High Fuel Prices & Economic Uncertainty Are Starting to Hurt Aircraft Orders

Aircraft companies have been riding high in a world marketplace where turbulence abounds. Foreign demand and business use has driven this paradoxical prosperity. Nevertheless, aircraft manufacturing is a highly cyclical industry for good reasons. Airplane demand is derived from the demand for air transport. Growth in passenger miles drives the level of demand for new planes. Airline profitability and cash flow determine their ability to buy new planes.

Maybe it is a small straw in the wind, but soaring fuel prices, the U.S. economic recession, and a slowdown in the world economy may be starting to catch up with demand. In today's Wall Street Journal, Susan Carey writes:

"JetBlue to Defer Deliveries Of 21 Airbus Jetliners" By SUSAN CAREY
Wall Street Journal, May 27, 2008 5:56 p.m.

JetBlue Airways Corp., in a bid to preserve liquidity and slow its growth rate as oil prices continue to rise, said Tuesday it will defer deliveries of 21 Airbus jetliners for up to five years, reducing the number of new A320s it will take into its fleet to just 11 between next year and 2011.

The discount carrier, based in Forest Hills, N.Y., also said it plans to offer to the public $160 million of convertible debentures that will mature in 2038 but would be subject to redemption by the airline, half in 2013 and the other half in 2015. JetBlue said the proceeds of the offering, plus cash on hand, would be used to repay up to $175 million of existing convertible notes that will become subject to repurchase in July at the bondholders' option.

JetBlue, which had 107 Airbus A320s in its fleet as of March 31, had been scheduled to take delivery of 12 new aircraft in 2009 and 10 each in 2010 and 2011. As a result of an amended purchase agreement with plane builder Airbus, the carrier will instead take 12 planes in 2014 and nine in 2015, years in which it hadn't foreseen any deliveries. The A320 as operated by JetBlue seats 150 passengers. Airbus is a unit of European Aeronautic Defense & Space Co.

The airline also operates 34 100-seat Embraer 190 jetliners made by Brazil's Empresa Brasileira de Aeronautica SA. A spokesman said JetBlue still anticipates taking delivery of nine of the new Embraers in 2009 and eight each in 2010 and 2011.

Earlier this year, JetBlue said it had cut its capacity growth for 2008 to just 3% to 5% over 2007. The carrier narrowed its first-quarter loss to $8 million from $22 million in the first quarter of 2007, despite spending 62% more on fuel and paying more than 40% more per gallon than a year earlier.

"In the face of escalating fuel costs, we believe it is essential to take a more financially conservative approach to managing our business," said Dave Barger, JetBlue's chief executive officer. The aircraft deferrals, he said, "will help us further moderate our growth rate in 2009 and beyond, which will enhance liquidity and defer future debt obligations."

JetBlue, which had $713 million of cash at the end of March, recently canceled plans to build a 300-room employee "lodge" adjacent to its training center in Orlando, Fla., again citing the need to husband cash. Crew members will instead stay in local hotels during their training sessions, as they have been doing since the training center opened. The $30 million project, announced two years ago and then hit by multiple delays, "doesn't make sense right now," a spokesman said.