Boeing insists it will not slow production of its hot-selling 737,
but some experts say falling global air traffic and declining orders
may force the company to do just that.
The world’s No. 2 plane maker, which saw orders for commercial
planes fall 61 percent in 2009, already plans to cut production of its
777 this year. The same may be necessary for the single-aisle 737 –
currently Boeing’s best-selling model.
Teal Group analyst Richard Aboulafia said the move was just a matter of time.
“It might be happening sooner than later because they’re pretty much
required to give suppliers nine months notice,” he added. “And that
means a rate cut announced now wouldn’t happen until well into the
third quarter of the year.”
An announcement of a production cut could come as early as January
27, when Boeing issues its fourth-quarter earnings report and financial
outlook.
Chicago-based Boeing and rival Airbus have suffered as carriers and
cargo operators grapple with the economic downturn and credit crisis.
Aboulafia said he also expected the “miserable market” to result in
production cuts for the Airbus A320, which, like the 737, is the
foundation of many airlines’ short- and medium-haul fleets.
Plane orders for Boeing and Airbus were down sharply in 2009 from a
record set in 2007. Last year orders for the 737, which lists for
between USD$51.5 million and USD$87 million, came to 197, less than a
quarter of the 838 logged in 2007.
The rapid decline coincided with a drop in air traffic amid a
painful global economic recession, during which airlines reduced
capacity, deferred and cancelled orders, and took planes out of service.
The International Air Transport Association estimates a 6.7 percent
decline in passenger traffic and cargo transport for 2009, while
forecasting only a 5.2 percent increase in 2010, when 1,300 planes are
due for delivery.
“We have to assume there will be further deferrals of deliveries,” IATA said in a December report.
IT’S THE ECONOMY
Jesup & Lamont analyst Alex Hamilton said he was braced for a production rate cut for 737s soon.
“Why?” Hamilton said. “Because there’s been one in every down-cycle before.”
But if the economy continues to improve, he said, pressure would
ease on airlines to delay, defer or cancel orders, lessening the chance
that Boeing will slow its 737 output.
Boeing said last year that it would cut monthly production of its
777 from seven to five in June 2010. The company has insisted that it
would keep assembly of its popular 737 at 31 a month.
“There is no change, and let me repeat, there is no change in our
assessment that we can hold the 737 at its current build rate,” Boeing
Chief Financial Officer James Bell said at a December 8 investor
conference.
“Now while I know some are sceptical about our ability to hold our
single-aisle rate,” he said, “there are several factors that support
our rationale around this rate assumption.”
Bell said Boeing had kept a conservative production rate during the
up-cycle and that it had an order backlog of more than 2,000 of the 737
aircraft.
Demand remains robust as airlines replace older, less fuel-efficient
planes, Bell said, and additional demand comes from developing and
emerging markets.
A Boeing spokesman declined this week to elaborate on Bell’s comments ahead of the company’s quarterly earnings statement.
Others agree that market demand is strong for single-aisle planes and that passenger traffic can sustain it.
“When you’re flying 80 percent load factors, that doesn’t strike me
as being too much capacity,” said Leeham consultant Scott Hamilton.
He added that Boeing was unlikely to slow production on the 737
until it is able to fill orders for the new 787 Dreamliner, which is
set for first delivery in the fourth quarter.
“Once the 787 starts delivering and the cash flow is there, maybe
then they can let up a bit on the 737,” he said. “But until you get
steady production and the airplane is certified, I don’t think they’ll
drop the rates on the 737.”