What’s happening to the global oil prices is nothing less than amusing. Brent Crude Oil, which cost more than $120 a barrel back in 2011, is now down to almost $60 - a mind-boggling 50% drop. Now, in the context of aircraft manufacturing, this becomes so important because many industry experts and analysts are fearing aero majors may need to slow down by reducing their ongoing production rate. Will that be necessary for Boeing (BA, Financial)? How will all this affect the company? Let’s take a look.
Why are there talks about slowing down?
In one of my previous articles where I was speaking of Bombardier’s (BDRAF, Financial) troubles because of the drop in oil prices, I had mentioned that analysts are expecting the oil prices to drop as low as $60 a barrel. It seems that time has come as Brent Crude oil price touched $60.79 a barrel according to NASDAQ. The following is chart shows the fluctuations in the Brent Crude Oil Spot Price. The latest spot price is as of December 15, 2014.
So, why am I speaking of this? Well, dropping oil prices are becoming a major concern for aircraft makers globally since it might affect the demand for the new age fuel-efficient aircraft. Boeing is working on multiple fuel-efficient models that are expected to support the future of air travel. The American jet maker’s 787 Dreamliner, 777X and the 737MAX are all targeted towards customers seeking lower operating costs and fuel economy. The company has spent billions of dollars on research and development and finally now when the time has come to enjoy the fruits of the hard work, the plunging oil prices might spoil the fun.
Airlines might feel it’s better to carry on with the existing fleet, since fuel costs are going down, compared with spending millions or billions on acquiring new jets. If the demand for these jets slow down, the jet maker will be forced to cut down the production rate so that it can continue operating the manufacturing facilities without experiencing a production gap, until the demand is back on track.
Is Boeing thinking of slowing down?
It would be wrong to deny that there are ample reasons to worry. However, the aero giant seems to be confident of the future demand and doesn’t feel a production rate cut will be necessary. A recent report by Scott Hamilton highlights certain points that Boeing mentioned in a message that it sent out to aerospace analysts regarding concerns about impact of falling oil prices.
According to the report, Boeing mentioned that it had successfully bagged more than 3,000 aircraft orders between 2005 and 2007 when oil averaged $60 a barrel – the same as the present times. This suggests that the company believes it has a similar chance now also. Secondly, the American company believes aircraft orders are more correlated to airline profits than oil prices. The company is confident that its value proposition of 20% better fuel-efficiency will continue to be attract newer buyers. Thirdly, the total value proposition extends beyond just fuel efficiency and the other factors will help in maintaining demand.
Parting thoughts
Aviation industry expert Scott Hamilton said, “We have received many calls from media and the financial community about the impact of oil. We tell these callers that we see no prospect of cancellations or deferrals on narrow-bodies, where the vast majority of the backlog is, due to low oil prices. Any cancellations or deferrals will be due to individual circumstances of the customer.”
The present drop in oil prices have raised a lot of concerns. However, thinking practically, one honestly can’t expect oil prices to be at this level forever. Slowly, the prices will again rise and then the doubts regarding the fall in demand will also fade away. Boeing has already realized this and now the investors need to understand this and keep faith in the company.
