Story ID: 
Boeing preaches rate restraint
By: Ian Goold
Caption: Prices for new Boeing jetliners could harden as the manufacturer works to manage production rates and outsourced parts supplies in the face of continuing h
Word Count: 803
Prices for new Boeing jetliners could harden as the manufacturer works to manage production rates and outsourced parts supplies in the face of continuing high demand that Boeing says defies previous market cycles. With many major carriers yet to decide how best to replace existing fleets and increase capacity, Boeing expects aircraft lessors to play a bigger part in the market as new financing models evolve and demand becomes geographically more diverse.After examining “a huge amount of data” to better understand the changing drivers that “make this order cycle different,” Boeing market analysts and customer-financing experts have concluded that some U.S. and European carriers must order aircraft soon. There is “significant pressure” for them to begin replacing large numbers of airplanes “now, and over the next few years, for economic, efficiency and environmental reasons,” according to president and chief executive officer Scott Carson. Despite the continuing high demand, the U.S. manufacturer is “taking a thoughtful, extremely disciplined approach to [production] rate decisions,” said Carson, whose career began 35 years ago as a flight-test mechanic. Boeing’s caution is being expressed as European competitor Airbus is preoccupied with beginning delayed introduction of the A380 very large airliner and development of the new A330XWB twin-aisle twinjet. Acknowledging that the market is “famously cyclic” with unpredictable periods of seven to 11 years between peaks, Carson said the new Boeing analysis suggests things are different this time around. “We see global gross domestic product and international trade continuing to grow in every region, [leading] us to believe this is–without question–much stronger and more prolonged than in past cycles.” But three fundamentally different attributes are driving the current order cycle, according to Boeing: replacement requirements, diverse geographical demand and diverse airline business models. While recent record single-year orders in 2005 and 2006 followed four years of “unusually low activity” and represent a smaller proportion of the current fleet than in previous market peaks, Carson said that other “situational differences and key indicators” reinforce Boeing’s analysis. “More than 17,000 airplanes [are] in service; a huge number will reach economic retirement age and drive one third of demand over the next 20 years. The sheer size of some fleets makes replacement daunting–something like 30 or 40 planes per year, which for some could take seven to 10 years to accomplish.”Boeing said high fuel prices will favor “more economical and environmentally progressive” jetliners as an “increasing focus on the environment, more stringent regulations and growing demand and competition require network carriers to expand and upgrade their fleets,” said Carson. Analysis of future demand and market mobility shows a more even distribution of demand, with Asia Pacific joining North America and Europe as a distinct major market. “Fueled by phenomenal growth in China and India, Asia Pacific has become a powerful market force roughly equal to that of Europe. This geographical diversification reduces investment risk and creates opportunities to shift assets to markets where demand and values are high.” The manufacturer said liberalization and increased competition, which have led to more innovative airline business models, including low-cost and emerging long-haul, business-class carriers, have reduced “the risk of economic cycle swings, or even varying passenger preference.” Given current “large and diverse” backlogs, airlines needing replacement aircraft must order soon, said Carson. He outlined Boeing’s newly conservative approach to accelerated production, having experienced manufacturing trauma in the late-1990s when requirements for outsourced 737 parts exceeded suppliers’ capacity. “With the demand in the past couple of years, there’s constant pressure to increase rates. We learned a painful lesson years back about making rate changes without disciplined supply chain management,” he said. The challenge is to agree to delivery dates with customers desperate for new aircraft. “You have to say, ‘No, we will not be able to meet your requirement,’” he said. Carson would much rather help airlines understand Boeing’s rationale than suffer the highly damaging effects of saying, “In spite of promises, we’re not going to make the delivery schedule.”He said Boeing’s disciplined approach is reinforcing that prudence. “We must produce what we develop, and we must deliver what we sell,” he emphasized. The principle that ultimately restricted supply will influence prices is not lost on the manufacturer. “For Boeing, this also means strong airplane asset values,” he said.Finally, Carson cited evolving aircraft financing methods, which were becoming much more asset driven, rather than dependent on airline credit, and were enhancing aircraft liquidity that produced a more resilient and stable market. With new leasing players in the Middle East and China bringing regional diversification to this market, he addressed the implications of the current extended market cycle for lessors. “More leasing companies are ordering. Additionally, private equity firms are starting up or funding lease companies, and capital markets are supportive of raising equity for lease companies,” he said.