by Tony D’Altorio, Investment U Research
Friday, June 24, 2011
The sounds of combat in the air were heard over Paris this week…
No, it wasn’t a re-enactment of a World War II air battle. It’s just the annual Paris Air Show.
The annual event marks yet another skirmish in the decades-long battle between the two behemoths of the aerospace industry – Boeing (NYSE: BA) and Airbus. (Airbus is a subsidiary of the European Aeronautic Defense and Space Company (PINK: EADSY), or EADS.)
The newly intensified battle is for the largest part of the civilian airliner market – the short-haul segment, which includes aircraft with between 90 and 240 seats.
Boeing – Airbus Competition Heats Up
The competition intensified in December when Airbus offered an upgraded version of its A320 family of aircraft – the A320neo. This updated version is attractive to airline companies for one main reason: It offers a 15-percent cut in fuel consumption compared to Airbus’ current models.
This is enticing in an age of high jet fuel prices for airline companies. Especially since fuel accounts for more than one- third of an airline’s operating costs.
Oil prices are up 40 percent so far this year, causing some airlines to raise fares up to seven times since the beginning of the year. Most companies expect the price of oil to stay above $100 per barrel in the long term, which makes fuel-efficient jets appealing.
Boeing won’t release a decision on whether it will upgrade its 737 or design a whole new plane until at least the end of the year.
If Boeing decides to design a new plane, the decision will be a costly one, with a price tag of at least $10 billion- before cost overruns. This would also tie up a large portion of Boeing’s engineering resources.
Boeing expects the final outcome to be at least 20 percent more fuel efficient than Airbus’ A320neo, which should draw business away from its competitor.
This upcoming decision is crucial for Boeing, and will determine if it will remain locked in competition with Airbus…
Global Airline Industry Outlook Remains Positive
The 737 and A320 families of aircraft account for about half of all commercial jets flying today. And there are over 4,300 of these jets on backlog.
The outlook for both firms is positive. Both should benefit from continued growth in the airliner business despite the current gloom about a “soft patch” in the global economy.
It’s forecast that airline traffic will grow at least four percent per year over the next 20 years. It looks like the Asia-Pacific region will have the fastest growth over this time frame.
As reported by my colleague, Justin Dove, Boeing recently projected in its annual market outlook that the number of commercial aircraft will more than double by 2030. It also expects passenger traffic to nearly triple, due to the Asia-Pacific region.
Asia Becomes Largest Regional Market for Commercial Aircraft
Boeing also notes that Asia overtook the United States and Europe last year as the largest regional market for commercial aircraft and expects that region to extend its lead in the years ahead.
That means airlines will need $4 trillion worth of new planes, or 33,500 jets, to meet the expected demand. Much of the growth will occur in the short-haul plane market.
It’s expected that there will be demand for about 25,000 of these types of jets over the next two decades, mostly in Asia. This is equal to 70 percent of the expected jet deliveries over this time frame.
Most of the orders for Airbus’ fuel-efficient A320neo at the current Paris Air Show are from Asian carriers such as Air Asia.
This makes Boeing’s decision whether to design and build a whole new narrow-body jet even more important.
Good investing,
Tony D’Altorio
