Boeing, Airbus at risk of cuts after defying slowdown

Airbus SAS and Boeing Co. will together build a record number of jets this year, defying the recession and slowdown in travel. They face a reckoning in 2010.

The world's two biggest planemakers may have to cut production of their narrow-body models by as much as 30 percent by 2011, according to a Bloomberg survey of 15 aerospace analysts and consultants. Boeing's 737 and Airbus's A320 contribute the majority of sales. Airbus, which trailed Boeing in deliveries until 2003, has only cut output once before.

The manufacturers rely on single-aisle jets as their cash cows to fund other projects, including the Boeing 787 Dreamliner that's more than two years behind schedule. Production cuts ripple through an industry of hundreds of suppliers, whose landing gear, seats and doors are fitted to the jets that have a list price of about $70 million and take almost a year to build.

"We're moving ever closer to the rendezvous with reality," said Chris Tarry, a London-based independent aviation analyst who has followed the industry for more than 20 years. "The reality is, there's too much capacity."

Boeing, which dominated the industry for decades, is more accustomed to adjusting production and has scaled back output by as much as a third in previous recessions. Airbus, with only 20 percent of the market at the start of the 1990s, avoided cuts and merely slowed down its production increases. European labor laws also make it harder for Airbus to cut jobs in a decline.

Trimming Production

One third of the participants in the Bloomberg survey predicted a production drop of at least another 9 percent in A320 output to 31 a month by 2011. Four respondents said Boeing will have to scale back by at least 10 percent to 28 737s a month in the same timeframe. The survey was conducted on Sept. 29 and 30 and included participants from Europe and the U.S., who predicted a range from no cuts to a 30 percent output drop.

The planemakers still have order backlogs to carry them through the next seven years at current rates, after they limited production increases even as record orders were placed between 2005 and 2007, as they sought to smooth demand swings.

"We have a weekly process that goes through every airplane in the skyline," and the production plan "still feels good," Boeing Chief Executive Officer Jim McNerney, 60, said at a Morgan Stanley conference in New York Sept. 2. His counterpart at Airbus parent European Aeronautic Defence & Space Co., Louis Gallois, 65, told journalists at a press meeting in Paris Sept. 28 that the coming winter will be "critical."

Scaling Back

Airbus spokesman Stefan Schaffrath said the company has no immediate plan to cut production further, after February's decision to trim monthly rates on A320s to 34 from 36 by this month, the first time ever it cut output. Chicago-based Boeing, which makes 31 737s a month, also hasn't yet seen a need to change its rate, said spokesman Jim Proulx. The company is scaling back output of the twin- aisle 777 next year.

The two manufacturers each control about half of the single-aisle market, which encompasses commercial planes seating 110 to 180 passengers. They're slated to hand over at least 970 new aircraft this year, including twin-aisles, beating the previous combined record of 914 set in 1999.

Cutting production by three planes a month would hit cash flow and profit by $300 million to $400 million at both Airbus and Boeing, said Carter Copeland, an aerospace analyst at Barclays Capital in New York.

Charges

Boeing took a charge of $2.5 billion on its 787 Dreamliner program for the third quarter and will have to pay penalties to waiting airlines. The Chicago-based company ended 2008 with $4.4 billion in cash, half the level from a year earlier.

Airbus needs cash to develop its A350, slated for 2013. The Toulouse, France-based company is also burning 100 million euros ($140 million) a month on its A400M military transporter. Its 525-seat A380 is generating less cash after deliveries dropped.

While Airbus has its final assembly plants in Toulouse and Hamburg, the major pieces of the A320 -- wings, fuselage, tail, and cockpit -- are built in Airbus's European plants in the U.K., Germany, Spain, and France. The 737's fuselage is built in Kansas and sent by train for final assembly at Boeing's plant in the Seattle suburb of Renton.

The lead time of as much as a year may force Airbus and Boeing to announce changes by the end of 2009 in order to give suppliers the opportunity to adapt their own output.

'About Time'

"If you wanted to cut in the back half of 2010, it's about the time to do it," Barclays Capital's Copeland said.

The cuts would contrast with each company's ability to maintain production levels this year by juggling delivery slots, persuading some carriers to take planes earlier than planned.

Still, pulling forward some deliveries into this year and next may turn out to have come at the expense of the schedule for 2011 and 2012, said Rob Stallard, an analyst with Macquarie Capital Inc. in New York.

In past cycles, aircraft lessors often swooped in on deferred orders to make bargains. The industry may lack that escape route this time as International Lease Finance Corp., the world's biggest lessor, seeks a buyer, and CIT Group, the third- largest aircraft financer, works to avoid bankruptcy.

Orders at Risk?

Global airline traffic in 2009 declined 6 percent from year-ago levels through August, with average fares down 20 percent. Airlines face combined losses of $11 billion this year, the International Air Transport Association predicts. The fallout is reverberating across the industry, with companies deferring orders or considering doing so in future.

Ryanair Holdings Plc, the biggest customer for Boeing's 737 in Europe, said Oct. 2 that it may suspend expansion starting in 2012. The Irish low-cost airline's 113 firm unfilled orders account for 5 percent of the 737 backlog, Morgan Stanley analyst Heidi Wood estimates.

AirAsia Bhd., Airbus's largest Asian customer for A320s, has slashed planned 2010 deliveries by 8 planes to 16, and CEO Tony Fernandes said Sept. 24 that "chances are high" the airline will also cut to 16 planes from the original 24 in 2011. Cathay Pacific Airways Ltd. said today it's too early to call a rebound, and that forward bookings are not very encouraging.

"It's going to be an extremely tough winter for airlines," said Richard Aboulafia, vice president at Fairfax, Virginia-based Teal Group, an aerospace research group. "Airlines already sold everything that's not nailed down to raise cash."