They Made The Hay... Now, The Sun Has To Keep Shining

With combined orders of nearly 7,000 aircraft over the past three years, it's no secret times have been very good to Airbus and Boeing. Now, the question is whether those record sales will hold up long enough to translate into deliveries.

The Wall Street Journal reports it's all-but certain some of those orders won't hold up to become actual aircraft, as it's not uncommon for customers to back out of aircraft orders. There are also the carriers that, to be blunt, won't be in business long enough to take delivery their planes.

The current boom market puts Airbus and Boeing in a tough spot when it comes to ramping up production to meet the apparent demand. Boeing, in particular, knows the consequences of increasing production too quickly, only to have the orders that were to keep those lines going evaporate. The planemaker suffered just such a dilemma in the late 1990s... and barely survived.

"In this hot market, it would be easy to be consumed with the desire to sell anything to people walking through the door who want to buy and push our production system to the point where you could break it," said Boeing Commercial Aviation CEO Scott Carson back in September 2006. "It’s much harder to say, 'I’m sorry, we’re sold out.'"

Funny thing is, even as both Boeing and Airbus told customers, essentially, to get in line for 2007... the orders kept coming. This week, Carson told the WSJ Boeing is continuing to work to achieve the right balance between increasing production, and preparing for an uncertain future. "We have been cautious about taking rates higher in anticipation that there could be a cooling off," he said Thursday. "That said, we continue to see surprising strength in the market."

Both planemakers expect the market to cool considerably for 2008, returning to the level of around 500 orders apiece... but conditions remain optimal for some carriers to buy now. The low dollar, in particular, is a strong incentive for airlines to lock in orders (even Airbus, which builds its planes primarily in euros, sells them in US dollars -- giving airlines extra buying power, at the expense of the planemaker.)

It's also worth noting both manufacturers predicted 2007 would be a slow year, compared with 2006... which was supposed to be slower than 2005. We all know how those predictions turned out.

"My credibility is about zero when it comes to predicting order numbers," said Carson this week. "But it's got to slow down some time and we think it's 2008."

Airbus and Boeing do intend to accelerate production rates, and possibly build new plants, to meet demand -- but only when each is fairly certain the orders will stick. Given that some of both companies' largest customers in recent years have been airlines that didn't even exist five years ago, it's hard to say at this stage which orders will last, and which will fall.

In such a hot market, "many of these orders never materialize, but it's impossible to predict which ones those will be," said Airbus Chief Operating Officer John Leahy, also the planemaker's top salesman.

Christian McCormick, chief executive of transportation finance at French bank -- and aircraft financier -- Natixis SA, says both manufacturers would be wise to wait awhile longer, to determine how things play out.

"If the manufacturers start increasing production and building factories to meet all this speculative demand, they'll be in trouble," said McCormick.

FMI: www.airbus.com, www.boeing.com