Sign of the times ...recommends industry activists to review this abridged/highlighted clip from Wall Street Journal...it covers issues discussed at recent AFA Metal n Money DIALOGUE and relates to comments on the growing influence of financial institutions in the great survival game of airline operations....(posted 22 Feb,2010)
Airline Woes Press Jet Makers
Airbus, Boeing Shuffle Orders, Hope for Cash to Keep Production Lines Rolling
Airbus, Boeing Shuffle Orders, Hope for Cash to Keep Production Lines Rolling
Airlines world-wide, despite improving traffic, still face a cash squeeze that is forcing jet makers Airbus and Boeing Co. to work harder to keep their factories busy.
So far, Airbus and Boeing have been able to avoid major production cutbacks by juggling orders and delaying airplane deliveries to many customers, officials at both companies say.
But the cash squeeze is widening the gap between healthier airlines that can tap stock and debt markets to fund new plane purchases and weaker rivals that must struggle for funding.
Pressure is growing as rising fuel prices threaten to outpace the slight fare increases that carriers have recently been able to make stick.
If carriers' finances improve over coming months, airlines that recently deferred deliveries should be in a better position to complete their orders over coming years. But if the airline industry slips back into crisis, Boeing and Airbus, already struggling with cost overruns on new planes, could be forced to make costly cuts in jetliner production. Both have already shelved expansion plans and throttled back output. On Friday, Boeing warned some 1,000 employees, mostly technology workers, they may lose their jobs in April.
For airlines that order new jetliners, the installment payments required by Airbus and Boeing while the planes are under construction are a major expenditure. These so-called predelivery payments, which can reach tens of millions of dollar per jetliner, currently are very difficult to finance through banks, so most airlines are forced to fund them with cash.
Airbus officials said last month they had shifted some 600 planes in their production schedules over the previous 18 months because of delayed deliveries. "A lot of aircraft move because of airlines' inability to make predelivery payments," said Airbus Chief Operating Officer John Leahy, the company's top airplane salesman. Some stronger carriers capitalize on such delays by accelerating deliveries, he added. Airbus had 31 cancellations in 2009.
Hans Peter Ring, chief financial officer of Airbus parent European Aeronautic Defence & Space Co., said an airline's ability to make installment payments is a "litmus test" of its ability to pay the balance due on delivery.
Aer Lingus Group PLC, which has been hit by Ireland's deep recession, deferred seven Airbus planes in 2009. The unprofitable Irish carrier's free cash dropped by more than 30% last year, to €770 million ($1.05 billion) on Dec. 31.
Australia's Qantas Airways Ltd. in June canceled orders for 15 of Boeing's new 787 Dreamliners and delayed delivery of another 15, in a move the carrier said would save it $3 billion in capital expenditures. On Dec. 31, Qantas had a strong cash balance of $3.2 billion, but the carrier has slashed capacity to meet falling demand.
In total, Boeing faced 121 order cancellations and deferred 271 deliveries last year, Chairman and Chief Executive Jim McNerney said last month. He said the rate of deferral requests slowed in the fourth quarter. Kostya Zolotusky, managing director of capital-markets development at Boeing's finance arm, said that while lending for airlines' predelivery payments has eased in recent months, "availability remains challenging compared to the very liquid period" before the financial crisis.
Mr. Leahy at Airbus said last month that pressure to shift delivery slots has eased in recent months, following a period in which the industry "was in free fall." He said the improvement is "a further sign that airlines are getting healthier." But others in the industry are more cautious.
"The market's thawing, but access to capital is still a big issue, especially for smaller, less-well-capitalized airlines," said Ron Wainshal, chief executive officer of aircraft lessor Aircastle Ltd. in Stamford, Conn.
Brian Pearce, chief economist at the International Air Transport Association, a trade group, said that while airfares are starting to rise in the U.S. and Asia, European airlines are still struggling. And airlines world-wide still face big losses, which eat into cash reserves, he said.
Mr. Pearce noted that carriers have boosted fares by restricting the supply of seats they offer. They did this by flying their planes on average 6% fewer hours than in early 2008—a move that increases the cost of each remaining hour the planes fly and eats into any gains. "Cash from operations is still very weak," Mr. Pearce said.
Many relatively healthy airlines around the world instead tapped stock and debt markets last year to raise cash for airplane deliveries and prepare for winter in the northern hemisphere, when air travel normally drops. But weaker and small carriers have a harder time issuing debt or raising equity.
"The crisis is a magnifying glass for the division between the haves and have-nots," said Henri Courpron, president of aviation & aerospace at Seabury Group, an investment bank and advisory firm in New York. Mr. Courpron said the Airbus and Boeing order-book shuffling was likely to widen a rift between stronger carriers that can modernize their fleets with newer, more-fuel-efficient planes and weaker carriers stuck flying older planes.
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