Airplane makers racked up billions of dollars in sales at the Farnborough International Air Show – including a blockbuster $14.7-billion (U.S.) deal for Boeing Co. – but two troubling phrases are causing some unexpected turbulence.
The words “letters of intent” and “memorandum of understanding” appeared in key sales announcements issued by Airbus SAS, Boeing Co. and Bombardier Inc., instead of the term that makes manufacturers much happier: “firm order.”
The wariness among airlines to sign firm orders is a sharp contrast to the billions of dollars worth of final deals signed at the Paris Air Show last year and another sign of the growing fear that the world economy is in danger of skidding off the runway.
“Last year, it looked like the global upturn was gathering force,” said Richard Aboulafia, vice-president of analysis at airline and defence industry consulting firm Teal Group Corp.
“This time, we’re looking at a perpetual European crisis, sluggish U.S. numbers, and much slower emerging market growth.”
Boeing reported $37-billion worth of sales, including the firm order with United Continental Holdings Inc. announced Thursday for 150 of its 737 single-aisle jets. But $13.4-billion of that $37-billion consists of commitments to buy planes, not firm orders.
Boeing trumped Airbus, which said it sold 115 aircraft worth $16.9-billion.
Firm orders for 54 Airbus aircraft represented $11.1-billion of the total, while another 61 were in memorandums of understanding.
Last year, after the Paris show, Airbus said it had landed firm purchase orders for 418 planes worth $44-billion and memorandums of understanding on another 312 planes that would generate $28.2-billion in revenue for the France-based manufacturer.
Bombardier scored a letter of intent and a conditional order but no firm deals for its C Series plane, which will challenge Airbus and Boeing in the 100-149 seat segments of the single-aisle market.
“Many large airlines have gone into the mode of hoarding cash,” said one European industry source.
That’s evident in Europe, where German magazine Der Spiegel quoted Hartmut Mehdorn, chief executive officer of struggling Air Berlin, as saying that cookies and coffee are no longer offered at company meetings.
Elsewhere in Europe, Hungarian national carrier Malev and Spanair of Spain have collapsed.
The Boeing deal with United includes an order for 100 of the airplane maker’s 737 Max jets, which offer new, more fuel-efficient engines than existing versions of a plane that has been a cash cow for decades.
Soaring fuel costs battered United and other airlines earlier this year and although they have fallen sharply in recent weeks, analysts are predicting a rebound in jet fuel prices during the second half.
Even though the planes will cost United $14.7-billion, the order is conservative, Michael Derchin, airline analyst with CRT Capital Group LLC, said in an interview from Stamford, Conn.
That figure reflects the list price for the new 737s and 50 more of the older version of the plane. Airlines typically receive discounts of 30 per cent or higher.
“They have $8-billion in unrestricted cash and they’re generating over $4-billion in cash,” Mr. Derchin said. “They certainly could have ordered more planes.”
He noted, however, that United and other airlines are balancing the urgency to make their fleets more fuel-efficient with the need to conserve cash amid the crisis in Europe and fears the U.S. economy will tip back into recession.
United’s passenger statistics for June showed how the deteriorating European economy is affecting air travel.
Revenue-passenger miles on flights across the Atlantic Ocean fell 1.4 per cent last month from a year earlier.