Boeing says it's flying high despite recession

The biggest sales boom in Boeing's ba cyclical history of making commercial passenger jets has come to a screeching halt.

After selling 4,134 planes the past four years, Boeing Commercial Airplanes, the company's jetliner division, is racking up more cancellations than orders for new planes this year. Industry analysts warn that more cancellations may be in the offing as people are flying less in the global recession.

But top executives at Boeing, the USA's largest exporter by value of goods sold abroad, remain publicly confident. They've announced only 4,500 job cuts so far — far fewer than the roughly 30,000 laid off after the downturn in travel following the Sept. 11 terror attacks. And none of the cuts are on the assembly line.

They're betting on two things to keep production humming for years: the company's staggering $270 billion backlog of orders; and belief that the 30-year trend of growing demand for air travel will continue beyond the current downturn.

At current production rates, it will take seven to eight years for Boeing to deliver the nearly 3,700 jetliners on backlog, says Randy Tinseth, the company's marketing vice president.

"We've clearly got a much larger backlog than we've ever had in previous cycles," Tinseth says. "That gives us flexibility as we go through this downturn."

Scott Carson, CEO of the commercial airplanes division, told investors at the JPMorgan Chase conference in New York earlier this month that over the next 20 years the market "is a rich opportunity for us," whether the ultimate demand for commercial jets is 29,000 planes, as Boeing projects, or just 27,000 if cancellations continue.

"We're playing from a position of strength," he said.

Are Boeing's leaders just whistling past the graveyard by believing that economic forces that have engulfed many large and successful companies in the past six months won't ensnare the manufacturing giant?

Richard Aboulafia thinks so. "Yes, Boeing has a record backlog, but only a fool would believe in it," says Aboulafia, an aircraft manufacturing analyst at Teal Group in Fairfax, Va.

If airlines in the USA and around the world are flattened financially by severe recession and deeply diminished demand, they will not hesitate to forfeit down payments and walk away from so-called firm orders for new planes, he says. Even if carriers negotiate delivery deferrals rather than cancellations, Boeing won't get hundreds of millions of dollars in the next few years that it expects to be paid upon completion of those planes, he says.

Boeing will start feeling the pinch in 2010, Aboulafia predicts. He says financing is available for all the planes that Boeing and its chief rival, Europe's Airbus, plan to deliver to the airlines this year. "But after that," he says, "all bets are off. In a serious downturn — and this certainly is one — production typically falls by about a third. I can't see why in this downturn it would be different."

Others much less confident

Others are more pessimistic.

Robert Stallard at Macquarie Research in New York lowered his rating on Boeing in January, warning that the company "is underestimating the potential for lower airline demand."

Joseph Nadol at JPMorgan last week cut his earnings estimates for Boeing and Airbus for this year and next. In addition to rapidly weakening demand for passenger planes, Nadol said, the cargo version of Boeing's 777 is in particular trouble because air freight volumes have "collapsed" by 25% from a year ago.

Giovanni Bisignani, head of the International Air Transport Association, the airlines' global trade group, warned last month that Boeing and Airbus might not be able to deliver up to half the commercial planes they build this year. In Boeing's case, that would be about 240 of the 485 planes it is scheduled to deliver. Bisignani said he based his prediction on conversations with several airline CEOs who told him they can't afford to pay for the new planes.

Even more chilling was the warning shot fired last month by Steven Udvar-Hazy, head of International Lease Finance, the world's largest lessor of commercial airplanes and the largest single customer of both Boeing and Airbus. Speaking with reporters at a Boeing media event in Seattle, he predicted that both airplane makers will be producing "white tails" by the end of this year. "White tails" are planes completed without a buyer, so they have no logo on their tails.

Chris Tarry, an independent industry analyst and consultant based outside London, estimates that 1,600 to 1,800 already-ordered Boeing 737s and Airbus A320s, both of which carry about 150 passengers, are in danger of not being delivered over the next three to 10 years. "(Airlines) simply don't need them," he says.

If there's anything Boeing understands, it's the wildly cyclical nature of the aviation business. Past downturns have led to massive layoffs, regional economic upheaval and larger U.S. trade deficits.

Boeing officials believe they can avoid most of that pain this time by better managing production.

Carson told investors at the JPMorgan Chase conference that the company won't decide until May or June whether to slow production of planes scheduled for delivery in the last half of 2010. Planes to be delivered then would go into production early next year. Suppliers need about six months advance notice of a change.

"There's lots of uncertainty in 2010," Tinseth, Boeing's marketer, admits. "That's why I'm trying to sell some additional planes in the back half of 2010 in expectation that there'll be some 'melt-away' from our backlog, through deferrals mainly.

"But we've been pretty successful in managing our business the last few years during our biggest sales boom ever. We've been very measured in our approach to increasing production rates. We're not producing planes at nearly the rate we did in the past, and that should keep us pretty healthy during the downturn."

There are other danger signs, however.

In the first two months of this year, Boeing sold only 22 new planes, down from 195 in the same period last year.

Worse, Boeing saw 32 orders for its new 787 Dreamliner canceled in February. The roughly $1.75 billion or so that Boeing will get from the new model 737 and 77 planes it sold in January and February won't come close to offsetting the nearly $5.5 billion it is losing from the cancellation of the 787s. Each 787 is priced around $170 million.

Much of Boeing's fortunes depend on whether the airlines have access to capital.

Airlines with good credit are going to pay more for borrowing in this economic climate, industry analyst Tarry says. "Carriers that aren't very creditworthy, and that's a lot of them," he says, "won't be able to accept delivery of planes they've already ordered and certainly won't order more."

That's left Boeing as the financier of last resort for some of the planes it builds.

Continental, arguably the top performer financially among traditional U.S. airlines and a top Boeing customer, has 13 new aircraft coming this year. Only six are financed so far. Gerald Laderman, Continental's treasurer, says the airline has "backstop" financing from Boeing for the other seven and will draw on that if necessary. Finding less-expensive capital won't be easy.

"Some lenders have just gotten out of the business of lending against airplanes," says John Pritchard, an attorney at Holland & Knight in New York who specializes in aircraft finance arrangements. "But the (loan) terms have gotten a lot tougher," he says.

Southwest Airlines, which flies only Boeing planes and is the best credit risk among U.S. carriers because of its strong balance sheet, recently trumpeted that in December it was able to refinance 17 late-model 737s at 10.5% interest on a three-year note secured by the aircraft. Just a year earlier, it refinanced several planes at 3.6% interest on an eight-year, unsecured note.

"It just reflects that the market has gotten so bad that even a good lending customer like Southwest could run into that kind of trouble getting financing," Pritchard says.

Other loans available

To bolster credit-backed sales, Boeing Capital, the company's lending arm, is expecting to make $1 billion in credit available to customers this year after not extending any the last three years.

The French government, a shareholder in Airbus parent EADS — European Aeronautic Defence and Space — is making more than $6 billion available to airlines buying or leasing Airbus planes.

Free-trade advocates may decry government financing as an intervention in the market, but the United States does much the same thing for Boeing's foreign customers via the U.S. Export-Import Bank.

Last year, the Export-Import Bank backed $5.5 billon in aircraft loans on 97 Boeing-built planes sold to 17 airlines and two leasing companies outside the USA.

Robert Morin, head of the bank's transportation lending group, expects 2009 to be a record year, with $7 billion to $9 billion in loan guarantees issued to foreign carriers and leasing companies. About 90% of the planes Boeing expects to deliver this year are destined for companies outside the USA.

Morin says he's hopeful that bank-supported aircraft leasing will decline next year and beyond as commercial lenders warm back up to the market.

Though it's too early to call it a trend, Morin says, commercial lending on airplanes picked up a bit in the current quarter after extraordinarily tight lending at the end of last year driven by the global liquidity crisis.