’s new stretched 747-8 which will carry about 460 or Airbus’ A380 that can carry 550. Rumor has it they are more interested in the twin engined 777-300 that seats 365 and is more fuel efficient. If this trend is repeated by other carriers, and airlines increasingly opt for smaller twin engined wide body jets it will have an impact on metals demand. United’s fleet is aging, the average is 13 years. It has the option to replace piecemeal and pay top dollar but manage its cash flow or take the bold step of committing to a major replacement program if the numbers support it. Investors are wary of the latter, the share price dropped on the news over fears the firm could over stretch itself.

–Stuart Burns

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