Bloomberg Businessweek - USA (2020-08-10)

Bloomberg Businessweek August 10, 2020

13

COURTESY

BOEING.

DATA:

CIRIUM,

BLOOMBERG

INTELLIGENCE

THEBOTTOMLINE NewordersatAirbusandBoeinghave

stalledthankstothepandemic.Nowthefutureof1,600planesset

toenterorreenterservicenextyearseemsincreasinglyatrisk.

themarketwillbeabletoabsorbthejetsthetwo

companieswillchurnoutincomingyears.Neither

wantstocuttooquickly,outoffearofcedingbusi-

nesstoitsarchrival,accordingtoSashTusa,anana-

lystwithAgencyPartnersinLondon.Hesaysthey’re

alsoreluctanttolowerproductionratesuntilafter

airlineshaveagreedtopaythecostsassociatedwith

deferringdeliveriesofaircraftoftenorderedmany

yearsearlier.“AirbusandBoeingarenowplayinga

potentiallydamaginggameofchicken,”Tusasays.

Attheendofthesecondquarter,Airbushad 145

finishedjetsawaitingdelivery.Boeinghasabout

450 ofits 737 Maxjetsreadytoshiponceregula-

torscleartheplanetoflyagain.Deliverieshave

beenfrozensinceMarch 2019 followingtwodeadly

crashes;thego-aheadfromtheU.S.FederalAviation

Administrationisexpectedbytheendoffall.By

Tusa’scount,morethan1,600planesarescheduled

toenterorreenterservicenextyear—onparwiththe

industry’sproductionpeakin2018.

Whileairlinesretiringsomeolder,fuel-guzzling

planes from fleets will help, each plane maker is tak-

ing 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 com-

ing 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 flexibil-

ity 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-

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 con-

tinue 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 con-

solidating 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 facto-

ries in the short term. And dismissing more work-

ers, 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 com-

panyis betterpositionedtobettravelwillbounce

backbecause ofstatesupportanda 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.”

�Charlotte  Ryan, with Siddharth Philip, Julie

Johnsson, and Guy Johnson

100%

50

0

▼Shareofairline fleets

in storage

Europe

NorthAmerica

China

1/2020 7/

◀ Boeing’s 737 Max

production line in

Renton, Wash.