Every company loves closing a big deal, which is why Boeing brass probably popped champagne corks yesterday when American Airlines announced an order for as many as 100 Boeing 787 Dreamliners. But behind the splashy announcement lies a more complicated story of an industry facing a difficult future.
Although Boeing and its European rival Airbus are booking huge orders and working through giant backlogs, their largest customers are losing money. The airline industry will lose $5.2 billion this year. Frozen credit markets are making it tough to finance aircraft purchases, and airlines are cutting capacity to prepare for tough economic times. Taken together, it doesn't make for a healthy sales environment.
On the surface, the American order is big news. The 787, which seats 290, has a range of 8,500 miles, meaning it can serve every route American flies. At catalog prices, the deal is worth $8 billion.
There's just one problem.
Boeing hasn't been paid. Announcing that you're buying planes isn't the same as actually buying planes. According to American, the deal is "subject to certain contingency provisions," one of which is reaching an agreement with the pilots' union to actually fly the planes.
And then there's the credit crisis. While Boeing and Airbus have the financial resources to extend several billion in financing to airlines that can't secure credit elsewhere, aircraft manufacturers must worry about the fate of their largest customer: International Lease Finance Corporation. International Lease, a subsidiary of corporate train wreck AIG, is the world's largest buyer of aircraft, with almost 1,000 in its fleet. The company is up for sale, but so far no one's interested. That calls into question the fate of its order for $25 billion worth of airplanes from Boeing and Airbus. Although a cancellation wouldn't sink either company, it would put a hell of a dent in their bottom lines.
And oddly enough, the recent drop in fuel prices — oil was trading for $70 a barrel today, down from a high of $147 in July — could hurt the big plane makers. If gas is four bucks a gallon, and I happen to drive a 12-year-old guzzler, I'm going to think very seriously about buying a more fuel-efficient car. But if gas falls back to $3, I'm not so worried and will delay that purchase. If the price of jet fuel keeps dropping, airlines may not be quite so eager to buy more fuel-efficient airplanes.
We're not suggesting Boeing or Airbus risk going the way of Bear Stearns. The two companies have sold more than 1,300 planes this year, and have a backlog of 3,100 orders. But a lousy economy will make things tough for even the strongest company. Throw a strike at Boeing into the mix and a weak dollar for Airbus and it might be awhile before anyone at either company is popping champagne corks again.
Photo by Dave Demerjian/Wired.com.
