Low oil prices have been a gift from God of late for the world's airlines. Carriers from Air Canada to Zambia Airways have seen the price of jet fuel plummet 27 per cent from last year and have now saved a cumulative $7-billion (U.S.) as a result, according to the latest jet fuel price index published by industry trade group IATA.
But just because airlines are now flush with unexpected cash doesn't mean they'll go binge-buying for new planes. While airline profitability is a key driver of aircraft orders, high oil prices and cheap money have already stoked demand for carriers to snap up the most fuel-efficient airliners possible.
U.S. aerospace consultant Richard Aboulafia predicts the good times the planet's plane manufacturers have enjoyed for the past several years will come to an end if oil prices stay low and interest rates start their inevitable rise.
"Boy, it looks like things might be changing," the Teal Group analyst told The Globe and Mail last week. "I'm not overly worried about interest rates because right now they're still pretty low. Fuel? That's anyone's guess. And if we're talking $60, that's a problem. No one really knows what the tipping point is."
Plane makers have been riding a wave of new orders in recent years because of the enormous gap between the price of borrowing money and the price of fuel, Mr. Aboulafia says. Global orders have topped 2,000 planes annually each year from 2011 to 2013 as the price of Brent crude stayed above $100 a barrel (U.S.) for all but a brief period, according to Desjardins Capital Markets.
The lack of other attractive investment opportunities for financiers also helped boost backlogs. Lenders plowed money into financing plane orders because, as Mr. Aboulafia puts it: "Where else are they going to put their money?"
How big are the numbers? Epic. Boeing Co.'s passenger airliner business enjoyed a backlog of 5,703 jets as of Nov. 30 while Airbus's book of planes not yet built stood at 6,036. To put that in perspective, Boeing is currently building its top-selling 737 at a rate of about 42 per month.
With order books that healthy, it's certainly not panic time for manufacturers. These are long-life assets and the calculation to buy one goes far beyond the volatility of oil price in one quarter.
But you can bet the prospect of sub-$70 (U.S.) a barrel oil lasting well into next year has carriers running the numbers on various macro-economic scenarios. Cheaper oil means it costs less to keep older planes flying. And for some airlines, that might be the choice they make instead of revamping their fleets.
Boeing chief executive officer James McNerney told Wall Street analysts last month that the company's commercial order book is safe until the price of oil falls "well south" of $70.
An analysis by U.K.-based consultancy Ascend Worldwide and reported by trade publication Flightglobal supports that view. Ascend compared the cost of a leased Airbus A320 with special wingtips against a leased A320neo with a new engine and 13 per cent lower fuel burn.
It found that although the lease rate for the re-engined A320neo is about 14 per cent higher, the plane is also cheaper to operate until crude falls below $55 (U.S.), at which point the older plane is just as economical.
Bombardier Inc. says lower oil prices have not made it more difficult to sell new airliners. The Montreal-based company is finding that customers for its existing regional aircraft have more money and are "better positioned to finance and buy" new planes, says Ross Mitchell, vice-president of business acquisition at Bombardier Commercial Aircraft.
Routes that are less passenger-dense also become more viable when the price of fuel goes down, he said. "That actually expands the number of routes that you could put our smaller aircraft on."
Bombardier's new C-Series plane might also benefit if things get more difficult for Airbus and Boeing, says Mr. Aboulafia. The jets compete with the smallest single-aisle aircraft made by its rivals in the 100 to 149 seat category.
Airbus and Boeing have an advantage over Bombardier in being able to offer sizable discounts based on the pricing power they enjoy because they produce so many planes, according to Mr. Aboulafia. So anything that slows interest in the A320 and Boeing 737 and prevents Airbus and Boeing from further increasing production and delivery rates, is positive for Bombardier.
"If [oil] prices stay where they are, I think we're fine" for all manufacturers, Mr. Aboulafia concludes. "But there is this upside scenario for Bombardier where the big guys rethink their output ramp plans. And that maybe gives Bombardier a little bit of breathing room."
Nicolas Van Praet