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Originally published March 19, 2012 at 7:59 PM | Page modified March 20, 2012 at 9:42 PM

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Boeing, Airbus watchers fear production rates headed too high

Boeing and Airbus are ratcheting up production of narrowbody aircraft to excessive and unsustainable rates, according to many industry insiders at an aircraft conference here.

Seattle Times aerospace reporter

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PHOENIX — Boeing and Airbus are ratcheting up production of narrowbody aircraft to excessive and unsustainable rates, according to many industry insiders at an aircraft conference here.

Boeing decidedly doesn't think so, and is determined to build jets at full speed ahead.

The pessimistic view is held by many airplane buyers at the annual conference of the International Society of Aircraft Traders, which opened Monday.

"We are in a bubble," Adam Pilarski, a respected industry analyst with consulting firm Avitas, told his audience of airplane lessors and financiers.

He said the announced production rates of 42 single-aisle jets per month from each plane-maker by 2014 would result in 5,000 more narrowbody jets being built over the next 20 years than the two companies' own forecasts predict will be needed.

But he said in a later interview that Boeing's plans to accelerate production make strategic sense. " "You still want to enjoy it while it lasts. Why not? Eventually the bubble bursts — too bad. If I were Boeing or Airbus I'd do exactly the same thing."

Yet Mike Bair, Boeing's senior vice president of marketing, expressed total confidence that the market will absorb all the 737s Boeing can make — ensuring plenty of jobs in Renton.

The world has just gone through the second worst economic downturn in the past century, yet "we motored right through it," said Bair. Whatever the next cycle brings, "we're confident we'll motor through it" once again.

Bair cited the 787 Dreamliner program, saying that when airlines in some hard-hit parts of the world needed to defer orders, Boeing found plenty of takers to fill those slots.

Bair said only some big shock to the world economy could stall the momentum that has seen aviation booming, and Boeing hiring, right through the downturn since 2008.

"If we go into a real recession, it could be a problem," Bair conceded. But he added that the diversity of demand globally will sustain the rates Boeing has projected.

"Unless it's a disaster, we think we have enough levers to pull to keep us going," Bair said. "We'd still be able to hold our rates for a period."

Still, Pilarski's notion of a bubble in jet production was supported by many conference attendees.

In part, that's because the high production rates of Airbus A320s and Boeing 737s, plus the introduction of more fuel-efficient models — the A320neo and the 737 MAX — in the next few years are seriously reducing the lease rates and resale prices of the current narrowbody jets.

That's hitting the pockets of airplane lessors and slamming the value of their assets. They don't like it.

Bertrand Grabowski, a board member of Germany's DVB Bank, which is heavily involved in aircraft financing, said though both jet-makers are publicly sticking to their "full-steam-ahead" posture, he hears a different tone in private.

"For the first time I'm starting to see Airbus and Boeing recognize ... that what's happening on the used market is a concern for their customers," he said.

He said that with 30 percent of narrowbody sales controlled by aircraft-leasing companies, Boeing and Airbus cannot afford to ignore their pain.

If the pain continues, eventually those lessors will stop ordering, he said.

And Grabowski believes some of the recent orders are already dubious. He mentioned the blockbuster 737 MAX orders by Lion Air and Norwegian, each of whom ordered more than 200 jets.

"Nobody thinks for one second the entirety of this order will be delivered," he said of the Norwegian order. "Some of these orders are paper orders. Boeing and Airbus both know they will evaporate."

Pilarski made one further projection that, if realized, would definitely worry Boeing. He gave a detailed argument that oil prices, currently at $108 per barrel, are artificially high.

He said there's no scarcity of oil and the price is not rational; instead, it's affected by short-term political judgments. He forecast it will drop drastically in the medium term, as low as $40 per barrel by 2018.

That would destroy the business case for ordering the 737 MAX and A320neo. It would certainly lead to airlines holding on to their older jets much longer.

Boeing, in contrast, is more in line with the general pessimism on oil prices. And it's gung-ho on jet production.

One Wall Street analyst here, who asked not to be identified, said that in the end Boeing and Airbus aren't concerned about the depressed values of the planes held by lessors.

While he agrees with Pilarski that there is a production bubble, he sees the market for new jets holding.

One reason is there is plenty of financing available to buy new jets, and very little to buy used ones, he said..

The likely result, he said, is that in the years ahead airlines will fly their jets for fewer years than previously, retiring them sooner and buying new replacements.

That will be very difficult for lessors who now own jets. But it sure sounds good for Boeing.

Dominic Gates: 206-464-2963 or

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