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Can Backlog Save Boeing?


Threats mount from airline bankruptcies, credit crunch.

In recent days and months Boeing (BA) has suffered a hit to its reputation from the delays on the 787 Dreamliner. These delays will definitely cost Boeing a sizable piece of its profit margin (via penalties paid to customers) on this program. But the problem with focusing on this issue any further is that everyone in the marketplace knows about it.

Over the past several months we have witnessed several factors that put Boeing's and Airbus' existing order books at risk. The first and most recent factor is that we have seen six airlines (Frontier, Oasis, Skybus, Aloha, Champion Air and ATA Airlines) either file for bankruptcy or discontinue operations. This alone has to make one pause about the ability of airlines to afford the orders on the books.

The second factor is the credit crunch that has infected the banking sector. Customers that buy airplanes include leasing companies that must have access to the capital markets to complete the purchases. If you were a banker, would you be excited about making a collaterized loan to an industry that is going through turmoil like the airline business currently is? In recent days we've seen problems arise at many of the leasing companies such as CIT (CIT). The Boeing order book is exposed heavily to the leasing sector.

The third and probably most significant risk to the backlog at Boeing and Airbus is the global economy. The correlation between air travel and GDP is very tight. As an analyst at Boeing once told me, "If you want to know how much capacity airlines are going to need, just watch the economy." I remember watching the 1997 Asian financial crisis (and subsequent economic downturn) hit Boeing's order book very hard.

In the span of a couple of months the cancellations came in and Boeing was forced to readjust the book of business and layoff workers.

For these reasons, I would be very cautious when someone uses the reason that one should own Boeing due to their tremendous backlog. It can go away very fast and that risk (probability) is rising rapidly in this economic environment. I would be paying close attention to what the financially healthy airline customers do with their orders on the books at Boeing and Airbus to gauge the severity of the damage.
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