Sales dive leaves widebody aircraft on taxi to nowhere
The downturn in orders is being felt most in the widebody market that includes the A380
Airbus and Boeing are expecting aircraft deals to be slow for up to three years, but the world’s two biggest passenger jet manufacturers are confident that bulging order backlogs will carry them through the dry season.
Amid falling demand for jets, the European and US aerospace companies are increasing production of their most popular aircraft to record levels, which may reduce the size of their backlogs but also raise profits.
“We will stay in a slow period [for aircraft orders] for a couple of years while we burn down the backlog,” says John Leahy, chief salesman at Airbus, in an interview with the Financial Times. “People have been buying at a rate of over 1,000 a year. Of course the order cycle will go down. But . . . we have been able to pause when we need to in a downturn because of the massive backlog.”
After six years of booming deals, the order slowdown is being felt most in certain widebody aircraft, raising questions over prospects for some of these big ticket, long-haul passenger jets which sell for $200m to $400m or more.
Dennis Muilenburg, chief executive of Boeing, said this month that he expected sales of twin-aisle aircraft to be tough until 2020, as the company introduces a new generation of large aircraft.
“The challenge we have is between now and the end of this decade, that roughly three-year time period, as we go through the transition to the [new] 777X [twin-aisle jet] and some . . . local hesitation in widebody orders,” he said.
The reality is that after years of bingeing on new aircraft, airlines are now beginning to realise their expansion plans may have been too ambitious — for the near future at least.
The International Air Transport Association, airlines’ main representative body, signalled in June that while passenger traffic will grow at just over 6 per cent in 2016, it is beginning to slow down from the 7 per cent plus rates seen in previous years. “Widebody is the first area airlines stop ordering when capacity is slowing,” says Sash Tusa, an analyst at Agency Partners. “The airline industry was probably over ordered.”
Mr Leahy insists there has been no particular slowdown in twin-aisle demand — indeed, Airbus’s orders net of cancellations last year were still higher than in 2011 and 2012. But airlines admit they may have been carried away. “Now the market is a little bit saturated,” says one industry insider.
Moreover, combined orders for Boeing and Airbus suggest widebody jet demand began slowing a year earlier than for single-aisle aircraft. At the recent peak in 2013, Boeing and Airbus logged combined net orders for 750 widebody jets. Orders fell in both 2014 and 2015, and so far this year the companies have scraped together deals for a mere 123 jets.
In part the slowdown reflects specific problems with certain aircraft. Airbus, for example, has struggled to sell its A380 superjumbo. This summer it put the A380 on life support, cutting annual production rates from 27 in 2015 to 12 by 2018. Airbus also had more cancellations than orders for its widebody A350 jet during 2014 and 2015.
Boeing, with a slightly bigger share of the widebody market, has suffered more, even if now there could be a sizeable order in the offing from Qatar Airways. It is now talking openly about the possibility of reducing production of the existing generation 777 twin-aisle jet, as customers wait for the more fuel efficient 777X. The US company is also more cautious about plans to increase the rate on the widebody 787 Dreamliner from 12 to 14 a month.
Some of the fall off in twin-aisle orders may be that the excitement on the launch of more efficient models — notably the Dreamliner and the A350 — is petering out.
But new technology is also challenging these bigger jets: narrow-body aircraft are carrying more passengers and flying further than ever before. Norwegian Air Shuttle, one of Europe’s biggest low-cost carriers, is planning to use the new Airbus A321LR single-aisle jet to fly passengers across the Atlantic. “The average size of aircraft on international routes is getting smaller,” says Richard Aboulafia of Teal Group, a consultancy. “It could be the 321 is used . . . at the expense of the 787.”
Rob Morris, head of Flight Ascend Consultancy, says the share of wide-bodies in the global fleet has shrunk from roughly 25 per cent in 1990 to about 19 per cent. This is in part because the single-aisle market has expanded rapidly as low-cost travel has grown.
Mr Morris believes the wide-bodies’ share has stabilised, but he acknowledges there may still be some impact from single-aisles’ increased range and capacity. About half of the routes flown by widebody aircraft are less than 5,500km, well within the range of the Airbus A321LR and Boeing’s new narrow-body 737 Max jet.
The decline in widebody deals could also be a function of the manufacturers’ huge order backlogs. Airbus and Boeing have orders for a total of 2,500 twin-aisle jets on their books, many of which will not be delivered for years.
Airlines might now be postponing new orders, says Mr Morris, to avoid paying escalation fees. These charges, typically calculated at 4 per cent of the price of the aircraft, are designed to protect the manufacturers from future increases in input costs between order and delivery.
Nevertheless, airlines will always need bigger jets for the most densely travelled long-haul routes, say airline executives. Congested airports and the rise in the number of passengers make them indispensable.
Mr Leahy believes the single-aisle aircraft will never pose a real threat to bigger jets. “Wide-bodies carry freight. They go longer ranges, and that is important for a lot of airlines,” he says. The A321 “is a game changing airplane. It is a very good market but I don’t think it will ever have a major impact on widebody sales either for us or for Boeing.”