Falling oil prices pose a challenge for Airbus, Boeing

Sharply falling oil prices are a boon to airlines, saving billions of dollars in monthly fuel bills…

Sharply falling oil prices are a boon to airlines, saving billions of dollars in monthly fuel bills for a highly competitive industry that last year eked out an average profit of just $6 a passenger.

But what is good news for the airlines raises questions for the world’s largest jet makers, Boeing and Airbus, which have been riding a wave of demand for the latest fuel-efficient jets, driven in large part by the stubbornly high price of oil.

The concern is that the current drop in oil prices could prompt airlines to delay orders, after nearly a decade in which the aircraft makers have benefited from a boom in orders. “What has propelled the market to record growth are two factors: Cheap cash and expensive fuel,” said Richard Aboulafia, an aerospace analyst with the Teal Group in Washington. “Now something has changed.”
Whether the continued fall in price of oil represents something more significant than a short-term imbalance of global supply and demand remains to be seen, some analysts warn. But if it continues, airlines would be motivated to keep their older, fuel-guzzling jets flying for a few more years and delay new orders in hopes of saving money.

“We can’t yet predict if it will last or how the air carriers will react,” Aboulafia said, “but I think now would be an excellent time for caution.”

Combined with low interest rates and recent efforts by some governments to clamp down on carbon emissions from aviation, the increase in jet orders, which began before the 2008 financial crisis, has lasted longer than any previous boom cycle in the jet age. The total backlog of unfilled orders for Boeing and Airbus stands at more than 12,000 aircraft, valued at close to $2 trillion and enough to keep their assembly lines humming for more than eight years.

And the plane makers continued to pad their already hefty order books in 2014. Airbus said on Tuesday that it secured purchase contracts for a net 1,456 jets last year, down slightly from 1,503 planes in 2013, and that it delivered 629 in 2014. Last week, Boeing reported 1,432 net orders in 2014, up from 1,355 a year earlier, and 723 plane deliveries for the year — an industry record.

Boeing and Airbus each control roughly half the market for airliners with more than 100 seats.

Gains in fuel efficiency have topped the manufacturers’ lists of selling points for their newest generation of commercial jets. They include recently upgraded versions of short-range workhorses like the Boeing 737 and the Airbus A320, as well as lightweight, wide-bodied models made from carbon fibre like the Boeing 787 Dreamliner or the Airbus A350, which will formally enter service with its first customer, Qatar Airways, this week.

But forecasts suggest that oil prices, which have fallen by more than half over the last six months, to less than $50 a barrel, will be significantly lower this year than in recent years.

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