Oil Collateral Damage: $100 Billion of Aircraft Orders at Risk

It’s a no-brainer that as airlines are cutting service, slapping on new fees and surcharges, and raising prices in increasingly desperate efforts to achieve profitability, the last thing they need to do is strain their cash flows further by buying new aircraft. A Times story assesses the magnitude of the cutback in orders.

From the Times:

More than $100 billion (£50.2 billion) of aircraft orders could be cancelled or postponed in the next couple of years as the high price of fuel drives airlines into bankruptcy or forces them to cut spending.

Analysts estimate that 20 to 30 per cent of the $530 billion order backlog held by Boeing and Airbus, the aircraft manufacturers, could be cancelled or delayed as the aviation industry heads towards a winter of turmoil. These cancellations would have a significant impact on aerospace suppliers such as Rolls-Royce, the engine maker………

Pessimism over the future of the airline industry is expected to lead to a muted Farnborough Air Show, which starts today. A few large orders are expected, including a possible $20 billion order from Etihad, the Abu Dhabi-based carrier, but the bonanza that has marked recent air shows is unlikely to be repeated.

The high price of fuel has already forced more than 20 airlines worldwide out of business and many more are expected to enter bankruptcy this year as their costs rise and passenger demand drops because of the economic slowdown in the United States and Europe. According to the International Air Travel Association (IATA), every $1 rise in the price of oil increases the fuel costs for the global airline industry by $1.6 billion.

Fears about a drop in aircraft orders come as Boeing and Airbus have a competitor in the trillion-dollar, shorthaul aircraft market for the first time in over a decade after the announcement yesterday that Bombardier, the Canadian engineering group, is to build a new passenger jet, the C-Series…

At a presentation on Saturday, EADS, the owner of Airbus, outlined its plans to cut costs further to cope with the rising value of the euro, which makes it more expensive to operate in Europe.

Airbus has already introduced a costcutting and restructuring scheme, called Power 8, which is intended to save €2.1billion (£1.68 billion) and eliminate 10,000 jobs. Louis Gallois, the chief executive of EADS, said that the company would extend this project with Power 8+ in order to achieve further savings.