“If you’re an airline today, your last goal is to buy planes, your main goal is survival,” said Ron Epstein, aerospace analyst at Bank of America Merrill Lynch.
The news that Boeing plans to resume production helped raise its shares by 14% on Friday. But that doesn’t change the fact that so far this year Boeing has had four times as many canceled new aircraft orders – 196 – as it has recorded new orders. 160 other orders have been deferred and are no longer recorded in its order book.
And while most of the canceled planes are Boeing 737 Max aircraft, immobilized since March 2019 following two fatal accidents that killed 346 people, the problem is much broader than this safety issue. It is the fact that airlines will not need new planes for the foreseeable future.
“No one steals,” said Epstein. “The longer it goes on, the more chances there are that airlines don’t have to buy planes. “
Faced with health concerns, travel restrictions and home stay orders put in place due to the coronavirus epidemic, demand for air travel is “essentially zero,” according to a statement released this week by United Airlines. He cut his May schedule by 90% and warned that travel demand should remain depressed in 2021. Other airlines are making similar cuts and issuing similar warnings.
Boeing (( rival )Airbus (( announced last week that it could only deliver 122 of the 182 jets built during the quarter, reflecting “customer requests to delay deliveries, as well as other factors related to the pandemic of COVID-19 in progress ”. It also cut future production plans by about 30%. )
Boeing has not yet announced how soon it will build planes when production resumes next week, but experts also expect production rates to drop.
Deliveries will be much lower
Epstein and other experts say they do not expect deliveries to drop to zero, even if they are sharply reduced by the current crisis. Airlines have already arranged financing for many planes near delivery. And newer planes are more efficient to operate than older ones, although with significantly lower fuel prices, this advantage is diminished.
“You buy a plane for 15 to 20 years, not for the next six months,” said Chris Denicolo, credit analyst at Standard & Poors.
The good news for Boeing and Airbus is that both have a huge backlog. Boeing had 5,400 orders pending at the end of March and Airbus about 7,500. Even if each has order cancellations equal to a quarter of this order book, they will have enough aircraft orders to keep growing for several years, while demand for travel and airplanes should recover.
“Most industries would kill to have orders for the next five to six years,” said Denicolo.
Yet industry-wide deliveries are expected to be down 50% to 60% this year, according to an estimate by Laurent Rouaud, co-founder of aviation consultant Avwork Partners. Combined deliveries from Boeing and Airbus were already down 22% in 2019 due to the 737 Max crisis. A drop of an additional 600 jets would significantly reduce the two companies’ cash flow as they earn most of their income when an airline takes delivery of a jet.
Why Boeing will restart jet construction
So why is Boeing building jet planes again? Mainly, to help support its suppliers, many of whom were severely damaged by Boeing’s problems with the 737 Max, which temporarily stopped production in January. As workers start building more model aircraft next week, a separate team will prepare to resume production of the 737 Max, though Boeing does not expect world aviation regulators whole approve his flight before mid-year.
“I think part of that is keeping the supply chain healthy,” said Denicolo. “The more it goes on, the smaller suppliers, the ones you and I haven’t heard of, may be out of business, which could cause bigger problems in the future. This could delay the restart of production. “
Boeing CEO Dave Calhoun acknowledged supplier concerns were a factor in the recovery of production.
“For every dollar spent by Boeing, about 70 cents goes directly to our suppliers,” he told employees Thursday when he announced the resumption of work. “Our team continues to focus on the best ways to maintain liquidity in our business and in our supply chain until our customers buy planes again. We continue to firmly believe in the future of aviation and Boeing as an industry leader and are ready to borrow against that future. ”
But while Boeing is doing what it can to help suppliers by resuming production, it is simultaneously preparing for the coming cow years.
The company is offer buyouts and enhanced retirement benefits to voluntarily reduce staff before moving on to involuntary layoffs.
The company had approximately 161,000 employees at the start of 2020, two-thirds of whom work in the commercial aircraft division. Epstein estimates that 20% to 25% of these jobs are at risk.
“We are in uncharted waters,” Calhoun told his Boeing employees on Thursday. “The impact of this global virus will change our business for years to come. “