Sunday, January 25, 2015

The Cheaper Fuel Pyramid Leads To More Boeing 737's

Boeing is putting its best foot forward as Oil per Barrel prices plunge under $50 a barrel, Certain market elements are the free radicals driving more sales. These free radicals will drive the order market rather than impede its growth.  Conventional Wisdom (CW) makes the assumption cheaper oil will collapse order books as Airlines will sit on cheaper ticket prices flying older equipment, because the cheaper oil is a hedge against competition. Is it a fuel price opportunity where weaker airlines will sit on not making further capital investments until they squeeze the life out of its current airframes.

CW then proceeds forward with the Premium Airline Crowd where they are always thinking about sound airline purchases while taking a hold on capital investments, as it will take the "opportunity" binge by swapping out high tickets for lower ticket prices when riding the fuel price dump Bull. These two examples illustrated dynamics of CW marketing on low fuel prices. Its what everybody thinks, until you talk to a Boeing optimist.

Boeing suggest, that a free radical pyramid exist for the opportunist:

Just Order
Opportunity is low fuel prices
Rise in traffic benefits the Revenue stream
Lower Ticket prices from Cheap fuel increases Cash Flow
The purchase window not affected by capitalization during fuel price drops.
A continued growth model takes into account capitalization needs during fuel price drops.
Finally, the goal is stay ahead of the competitors through sustained growth and better equipment.  

The zig-zag of the fuel price chart line will make you crazy over a ten year chart. The airplane growth line is built on regression analysis which is not so Zig-zag, but more of a nice swooping straight line upward. It takes into consideration seasonality influences such as fuel cost. I would be willing to bet the airline cost factor has changed it coefficient a bit downward at the glee of those looking at the upward swing on the revenue line after offering slightly lower ticket prices. Its more than that. A traveler indeed has cost before they attempt a ticket purchase. It takes them half the cost to fill-up their car going to the airport. Tires go cheaper, food is cheaper and so forth. Bottom line, a customer has more spendable cash for a vacation going over seas. Hence, increased airline revenue. It rapidly becomes, "It's the oil economy stupid", for the Boeing speech to its own customers. The Airlines aren't blinking by canceling orders, but are beginning to pour it on the order book as the growth line keeps swooping upward.

The price of oil will go back upwards to $80 a barrel until next year. An Arab Oil Sheik told me so! The airlines won't have lost its place in the production line by staying tight with ordering more airplanes, an airline exec told me so. Economics is simple as long as someone tells you so.