Who’s going to pay for fuel efficient planes?

Why are some airlines shelling out tens of billions of dollars to scoop up the latest state-of-the-art planes?

Up, up and away

Karim Sahib/AFP/Getty Images

Aircraft makers are racking up huge sales of fuel-efficient planes. But who’s going to foot the bill?

Airlines facing turbulent economic times have historically turned on the “fasten seat belt” sign and tried to ride out the chop, cutting underperforming routes and offering seat sales to boost others. With high fixed costs, the name of the game is preserving cash flow. So why then, with the economy looking so gloomy, are some now shelling out tens of billions of dollars to scoop up the latest state-of-the-art planes? It’s all about fuel.

With the price of oil hovering just under US$100 a barrel, airline executives are gambling that newer, more fuel-efficient planes will translate into huge cost savings down the road. Boeing, for example, revealed last week that it had signed the biggest-ever order in history with Indonesia’s Lion Air, which agreed to buy 320 Boeing 737s in a deal worth US$21 billion, based on list prices. Of those, 201 will be the 737MAX, outfitted with more efficient engines that burn up to 12 per cent less fuel than a regular 737 (Boeing also sold 50 of its 777 jets to Emirates Airlines for US$18 billion a week earlier). Similarly, Airbus’s A320 NEO, which has also been outfitted with more fuel-efficient engines, has proven to be the manufacturer’s fastest-selling model ever.

But if there’s a challenge for the industry, it’s finding lenders willing to finance all these purchases. It’s no coincidence that the biggest buyers right now are from Asia and the Middle East. “In Asia, their idea of a recession is an eight per cent growth rate instead of 12 per cent,” says Richard Aboulafia, an industry analyst at the Teal Group. “And while the Middle East doesn’t have a lot of traffic, they’re really good at taking oil cash to buy market share.”

In Europe and North America, it’s a different story. Boeing, for example, agreed this summer to provide 100 single-aisle airplanes to American Airlines on lease, and plans to use its capital finance arm to help it sell more planes. “Boeing Capital will be much more than a lessor of last resort,” Jim Albaugh, the CEO of Boeing Commercial Airplanes, recently told reporters. It worked for the auto industry—at least for awhile.

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