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US Airlines May Cancel More Aircraft Orders

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US airlines, which have already downsized, may be forced to defer or cancel more aircraft orders if the prolonged recession further erodes travel demand and continues to choke credit markets.

Experts say the possibility for more order modifications in the near future is growing. That's bad news for airlines in need of modern aircraft, and also for plane makers.

"Once (airlines) start looking at what they need for the future and trying to preserve as much cash as they can, I think it's quite possible we'll see some major order deferrals if not outright cancellations," Jim Corridore, airline analyst with Standard & Poor's Equity Research said last week.

For US airlines that currently lag foreign rivals in fleet renewal, the need is great for fuel-efficient planes to bolster their competitive positions and to meet potential demand for heightened energy conservation.

Meanwhile, plane makers Airbus and Boeing, who get paid when they deliver aircraft, face a weaker growth outlook. Airlines already are discussing changes to their plane orders, said JP Morgan analyst Joseph Nadol.

"With no sign of relief on traffic growth, a number of airlines are in negotiations with Boeing and Airbus for order modifications, and agreements may be reached in the coming weeks," Nadol said in a March 25 research note.

"Falling demand should ultimately prompt Boeing and Airbus to cut rates, and while the timing is uncertain, we see announcements coming sooner rather than later," added Nadol, who expects a cyclical decline in commercial aerospace orders starting in 2010.

Clay McConnell, a spokesman for Airbus, said in an email last week that his company "has not had any specific US airline cancellations in recent months" but added there may have been "one or two" deferrals from time to time.

"We don't see a trend developing toward any widespread deferrals or cancellations in the US market," he said.

DELIVERIES SET, BUT GROWTH QUESTIONABLE

With the exception of United Airlines, the six-largest US airlines have deliveries planned for 2009.

American Airlines, which is replenishing its fleet, reiterated this week that it plans to take delivery of 29 Boeing 737s.

Delta Air Lines has 32 aircraft on order for 2009 delivery. Delta has 18 firm orders for the delayed 787 Dreamliner, but the delivery timetable is uncertain. Delta declined to comment on Tuesday on possible changes to its fleet plan.

Continental Airlines, which will take delivery of 13 737s this year, said it has not changed its order plans.

Southwest Airlines said in a recent regulatory filing that it expects to take delivery of 13 737s this year. The airline has said it has curbed its growth plans amid weak travel demand.

"Everybody is looking far more closely at aircraft that were envisioned as growth airplanes," said airline consultant Robert Mann said on Wednesday.

He said orders that are part of a growth strategy are more likely to be stopped than orders that are part of fleet replenishment. Airlines need modern, fuel-efficient planes to remain competitive.

"If you can afford to do it, this is a great time to be renewing a fleet," Mann said. "They need to be taking the airplanes, assuming they have a long view of the business."

FUTURE MURKY FOR PLANE MAKERS

Aside from capacity cuts, aircraft orders also are being hit by tight credit markets, which make it hard for airlines to finance expensive aircraft.

Many carriers take advantage of manufacturer financing, but some experts have questioned whether such financing will be available. Boeing Commercial Airplanes chief executive Scott Carson said in March that customer financing for new orders is sufficient into 2010.

The impact of order deferral and cancellations by US carriers on the biggest plane makers is debatable. Both Airbus and Boeing have enormous order backlogs, and the bulk of those orders are from Asian and Middle Eastern buyers.

Boeing, which has received more cancellations than orders this year, has nearly 3,600 orders yet to be delivered -- about seven years worth of production. The company said, however, that the diversity of buyers on its order books will insulate it from the pain of airline capacity cuts.

"The fact that it's diversified by region and business model, I think that will help us through this downturn," said Boeing spokesman Bernard Choi.

Consultant Mann disagreed, saying the global nature of the economic downturn could leave the company with completed aircraft that have no buyers.

"You see the very great possibility that Airbus and Boeing and Embraer and Bombardier will end up with airplanes on the ramp with no place to go," Mann said. "I think that time is not far off."

(Reuters)