In the past few years, aerospace giants Boeing and Airbus have ramped up production of commercial jets. The popular Boeing 737 and Airbus A320 narrowbody jet families have experienced some of the biggest production increases -- and both companies are planning to boost production again in the next few years.
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Delta CEO Richard Anderson has warned of a "bubble" in narrowbody demand and production. Photo: The Motley Fool
Boeing and Airbus insist that there is adequate demand to support their increased production rates. Not everybody agrees, however: Delta Air Lines CEO Richard Anderson has warned of a huge demand "bubble" for narrowbodies like the 737 and A320, which will eventually pop. The truth is probably somewhere in the middle, though.
Soaring narrowbody production
Looking back to 2010, Boeing delivered 376 jets from the 737 family. In that same year, Airbus delivered 401 A320-family aircraft.
Production rates have increased steadily since then as Boeing and Airbus have moved to catch up with their swelling order backlogs. In 2010, Boeing announced plans to raise 737 production from 31.5 per month to 35 per month by 2012 and 38 per month by 2013.
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Last year, Boeing increased 737 production again, this time to 42 airplanes per month. It already has 2 more rate increases in the works, and production is scheduled to rise to 52 per month by 2018.
Not to be outdone, Airbus has increased the A320 production rate from 34 per month in 2010 up to 42 aircraft per month today, with intermediate steps at 36, 38, and 40. Last year, Airbus revealed plans to increase the build rate to 46 per month by mid-2016, and the company recently announced that production will reach 50 aircraft per month by early 2017.
In a much more surprising development, Airbus CEO Tom Enders stated that the company is evaluating an increase in the A320 production rate all the way to 60 aircraft per month. That would be nearly double the 2010 figure!
Plenty of demand (for now)
Based on the confirmed plans for 737 production to reach 52 per month and A320 production to rise to 50 per month, Boeing and Airbus will be producing more than 1,200 single-aisle jets annually by the end of 2018. At the moment, there is plenty of demand to support these increased production rates.
Boeing and Airbus have long backlogs for their single-aisle jets. Photo: The Boeing Company
As of the end of January, Boeing had 4,269 unfilled 737 orders, enough to support more than 7 years of production, even including the planned rate increases. Meanwhile, Airbus had 5,099 unfilled A320-family orders, equal to nearly 9 years of production, including the planned rate increases (but not the new 60 aircraft per month proposal).
Based on these enormous backlogs of firm orders, Boeing and Airbus clearly don't have to worry about running out of orders anytime in the next decade.
Trouble on the horizon?
Looking further out -- to approximately 2030 -- there is more of a possibility that Boeing and Airbus will be unable to sustain their planned production rate increases. In Boeing's 2014 Current Market Outlook, the company projected global demand for 25,680 single-aisle planes over the next 20 years.
This works out to annual sales of 1,284 single-aisle jets (on average) over the next 20 years. Today, Boeing and Airbus are producing about 1,000 single-aisle jets annually, but within a few years they will be producing more than 1,200 per year, close to the long-term demand forecast.
Some single-aisle jet demand will be met by smaller companies like Embraer. Photo: Embraer
However, while those two companies dominate the single-aisle jet market, they are not the only competitors. Bombardier's new CSeries jet is scheduled to enter service later this year. Embraer is scheduled to begin delivering its new E-2 series of jets in 2018. New entrant Comac is also readying a single-aisle jet for deliveries later in the decade.
Even if these 3 smaller players only capture 15% of the single-aisle market, the remaining demand of about 1,100 planes per year would fall short of the combined production plans of Boeing and Airbus. The demand shortfall would be even greater if Airbus increases its build rate beyond 50 per month.
To some extent, Boeing and Airbus face a Catch-22. If they hold production steady, their smaller competitors may be able to win orders just by virtue of being able to deliver aircraft in a timely fashion. But if Boeing and Airbus invest in more production capacity, they could create a "bubble" in production that eventually gives way to a big bust.
For now, Boeing and Airbus seem to be striking a good balance between meeting current demand and avoiding the risk of long-term overcapacity. 2030 is a long way off, and the demand forecast could change significantly by then. That said, any further production increases would be worrisome for investors.
The article Are Boeing and Airbus Building Too Many Jets? originally appeared on Fool.com.
Adam Levine-Weinberg owns shares of Embraer-Empresa Brasileira and The Boeing Company. The Motley Fool recommends Embraer-Empresa Brasileira. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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