This Big Boeing 737 MAX Order Cancellation Could Be Start Of A Wave.

This Big Boeing 737 MAX Order Cancellation Could Be Start Of A Wave.

Boeing 737

The plane-leasing firm Avolon has canceled orders for 75 737 MAXs worth $8 billion at list value, it said Friday, in what could be the beginning of a flood of deferrals and cancellations for Boeing BA and Airbus as the coronavirus pandemic decimates air travel.

Boeing may face greater risks. As the grounding of the 737 MAX stretches past one year, more customers will be able walk away from orders without penalty due to material adverse change clauses in sales contracts that kick in if the plane maker fails to deliver within a year of the agreed date. And compared to Airbus, more of Boeing’s backlog is made up of orders from airlines that committed to buy more planes than they realistically needed before the downturn began, analysts with the investment bank Barclays estimate.

Adam Pilarski, a consultant with Avitas who has warned for years that airlines were ordering too many planes during the boom times of the last decade, expects that airline traffic won’t return to 2019 levels until 2023, a forecast in line with many other observers.

“We already have enough planes for the next four years,” he told Forbes. “Every single person who has contracts to buy a plane doesn’t want them right now.”

Airlines worldwide are going into suspended animation. For April, scheduled flights are down to 20% of normal capacity, analysts with the investment bank Jefferies JEF estimate, and over half the planes in the world fleet were parked as of Friday.

A good share of those planes may never return to service as airlines accelerate retirement of older aircraft, which will help plane makers down the line when demand returns, but that will only cushion the pain ahead so much.

Airbus and Boeing will be forced to cut production by 30% to 40% through 2021, and perhaps beyond, Barclays analysts said in a research note this week.

With international travel being hit hardest amid the pandemic, and expected to bounce back slower, many analysts believe demand for widebody aircraft will take the worst hit. Jefferies expects widebody production to fall 60% over the next three years, which will hurt Boeing worse than Airbus given the greater weight in its business of large models like the 787 and forthcoming 777X.

Boeing could also be at more risk of cancellations and deferrals than Airbus given its customer base. Barclays estimates that a third of Airbus’ order backlog is with customers that appeared to be over-ordered before the pandemic upended the world economy, as compared to nearly half for Boeing. The problem is most pronounced for Boeing in widebodies, where 58% of its backlog is from airlines that are over-ordered, according to Barclays.

Many of the airlines with the fattest order books are Asian and Middle Eastern carriers that expanded rapidly over the last decade amid rising wealth in their home markets and low interest rates that greased plane sales.

At the top of the table for Boeing is the Gulf budget carrier flydubai, which has orders for 237 737 MAX aircraft outstanding, 198 more than its business justified, Barclays believes. Lion Air is next with 174 excess aircraft on order with Boeing, in Barclays’ estimation. The Indonesian airline group also has 190 A320 family aircraft on order, 135 of which Barclays considers unjustified, third-most among Airbus’ most over-ordered customers.

Malaysian budget airline AirAsia is the world’s most over-ordered airline, with an excess 326 aircraft on order with Airbus, according to Barclays. In February it deferred delivery of 78 A330neo planes for its AirAsia X subsidiary.

There will be tense negotiations ahead between airlines, leasing companies and Boeing and Airbus, Pilarski says, with the plane makers pushing for deferrals over cancellations, and threats from buyers to abrogate contracts by declaring bankruptcy.

“This is a good time for lawyers,” he says.

In addition to abandoning orders for 737 Boeing 737 MAX aircraft, which it hadn’t placed with customers, Avolon cancelled commitments for four A330neos and deferred delivery for 25 narrowbody aircraft to 2024 or later, including 16 737 MAX planes. Avolon still has a total of 55 orders for the MAX.

The moves cut its commitments to take new planes through 2023 by 42% to 165 aircraft.

Boeing said in a statement that the restructuring of Avalon’s order book was a mutual agreement. “As we have produced fewer MAX airplanes than planned, we have implemented these adjustments to regain flexibility in managing the more than 4,300 unfilled 737 MAX orders. This is also the right step to align to the realities of the marketplace as we balance supply and demand and protect the 737 MAX’s underlying value, especially in the leasing sector.”

One option cash-strapped airlines have to raise money is to sell planes to lessors and lease them back. Pilarski, whose firm works on such deals, says he hasn’t seen any in the works yet. “I think people are too scared right now to do anything.”

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