Airbus Vs. Boeing: What's Ahead for Jet Manufacturing

When the 2008 commercial airliner year-end sales totals are announced sometime early in January, look for headlines reporting that Airbus has out-sold Boeing once again. The Euro jet-builders went into December with a commanding lead in the annual orders race, having booked 878 new deals for the year, well beyond the year-to-date total of 661 Boeing was reporting as of mid-December.

You can also expect the headlines in January to be full of talk about massive declines in jet orders. As it stands, Boeing, at least looks likely to end 2008 with sales that are fully 50 percent below 2007’s total of 1,422.

But both of those headlines will miss very important points:

• Even if Boeing (for example) only sells 711 jets in 2008 — a full 50 percent plummet from last year — 711 jets would still be an amazingly good year. Fact is, 2007 is just not a valid comparison. Last year was not only an all-time record sales year for the company, it was a record that’s nearly 40 percent greater than the previous mark. U.S. manufacturers (Boeing and the former McDonnell Douglas) over the past two decades have averaged about 542 orders a year. So, 711 orders wouldn’t be just an above-average year for Boeing, it would be one of the top five or six years for the company since the dawn of the Jet Age.
• A total of around 700 will also mean that Boeing will have added to its already-record commercial jet backlog, which stood at a whopping $279 billion at the end of the third quarter. That’s important to investors, because Boeing typically receives about two-thirds of its revenues on delivery; it’s important to regions like Puget Sound, Southern California, Texas and Kansas, because the backlog means a steady supply of work for aerospace suppliers; and it’s important to the United States as a whole, because Boeing jet sales are the largest single component of U.S. manufacturing exports.

An important and overlooked figure will be the number of cancellations. Airbus, in its most-recent report, had seen 122 orders canceled — a 14 percent cancellation rate. Boeing was doing a lot better, having lost only six orders, for a cancellation rate of 0.9 percent. What that says is that the global airline industry as a whole is going ahead – at least for the moment –with more than 85 percent of airlines’ plans to replace aging fleets, even in the face of sharp projected drops in air travel.

Whether that continues is anyone’s guess. Widely quoted and well-respected Teal Group vice president Richard Aboulafia thinks it won’t. My go-to analyst told The Seattle Times last week that we’re likely to see widespread order cancellations in the new year, which will lead to an aerospace manufacturing downturn starting in 2010. This morning, he told a Reuters-sponsored investor summit that anywhere from 30 to 70 percent of Airbus and Boeing’s backlogs are at risk, because airlines will be cutting capacity as the global economy slides. Those backlogs, he says, are “firm as Jell0.”

Other analysts - notably the Leeham Group’s Scott Hamilton - say fears of collapsing demand are real but “overwrought.” Airline balance sheets are being helped by free-falling fuel prices, and since new jets are cheaper to operate than the planes they’re replacing, they’re still attractive. “For 2009 at least, the two companies are not going to see major declines in deliveries, based on current market conditions,” he says.