Airbus and Boeing 2014: the rain of orders and deliveries continues, with no sign of slackening

Boeing's very, very good year

For 2014, Boeing had 1550 gross orders, and 118 cancellations, for a net total of 1432, a new record for the company, surpassing the 1413 orders achieved in 2007. Boeing had a particularly successful December, adding 174 new orders, including 20 777s and 16 787s.

Boeing 2014 orders by type

Source: CAPA - Centre for Aviation and Boeing

Boeing had particular success with narrowbodies in 2014, logging 1196 gross orders, including 891 of the new 737 MAX, 302 of the 737 NG family and three Boeing Business Jets.

This is the third consecutive year that orders for Boeing's 737 family will have topped 1000 aircraft. Better than half of Boeing's 737 orders for the year have come from 'unidentified customer(s)', including 174 in 4Q2014.

Boeing 737 orders: 2006 to 2014

Source: CAPA - Centre for Aviation and Boeing

Boeing's 737 MAX order backlog is now in the region of 2600 aircraft, representing better than five years of production, even at the current record output of 48 per month. Combined with the 737 NG order book of nearly 1700 aircraft, and Boeing's 737 family order book totals more than eight years of output.

737 NG and 737 MAX unfilled orders

Source: CAPA - Centre for Aviation and Boeing

To deal with the excessive backlog, Boeing is increasing production over the next four years. The first aircraft at the new build rate of 42 per month was rolled out in Mar-2014. This will be raised to 47 per month in 2017 and then to 52 per month. Output was just 31.5 aircraft per month in 2010. This is putting pressure on its suppliers, as well as its own manufacturing capabilities, as Boeing is concurrently developing its Renton production facility with a third, 737 MAX-dedicated assembly line.

777 orders for the year were 281. Boeing launched the 777X family at the end of 2013 and the new aircraft did particularly well in 2014, securing 224 of Boeing's orders for the family. Existing customers also continue to line up for the 777-300ER, which accounted for the entirety of non-777X orders for Boeing this year.

Boeing intends to keep 777 production at 8.3 aircraft per month/100 per year out to the switch over between the current generation and the 777X. This means Boeing still has to sell around 230 current generation 777s over the next five years to bridge the production gap, with the 777X due to enter service around 2020.

As airlines update their fleets and leasing companies see opportunities to plug gaps in the market, the 777-300ER continues to accumulate small orders. Boeing anticipates sales of 40-50 aircraft per year, which would allow it to avoid any output cut. There are risks though. If current generation 777 orders dry up or the 777X programme runs into development troubles - something that happens with distressing regularity with modern aircraft, even with re-works of existing airframes - then Boeing will have a very difficult time maintaining production at current levels.

New orders for the 787 were few and far between for Boeing, particularly in the first half of the year. Momentum picked up in 2H2014, particularly in the last four months. Boeing logged 65 orders, although this was cut back to 51 after cancellations. Leasing companies have proved to be the chief customers for the Dreamliner this year, with Avolon ordering six, CIT Leasing taking 12 and MG Aviation ordering two. All Nippon Airways became a repeat customer, with an order for 14 to round out its fleet and large orders for 15 and 14 aircraft were placed by unidentified customers in Sep-2014 and Dec-2014.

Apart from a single VIP 787-8 ordered in the beginning of the year, all the orders placed in 2014 have been for the larger 787-9. With its extra range and capacity for around 40 more passengers, the variant has proved to be the most popular of the family for several years. It has been around 12 months since Boeing secured a commercial airline order for the 787-8 or the 787-10.

Boeing 787 aircraft orders, deliveries and backlog, year to 31-Dec-2014

Source: CAPA - Centre for Aviation and Boeing

The sole cloud on Boeing's horizon has been the 747-8 programme. Boeing received just two 747-8 orders this year, and these were neutralised by other customers dropping orders.

19 747-8s were delivered in 2014 and Boeing announced earlier in Dec-2014 that output will fall from 1.5 to 1.3 aircraft per month from Sep-2015. With airlines reluctant to buy large, 4-engine aircraft, global cargo markets still soft and airfreight suffering structural issues, the market for the aircraft has almost dried up. Boeing (and Airbus as well) is hopeful that there is still a role for the very large aircraft, but with large, high efficiency twins now offering capacity in the 350-450 seat range, there are fewer and fewer route pairs where these aircraft are the best choice to operate.

For the year, Boeing delivered 723 aircraft.

This includes delivery records for the 737 (485 aircraft), 777 (99 aircraft) and the 787 (114) aircraft. This was in line with Boeing's forecast of 715-723 aircraft. The 787 deliveries will have been particularly satisfying for Boeing, after the continuing issues with production at its South Carolina manufacturing campus. Boeing achieved a one month record for 787 deliveries in Dec-2014, managing to get 34 aircraft to customers and beat its target of 110 for the year.

Boeing annual deliveries

Source: CAPA - Centre for Aviation and Boeing

With 737 and 787 production both set to continue to build, Boeing will be delivering record numbers of aircraft for the foreseeable future. Expectations for deliveries for 2015 are 750-760 aircraft, meaning Boeing will have doubled output over the space of seven years, and will be producing better than two aircraft per day.

With its strong commercial sales and deliveries position, Boeing is confident and looking to boost shareholder value. Boeing bought back USD6 billion in shares in 2014 and announced a new USD12 billion share buyback in Dec-2014, replacing the previous scheme, of which approximately USD4.8 billion was remaining. The company also raised its quarterly dividend by 25% to USD0.91 per share.

Airbus slipped a little behind in orders and production, but may make a late burst

Airbus is expected to outsell Boeing in terms of orders in 2014, despite only having logged significantly fewer orders by the end of Nov-2014. Airbus usually finalises a large number of orders late in the year, with the final few weeks of December turning into a '13th month' for the company.

Airbus has a similar number of gross orders to Boeing, with 1,328 to the end of Nov-2014. It has been hit much harder by order cancellations this year - mostly for A320s, but also for the A350 (70 orders cancelled by Emirates, in an almost unprecedented move for the financially healthy carrier) and the A380 (six cancelled by the troubled Skymark Airlines). These 297 cancellations cut Airbus net order total to 1031, although the company has announced another 140-odd orders since the beginning of Dec-2014.

Orders aside, Airbus will be well behind Boeing in deliveries, with the manufacturer expected to only marginally better its target of matching 2013 deliveries of 626. For the year to the end of Nov-2014, Airbus had delivered 564 aircraft.

2014 was a key year for Airbus to deliver on new aircraft programmes. It is putting the A350 XWB - which will be the mainstay of the company's widebody offering for the next 15-20 years - in to hands of launch customer Qatar Airways on 22-Dec-2014. It also made clear progress with the A320neo, which is due for entry into service, also with Qatar Airways as launch customer, around Oct-2015.

The A320 programme continues to be a star performer for Airbus. For the year to the end of Nov-2014, Airbus logged 970 narrowbody orders, comprising 752 for the A320neo and 218 for the A320ceo. This essentially fills the remaining production slots for the A320ceo.

Like Boeing, Airbus has a massive backlog of orders for its narrowbody aircraft. Airbus has 4832 outstanding A320 family orders, 3761 for the A320neo family and 1071 for the A320ceo.

Airbus A320 family order backlog as of end of Nov-2014

Source: CAPA - Centre for Aviation and Airbus

Airbus' approach to narrowing its order backlog isn't as aggressive as Boeing, at least not yet. A320 production has been steady at 42 per month since 4Q2012. Airbus' production year is effectively about 11.5 months, meaning its narrowbody output is only a little ahead of Boeing's.

Airbus plans to raise production to 46 aircraft per month - around 525-530 per year - by 2Q2016. Further increases towards the latter part of the decade are under consideration, although Airbus is likely to introduce them along with the A320neo production ramp up, set for 2018 and beyond.

A320 narrowbody family annual production

Source: CAPA - Centre for Aviation and Airbus

In early 2014, the company stepped back from plans to raise narrowbody output to 50 per month, or beyond, mostly due to concerns about the fragility of its supply chain. With three A320 assembly facilities operating, and a fourth - the new Alabama final assembly line - due to join in production in 2015, Airbus has the production capacity available to raise production to beyond 50 per month, should it see the necessity and requisite strength in the supply chain.

The ongoing process of aerospace consolidation in Europe and the US, particularly the acquisition of smaller tier two and tier three suppliers by bigger tier one corporations, may help Airbus over the next few years, although potentially at the cost of some pricing controls.

Even as Airbus and Boeing demanded high production levels, both major manufacturers have been pressuring suppliers, particularly smaller manufacturers, for lower prices. At higher output levels, quality control problems have been apparent for several major component makers, on both sides of the Atlantic. Airbus and Boeing have taken action, expanding their relationships with suppliers to include more direct feedback and supervision.

One area Airbus has lagged Boeing has been in widebody sales. The launch of the A330neo in Jul-2014, gave the Airbus widebody product line up a boost, albeit one with less capacity diversity that Boeing's. It will also ensure the A330 will stay in production beyond 2030.

Airbus' decision to launch the A330neo programme at the Farnborough Airshow ended nearly two years of speculation about the aircraft. Airbus quickly garnered 121 commitments, of which it had confirmed 40 by the end of Nov-2014. Several major customers, including AirAsia X (55), CIT Aerospace (15), Avolon (15) and Hawaiian Airlines (eight) have firmed up their orders during Dec-2014, taking orders above 130 for the year.

In addition, Airbus has logged 41 orders for the A330ceo this year. Airbus plans to certify the new A330 'Regional' variant - targeting medium-haul customers in Asia Pacific - and a version with higher maximum take-off weight offering an extra 350-500 nm range in 2015.

Despite these developments, Airbus has already announced that it will be making production cuts to the A330 programme - both in 4Q2015 and again in 2016 - to resolve its production gap to the A330neo, which is due to enter service in late 2017.

Airbus has a firm backlog of 215 A330s, a little under two years production at present rates. Output for A330 is at a record 10 per month, a testament to the popularity of the mature platform and the scramble for high efficiency twin-jets among airlines.

A330 annual output

Source: CAPA - Centre for Aviation and Airbus

The cut to A330 production will have a negative effect on Airbus' cash flows for 2016 and 2017, but as the A330neo enters production, rates will build up again. Airbus sees the cut as necessary to ensure that its supply chain has good visibility on their requirements as they move towards the A330neo production ramp up.

A330ceo production will be dropped down again beyond 2017, while A33neo production will be built up, and could eventually stabilise at better than the current rate of 10 per month rate.

Airbus transition plans from ceo to neo

Source: Airbus

Airbus celebrated the first A350 delivery in 2014 - albeit with a little difficulty and just before the close of the year - but orders have not been particularly impressive. Airbus suffered a high profile cancellation of 70 A350 from Emirates earlier in the year, after the Middle East carrier reviewed its fleet plan, not to mention ordering 150 Boeing 777Xs. The A350 gained some order momentum towards the end of the year, grabbing orders from Delta Air Lines, All Nippon Airways, Finnair and Air Mauritius, but its tally is still nearly 30 to the negative for the year.

Another widebody suffering order cancellations was the A380, with Skymark Airlines cancelling its order for six. The big Airbus widebody has gathered just one order this year, for 20 aircraft from leasing company Amedo.

With a backlog of around 170 aircraft, production at about 2.5 aircraft per month/30 per year and better than 40% of orders concentrated with a single customer, the A380 remains in something of a precarious position. Airbus expects to achieve break-even for the programme in 2015, and there are delivery positions for the aircraft out to 2022, but speculation on the future of the programme has been plentiful.

Emirates, which has ordered 140 A380s, has been pressing for a 'neo' version of the aircraft. With the A350-1000, A330neo and A320neo all in development, it is uncertain whether Airbus has the resources to commit to a development programme prior to 2017-2018. Airbus would need a solid business case before committing to putting new engines on the aircraft and making other improvements, which would likely require investment of more than EUR2 billion. A further stretch is also an option, but also an expensive, long-term one that appeals to a very limited number of customers.

Airbus believes in the long-term future of the A380, and has partially blamed its own marketing efforts for the lack of sales, a position some A380 customers share. In order to broaden the aircraft's appeal, Airbus is working with customers to offer higher density configurations, maturing the aircraft away from the luxury-oriented fleet flagship and into a medium and long-haul workhorse. Fully half of all A380 customers offer densities under 500 seats, but newer users have typically offered higher capacities than initial operators.

2015 will be another year focused on delivery for Airbus - it will bring its minor A330 updates and the A320neo to the market this year, and will also need to show progress on the A350-1000 and A330neo, both of which are due to enter service in 2017. Beyond this, Airbus may look to more ambitious programmes.

Declining fuel prices won't dampen enthusiasm

2014 proved to be a year that exceeded the expectations of the manufacturers. Both manufacturers successfully brought new products to customers and have kept production levels up, keeping airlines and investors happy. Aircraft deliveries have climbed for the fifth consecutive year, driven by the burgeoning of aviation in Asia Pacific.

Global fleet deliveries by region: 2005-2014

Source: CAPA - Centre for Aviation and Airbus

Initial order projections for 2014 were exceeded, revised and then exceeded again. Globally, large commercial aircraft orders in 2014 exceeded 2000 for the fourth year running. The challenges for Airbus and Boeing for 2015 and the few years beyond are about executing new programmes and bringing them to market, rather than winning orders.

With oil prices dipping below USD50 per barrel in the early stages of 2015, questions are being raised as to whether the decline in fuel prices will also cut the demand for aircraft. Fuel is typically 40-50% of airline cost, but it is not fuel efficiency alone that is driving demand for new aircraft.

US NYMEX oil price per barrel (USD): 2014

Source: US Energy Information Administration

Passenger traffic growth set to continue above the long term trend of 5.5% p/a - particularly in long-haul markets - so airlines are adding capacity to their fleets to accommodate this anticipated demand. New aircraft also bring other benefits apart from better fuel efficiency - lower maintenance burden, higher capacity, less noise, greater range and better utilisation.

Airbus expects that dropping fuel cost will contribute to airline profitability in 2015, freeing up funds to invest in new equipment. In combination with this, the liquidity position of commercial aircraft financial markets is in the best shape seen since the financial crisis. Export credit usage has returned to pre-crisis levels and traditional commercial bank debt and the capital markets have been augmented by alternative sources, creating a more balanced and diverse market place.

Economics is the underlying force that will determine growth

As always, there are downside risks. Social and political unrest, health crises and interest rate and currency fluctuations all have the potential to damage the outlook.

The underlying picture for passenger traffic, and thus aircraft demand, is supported by generally robust economic growth, forecast record airline profitability and the long-term aircraft replacement cycle, maintaining the strength of the market.