By Ankit Ajmera
(Reuters) - Orders for long-distance wide-body jets are on track to fall this year by the most since the throes of the 2008 financial crisis, fuelling concerns that the drop will eat into future cash flow at Boeing <BA.N> and its European rival Airbus<AIR.PA>.
Boeing, heavily hit by this year by the grounding of its single-aisle 737 MAX planes, said last month it would cut production of its bigger 787 Dreamliners in late 2020 due to a drought of orders from China, the world's second largest market by passenger air traffic.
This means over $1 billion (£772 million) less in annual cash flow starting in 2021, analysts estimate, and if demand remains weak, Boeing could be forced to further cut the 787 production in the next few years.
A Reuters analysis of two decades' worth of Boeing and Airbus orders data shows that when the economy weakens, orders for wide body jets, more expensive and with longer delivery times, fall more than those for smaller jets.
Graphic: Net industry orders for commercial aircraft - https://graphics.reuters.com/AIRCRAFT-ORDERS/0100B2L41YZ/Net-industry-orders.jpg
"Demand for wide-body aircraft remains soft and is unlikely to improve while the world continues to slow down," Berenberg analyst Andrew Gollan says.
That bodes ill for both planemakers since wide-body aircraft is a higher margin business.
At over $200 million, the 787s and Airbus A350s cost twice as much as smaller planes and analyst estimate they generate about half of commercial aircraft gross profits while only accounting for a quarter of their sales.
Between January and September, combined net orders for Boeing and Airbus wide-body jets fell by 56.4% to 105 planes. If the trend continues, the annual drop could be nearly as bad as a 70% plunge in 2009, the data suggest.
Graphic: Year-on-year sales for Boeing and Airbus - https://graphics.reuters.com/AIRCRAFT-ORDERS/0100B2L51Z1/Boeing-vs-airbus.jpg
While Boeing is bound to be hit harder if the worldwide ban on its 737 MAX after two crashes that killed hundreds continues, analysts expect it to compete fiercely for wide-body orders, which in turn could pressure Airbus' margins and possibly hurt its cash flow.
"Boeing will almost certainly compete more aggressively," Berenberg's Gollan says. "If demand does not improve in the coming years it maybe even force (Airbus) to look at production rates."
ADVERTISEMENTInteractive graphic: Global GDP Growth: Y-O-Y percentage change - https://fingfx.thomsonreuters.com/gfx/editorcharts/AIRCRAFT-ORDERS/0H001QXG596G/index.html
As the world economy cools, global passenger air traffic growth slowed to its lowest rate in a decade last August with freight demand remaining weak or falling for the 10th consecutive month, according to the International Air Transport Association.
Interactive graphic: Air traffic, freight volumes weaken in 2019 - https://fingfx.thomsonreuters.com/gfx/editorcharts/AIRCRAFT-ORDERS/0H001QXGQ985/index.html
ADVERTISEMENT(Reporting by Ankit Ajmera; additional reporting by Sanjana Shivdas in Bengaluru; Editing by Tomasz Janowski)
