Wednesday, June 25, 2008

Although Commercial Aircraft Orders Are Down, Backlogs Are Still Growing. What About the "Flake Out Factor?"

The Department of Commerce's latest data show new orders for commercial aircraft are down 36.7% from last year. Is that a worry for Wichita? Not yet. The month to month data are very volatile and new orders are down from a very high level last year. The level of new orders was high enough that unfilled orders are still up and I estimate the backlog now represents a healthy 35.4 months of shipments. The new planes, particularly the more fuel efficient planes built of composite, are made to order for today's rapidly rising fuel prices.

But Will it last?

J. Lynn Lundsford and Susan Carey warn in today's Wall Street Journal that "As rising oil prices cause even the strongest airlines to struggle, Airbus and Boeing Co. face the possibility that as many as a third of their orders for new jets could be postponed or canceled." One very savvy observer is Steven Udvar-Hazy, the chairman and founder of aircraft-leasing giant International Lease Finance Corp. which buys many of the planes airlines lease. He "predicts that 25% to 30% of the two makers' order books ... could be subject to what he called the 'flake-out factor' if oil prices continue their unprecedented rise."

This reminds us of a fundamental truth. Orders for aircraft are ultimately tied to the demand for airlines and their profitability. Rising fuel costs make the new generation of aircraft attractive, but they rob airlines of their ability to pay for the newer planes. Financially, U.S. airlines are far from healthy. Christopher Hinton of Market Watch tells us that airlines are cutting back on capacity and laying off workers:


Anonymous said...

This Post was done in June, well its now November/December and that worry that we were worried about has finally arrived. Hawker laid off thousands of employees, Cessna will lay-off around 500 employees for the first round of layoffs, and now Boeing might be doing layoffs again. Being a Cessna employee, i know that orders are over then last year, so layoff why? Well, the big dogs want their bonuses and fat pay checks thats why!

Anonymous said...

well, the flake out factor is what made over half my department recieve that pink slip and making there last day January 30th. Buyers are not cancelling their orders, they are just putting it on "Lay-a-Away" is what i call it. Since banks are getting tight about lending money, it is a high risk especially now. But once the "Lay-a-Away" is paid off, i might, MIGHT see my co-workers back, or I too might be joining them soon.