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Airbus and Boeing Will Keep Making Jets That Airlines Can’t Buy

Bloomberg logoBloomberg 8/6/2020 Charlotte Ryan

(Bloomberg Businessweek) -- For decades, the competition between Airbus SE and Boeing Co. has centered on issues such as which could build the biggest jumbo jet or log the most multibillion-dollar sales each year. Then the coronavirus hit. Now the world’s two dominant plane makers will battle to see which one can best weather an unprecedented downturn in air travel that’s emptied the wallets of the airlines that buy their planes.

With new orders dormant, the challenge is to cut costs and protect cash while keeping factory systems and global webs of suppliers operating at a high enough pace to retain essential skills and be ready to bounce back when the crisis passes. Getting the balance right will be tough, given that Airbus and Boeing together employ almost 300,000 people and sell aircraft that typically take a year to build. Walking this tightrope is also expensive: In the second quarter, Boeing burned through $5.6 billion in cash; Airbus, $5.2 billion. And things are set to get tougher, as a fresh surge in infections prompts new travel restrictions worldwide.

Airbus and Boeing are sharply reducing output, announcing plans to reduce staff and trimming costs in research. They’ve also entered into what Airbus Chief Executive Officer Guillaume Faury calls “difficult” discussions with customers, negotiating to stretch out delivery schedules while prodding airlines not to walk away from commitments.

That risks creating a dynamic that pits the plane makers against ailing carriers, as they try to get them to honor contracts and accept jets they can’t afford and don’t need. If they don’t press carriers to pay for at least some of the planes ordered during flush times, then the airframe manufacturers will have to burn more cash to keep their operations humming. But if they push too hard, they could further hobble some customers financially—endangering future sales or even driving them toward bankruptcy, jeopardizing existing contracts. “It’s more about finding ways to deal with the situation together,” Faury says.

3420_BIZ_BOEING_03 © Photographer: Liu Guanguan/Getty Images 3420_BIZ_BOEING_03

Even at lower production levels—a roughly 40% drop at Airbus alone—it’s unclear whether the market will be able to absorb the jets the two companies will churn out in coming years. Neither wants to cut too quickly, out of fear of ceding business to its archrival, according to Sash Tusa, an analyst with Agency Partners in London. He says they’re also reluctant to lower production rates until after airlines have agreed to pay the costs associated with deferring deliveries of aircraft often ordered many years earlier. “Airbus and Boeing are now playing a potentially damaging game of chicken,” Tusa says.

At the end of the second quarter, Airbus had 145 finished jets awaiting delivery. Boeing has about 450 of its 737 Max jets ready to ship once regulators clear the plane to fly again. Deliveries have been frozen since March 2019 following two deadly crashes; the go-ahead from the U.S. Federal Aviation Administration is expected by the end of fall. By Tusa’s count, more than 1,600 planes are scheduled to enter or reenter service next year—on par with the industry’s production peak in 2018.

a screenshot of a cell phone: Share of Airline Fleets in Storage © Bloomberg Share of Airline Fleets in Storage

While airlines retiring some older, fuel-guzzling planes from fleets will help, each plane maker is taking the calculated risk of continuing to produce jets faster than the market can absorb them. Airbus is set to complete 51 aircraft a month, despite delivering only 74 in the entire second quarter. Even as Boeing scales back its production plans, it wants to get back to producing 31 of its 737 Max jets a month by early 2022. The monthly build rates for its widebody 787s and 777s were at 19 pre-Covid and are coming down to a combined 8 jets a month next year. The U.S. manufacturer is pushing to hand over at least half of the grounded 737 Max aircraft in the first 12 months after the plane’s return to service. But delivery delays related to the grounding have given customers extra leverage to demand flexibility on when they accept the jets.

“Both are very focused on minimizing cash burn, and part of that strategy is ensuring you don’t build a lot of airplanes that sit on the ramp,” says Bloomberg Intelligence analyst George Ferguson. “Airbus is being less cautious than Boeing, trying to build through the downturn in hopes that as things fade, the customers will come and get their airplanes.”

By continuing to produce more than it can deliver, Airbus would provide greater support for its cash-strapped supplier network and more jobs for its own workforce, something Faury has flagged as a priority. The danger is that if the recovery comes later than expected—a growing possibility as areas in Europe and elsewhere see a flareup in Covid-19 cases—Airbus will be stuck with even more planes it can’t push on the airlines.

The company has matched its adjustments as closely as possible to the downturn “in a way that is sustainable and brings back stability, not only for the company but also the wider supply chain, too,” says Chief Operating Officer Michael Schöllhorn. It can cut back further if needed, he says.

Airlines are sounding an increasingly cautious note. Air France-KLM said on July 31 that it will continue to take aircraft only if it has financing. Air Canada in July threatened to cancel Boeing and Airbus orders, including for Airbus’s Quebec-made A220 narrowbody jet, if it doesn’t get support from the Canadian government. Willie Walsh, CEO of British Airways owner IAG SA, said airlines that treat the crisis as temporary are “misguided.”

A further downturn in demand could force more drastic measures. Boeing is already considering consolidating production of its 787 widebody, which is built at factories in North Charleston, S.C., and Everett, Wash., into a single plant. Hard decisions lie ahead, CEO Dave Calhoun said on an earnings call: “I don’t want to predispose any answers, because we don’t have any.”

For Airbus, which assembles planes in China, Europe, and North America, the options are more limited. The company has ruled out closing factories in the short term. And dismissing more workers, after it already announced plans for 15,000 cuts, would risk a run-in with European labor unions.

Still, standing firm could pay off, allowing Airbus to scoop up a bigger share of the market, says Bloomberg Intelligence’s Ferguson. He says the company is better positioned to bet travel will bounce back because of state support and a healthier narrowbody program—but it might not be enough. “Cutting production is the most important lever to pull to get through the downturn,” Ferguson says. “I don’t see any other good responses.”


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