(Bloomberg Opinion) -- Airplanes just aren’t selling like they used to.
Monday marked the second day of the Dubai Air Show, and while there was the usual smattering of headlines with big-dollar figures, there was also fresh evidence that the robust aerospace cycle that’s propelled the industry’s stocks to new highs is getting long in the tooth. Carriers including Emirates and Etihad Airways rejiggered orders at the Air Show as they sought to adapt to a global growth slowdown and weaker demand for travel in the Middle East amid stubbornly low oil prices. This follows similar rethinks at British Airways-parent IAG SA and Deutsche Lufthansa AG earlier this month, with both carriers seemingly pushing out or putting on hold orders for Boeing Co.’s 777X wide-body model. The general takeaway is that the world doesn’t need as many planes right now as airlines might have thought just a few years ago, especially when it comes to the biggest jets used for long-distance international flights.
The 777X in particular appears to be in trouble, with launch customer Emirates also reportedly contemplating cutting or delaying its order for 150 of the jets, perhaps in part by swapping in some of the smaller 787 Dreamliners. The Middle East is one of the more attractive markets for the 777 model, which is too big to fly in many other regions. So if airlines there are balking, then production rates may need to come down. Complicating things is a delay in the first deliveries of the 777X until 2021 due to durability issues with a General Electric Co. jet engine. Emirates chief Tim Clark has made it clear he’s fed up with a pattern of delayed rollouts, or worse, post-delivery glitches that force costly groundings, and the delay could factor into any decision. Stanley Deal, who took over as head of Boeing’s commercial airplanes division in October following the ouster of Kevin McAllister, told reporters over the weekend that the company was still in talks with Emirates on the 777X and a still yet-to-be-confirmed order for 40 Dreamliners. “Long term, the 777X’s value remains intact,” Deal said.
Boeing has also trimmed its production targets for the Dreamliner after expected orders from China failed to materialize. Etihad Airways said at the Dubai Air Show that it will take 20 fewer Dreamliners over the next four years than originally planned as it grapples with eye-popping losses. Airbus SE models weren’t spared from weakening demand, either. Emirates finalized a $16 billion order for 50 Airbus A350 widebody jets — more than it had committed to in February — but appears to have backed away from an earlier commitment to buy 40 A330neos as well, meaning the total value of the deal before customary discounts is less than originally outlined.
The news was better in the narrow-body market. Air Arabia inked a firm order for 120 of Airbus’s A320-model jets. Even Boeing’s troubled 737 Max got some love, with Turkish holiday carrier SunExpress exercising an option to add 10 more of the jets to its fleet. Indian low-cost carrier SpiceJet Ltd. may also seize on the dearth of Max orders as an opportunity to pick up some of the jets at a discount as it contemplates a new hub in the Middle East. In an interview with Bloomberg TV, SpiceJet chairman Ajay Singh wouldn’t rule out signing a deal at the air show, although the size and ultimate timing remain up in the air.
Even so, the early returns on the Air Show would seem to be at odds with Airbus CEO Guillaume Faury’s comments last week that aviation demand continues to move “up and up.” Global passenger traffic is indeed still growing, but at a much lower rate than over the past few years. And that matters, because aviation stocks aren’t cheap right now. The SPDR S&P Aerospace and Defense ETF is up 42% so far this year, well outpacing the broader S&P 500 benchmark. The high valuations for aerospace stocks can hold to the extent margins are still on an uptrend and the rebound investors are positioning for in the manufacturing industry plays out, Denise Chisholm, Fidelity’s head of sector strategy, said in a Bloomberg TV interview. At least some airlines, though, are choosing to plan more conservatively.
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Brooke Sutherland is a Bloomberg Opinion columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.
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