Boeing: How Single Aisle Aircraft Could Be A Key To Success

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Boeing (NYSE:BA) and Airbus have decided to increase production of  single aisle aircraft. This is being done primarily to accommodate for higher demand and to clear up backlog which has been mounting over the years. It is anticipated that, even with stepped up production levels, customers will have to wait years for their orders to get fulfilled. In this respect, it appears that both companies are going to be busy for a while to come.

Lower Oil Prices Enable Fleet Expansion:

Oil prices have been trailing at very low levels over the past few months. With a high of about $105 a barrel in July 2014, prices are well below $40 this year. Such a situation works in favor of airline companies, as fuel prices constitute a large portion of their costs. Airlines have reaped substantial benefits from such lower input costs and better profitability. It allows companies to use the cash generated to initiate fleet expansion and other restructuring plans. Furthermore, many companies have also used the freed up cash to reward investors, thereby increasing confidence. [1]

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Oil prices recovered this week slightly after recording steep losses in the last trading session. This was mostly aided by a lower rig count in the U.S., which helped stabilize prices in the current session. However, the overall glut is expected to continue for a while to come as Russia and OPEC continue to pump oil at near record levels. Additionally, there has been a sharp decline in demand (affected largely by macro economic conditions in China), especially for gasoline, which showcases a more bearish outlook. [2]

As fuel prices remain lower and airline profitability increases (expected to be a record $36 billion in 2016), airlines have far more liberty to allocate cash for expansion activities. [3]

Demand for Air Travel in Asia To Fuel Orders:

Despite adverse global economic conditions, demand in Asia is not showing any signs of a slowdown; in fact, just the opposite is anticipated. According to the Airbus CEO Frabrice Bregier, the company and its competitors are seeing no downturn in orders, especially from this region. He added that his company forecasts demand for about 12,810 new airplanes in the Asia-Pacific region valued at around $2 trillion over the next two decades. This represents about 40% of the forecasted global demand for about 32,600 airplanes over the same period. Furthermore, Airbus expects the passenger numbers in Asia to grow at a rate of about 5.6% annually, with China forecasted to grow in double digits. [4]

Boeing expects a requirement of about 3,750 new aircraft worth close to $550 billion within the next 20 years in South East Asia. Of these new airplanes, about 76% of the demand will be for single aisle aircraft like the Boeing 737 and the Airbus A320. Dinesh Keskar, senior vice-president for Asia Pacific and India sales at Boeing, said that the company attributes this growth to the rise of low cost carriers and higher demand fuelled by markets like Indonesia, Myanmar and Vietnam. [5]

Given the current trend of oil prices and the future of air demand in Asia, it seems highly plausible that demand for airplanes is going to skyrocket going forward. As Boeing and Airbus clear backlogs and accept new orders, there should be a significant increase in the top line of both companies.

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Notes:
  1. How Much Longer Will Oil Prices Benefit Airlines?, www.marketrealist.com []
  2. Oil Prices Rise on Lower U.S. Rig Count, But Glut Weighs, www.reuters.com []
  3. Airlines Reject Criticism for Fares as Oil Price Drop, www.nst.com []
  4. Airbus CEO Sees Nonstop Demand in Asia, www.cbsnews.com []
  5. Boeing Sees New Aircraft Demand Worth $550 Billion in SE Asia Over 20 Years, www.chinanewsasia.com []