Are you sure?

Global air woes could slow Boeing plane production

Boeing Co insists it will not slow production of its hot-selling 737 plane, but some experts say falling global air traffic and declining orders may force the company to do just that.

The world's No. 2 planemaker, which saw orders for commercial airplanes fall 61% in 2009, already plans to cut production of its 777 jumbo jet this year. The same may be necessary for the single-aisle 737 - currently Boeing's best-selling model.

Teal Group analyst Richard Aboulafia said the move was just a matter of time.

“It might be happening sooner than later because they're pretty much required to give suppliers nine months notice,” he added. “And that means a rate cut announced now wouldn't happen until well into the third quarter of the year.”

An announcement of a production cut could come as early as January 27, when Boeing issues its fourth-quarter earnings report and financial outlook.

Chicago-based Boeing and rival Airbus have suffered as carriers and cargo operators grapple with the economic downturn and credit crisis.

Aboulafia said he also expected the “miserable market” to result in production cuts for the Airbus A320, which, like the 737, is the foundation of many airlines' short- and medium-haul routes.

Airplane orders for Boeing and Airbus were down sharply in 2009 from a record set in 2007. Last year orders for the 737, which lists for between $51.5 million and $87 million, came to 197, less than a quarter of the 838 logged in 2007.

The rapid decline coincided with a drop in air traffic amid a painful global economic recession, during which airlines slashed capacity, deferred and canceled orders, and took planes out of service.

The International Air Transport Association estimates a 6.7% decline in passenger traffic and cargo transport for 2009, while forecasting only a 5.2% increase in 2010, when 1,300 planes are due for delivery.

“We have to assume there will be further deferrals of deliveries,” the IATA said in a December report.




Jesup & Lamont analyst Alex Hamilton said he was braced for a production rate cut for 737s soon.

“Why?” Hamilton said. “Because there's been one in every downcycle before.”

But if the economy continues to improve, he said, pressure would ease on airlines to delay, defer or cancel orders, lessening the chance that Boeing will slow its 737 output.

Boeing said last year that it would cut monthly production of its 777 jumbo jet from seven to five in June 2010. The company has insisted that it would keep assembly of its popular 737 at 31 a month.

“There is no change, and let me repeat, there is no change in our assessment that we can hold the 737 at its current build rate,” Boeing Chief Financial Officer James Bell said at a December 8 investor conference.

“Now while I know some are skeptical about our ability to hold our single-aisle rate,” he said, “there are several factors that support our rationale around this rate assumption.”

Bell said Boeing had kept a conservative production rate during the upcycle and that it had an order backlog of more than 2,000 of the 737 aircraft.

Demand remains robust as airlines replace older, less fuel-efficient planes, Bell said, and additional demand comes from developing and emerging markets.

A Boeing spokesman declined this week to elaborate on Bell's comments ahead of the company's quarterly earnings statement.

Others agree that market demand is strong for single-aisle planes and that passenger traffic can sustain it.

“When you're flying 80% load factors, that doesn't strike me as being too much capacity,” said Leeham Co consultant Scott Hamilton. Load factors are a measure of how full an airplane is.

He added that Boeing was unlikely to slow production on the 737 until it is able to fill orders for the new 787 Dreamliner, which is set for first delivery in the fourth quarter.

“Once the 787 starts delivering and the cash flow is there, maybe then they can let up a bit on the 737,” he said. “But until you get steady production and the airplane is certified, I don't think they'll drop the rates on the 737.” (Reuters)