Boeing 737 Max Demand Stays Strong Despite Oil Worries

Author's Avatar
Jan 26, 2015

Crude oil prices have hit below $50 drawing concern regarding demand for reengineered aircraft. However, American aero major Boeing (BA, Financial) is witnessing solid demand for its aircraft, affirmed senior VP global sales and marketing John Wojick of the company. Several analysts believed that demand for newer airplanes would take a toll on the back of plunging oil prices, as airlines might rethink the revamp of their existing fleet. Oil price has seen a sharp plunge of more than 60%, and recovery is uncertain as OPEC is not ready to lower production. Despite this, the order trend remains undisturbed and Boeing looks pretty confident of bagging consistent orders.

03May20171203551493831035.jpg
Air China announce commitment for 60 737 and 737 Max planes, Picture taken from Boeing

Airlines’ demand stay strong
Boeing’s narrow body aircraft, the 737 Max family, is continuing to see “very strong” demand. Falling oil prices may cause some airlines to re-evaluate their order decisions regarding replacing their existing fleet, but that doesn’t seem to be the case. There are two reasons why airlines demand for jets are staying strong. First, cheap energy price seems to have boosted the economy on the whole, leaving higher amount left in the hands of individuals for greater discretionary spending such as higher level of air travel. So air passenger traffic is growing phenomenally.

Second, carriers’ profits are also increasing as they have to spend less on fuel charges. According to International Air Transport Association carriers profit has grown from $7.4 billion in 2012 to $12.9 billion in 2013. It is expected to come in around $18.7 billion in 2014, thanks to depressed oil prices. Increased air travel along with greater profit gives an opportunity to buy planes with advanced engine and better technology. Lower fuel shouldn’t be an excuse of deferring orders or holding demand, it should rather be a reason to buy more fuel efficient planes to lower fuel costs further, particularly as more than a third of airlines’ operating cost is incurred on fuel.

Not giving in to the oil drop
John Wojick told Reuters that declining oil prices is not bearing a negative impact on the demand for new planes. To back his assertion, he further said that the deal price for the reengineered version of its top selling narrow body, the 737 Max, has been quite good. The fuel efficient airplane is also bagging big orders, adding to its epic backlog.

During its earnings conference, Delta Air Lines (DAL, Financial) said that their fleet replacement or expansion plane isn’t changing a bit owing to oil price drop. This reflects the sentiments of most of the airlines whose order plans are not affected by the oil price.

In addition to the solid demand for the 737 Max, Boeing also seems to be working its way to bridge the fvvgap between the 777 and its successor 777X. The company believes it will be able to win sufficient 777 orders to manage a smooth transition.

A concern ruled out
Delegates at the Airline Economics conference expressed their concern regarding Boeing or Airbus’ (EADSY, Financial) ability to get a premium price for higher fuel efficiency of their 737 Max or the A320neo respectively.
As oil prices are low, Boeing and Airbus might have to compromise on their bargaining power of charging a premium.

03May20171203561493831036.jpg
Airbus A320 neo, Picture taken from Airbus

However, Wojick has ruled this out saying that rising air travel is keeping the demand for planes high, particularly as the upgraded planes can make traveling more affordable. He also said that the 787 Dreamliner was unveiled at a time when oil was $40, but that didn’t impact its orders. Moreover, Ryanair (RYAAY, Financial) has paid a premium on its purchase of the 737 Max, which is scheduled to get delivered starting 2019 through 2024. The company CEO Michael O’Leary hopes the 737 Max to be a game changer, carrying more passengers and cutting fuel cost by 20% compared with its predecessor. He said that as the airlines fuel cost runs north of 40% of its total cost, buying the 737 Max and saving 20% on fuel would give it an edge over competing operators.

The overall aerospace environment looks quite upbeat. Airlines profits are rising, plane makers are seeing record level backlog and boosting their production level. Boeing’s future is looking quite optimistic, and there’s no reason to worry regarding future orders. The company has enough in its order book to run the production facility for the next seven to eight years.