Jet makers may find reality bites next year

Airbus and Boeing will together build a record number of jets this year, defying the recession and slowdown in travel. They face a reckoning in 2010.

The world's two biggest plane makers may have to cut production of their narrow-body models as much as 30 percent by 2011, according to a Bloomberg survey of 15 aerospace analysts and consultants.

Boeing's 737 and Airbus' A320 contribute the majority of sales. Airbus, which trailed Boeing in deliveries until 2003, has only cut output once before.

The companies rely on single-aisle jets as their cash cows to fund other projects, including the Boeing 787 Dreamliner that's more than two years behind schedule.

Production cuts ripple through an industry of hundreds of suppliers, whose landing gear, seats and doors are fitted to the jets that have a list price of about $70 million and take almost a year to build.

"We're moving ever closer to the rendezvous with reality," said Chris Tarry, a London-based aviation analyst who has followed the industry for more than 20 years. "The reality is, there's too much capacity."

Boeing, which dominated the industry for decades, is more accustomed to adjusting production and has scaled back output as much as a third in previous recessions.

Airbus, with only 20 percent of the market at the start of the 1990s, avoided cuts and merely slowed down production increases. European labor laws also make it harder for Airbus to cut jobs.

One third of the participants in the survey predicted a production drop of at least an additional 9 percent in A320 output to 31 a month by 2011.

Four respondents said Boeing will have to scale back by at least 10 percent to 28 737s a month in the same time frame.

The survey was conducted last Tuesday and Wednesday and included participants from Europe and the U.S., who predicted a range from no cuts to a 30 percent output drop.

The plane makers still have order backlogs to carry them through the next seven years at current rates, after they limited production increases even as record orders were placed between 2005 and 2007.

"We have a weekly process that goes through every airplane in the skyline," and the production plan "still feels good," Boeing CEO Jim McNerney, said last month at a conference in New York.

His counterpart at Airbus parent European Aeronautic Defence & Space, Louis Gallois, told journalists last week in Paris that the coming winter will be "critical."

Airbus spokesman Stefan Schaffrath said the company has no immediate plan to cut production further, after February's decision to trim monthly rates on A320s to 34 from 36 by October, the first time it cut output.

Boeing, which makes 31 737s a month, also hasn't yet seen a need to change its rate, said spokesman Jim Proulx. The company is scaling back output of the twin-aisle 777 next year.

The two manufacturers each control about half of the single-aisle market, which encompasses commercial planes seating 110 to 180 passengers. They're slated to hand over at least 970 new aircraft this year, including twin-aisles, beating the previous combined record of 914 set in 1999.

Cutting production by three planes a month would hit cash flow and profit by $300 million to $400 million at both Airbus and Boeing, said Carter Copeland, an aerospace analyst at Barclays Capital in New York.

Global airline traffic in 2009 fell 6 percent from year-ago levels through August, with average fares down 20 percent. Airlines face combined losses of $11 billion this year, the International Air Transport Association predicts.

The fallout is reverberating across the industry, with companies deferring orders or considering doing so in future.

Ryanair Holdings, the biggest customer for Boeing's 737 in Europe, said Friday it may suspend expansion starting in 2012. The Irish low-cost airline's 113 firm unfilled orders are 5 percent of the 737 backlog, Morgan Stanley analyst Heidi Wood estimates.

"It's going to be an extremely tough winter for airlines," said industry analyst Richard Aboulafia of the Teal Group. "Airlines already sold everything that's not nailed down to raise cash."