Boeing 2008 Annual Report Download - page 38

Segment Results of Operations and Financial Condition
Commercial Airplanes
Business Environment and Trends
Airline Industry Environment For the world’s airlines, 2008 was a challenging year characterized by
volatility of several key operational factors including oil prices, economic growth, exchange rates and
financing terms. In the first half of the year, airlines focused on adapting to spiking oil prices which
peaked close to $150/barrel in July. In the second half of 2008, the focus turned to the implications of
the global credit crisis and recession as fuel prices fell below $40/barrel for the first time since 2004. Air
traffic growth declined toward the end of the year as higher fares to cover higher fuel costs earlier in
the year and the economic slowdown reduced demand for air travel.
The impact to airline operations and profitability was dramatic. Globally, over 25 airlines entered
bankruptcy, and airlines curtailed capacity growth by cutting unprofitable routes and flights, reducing
utilization, and parking older generation airplanes. Following its first profitable year since 2000 in 2007,
the airline industry fell back into losses in 2008 led by U.S. airlines. U.S. airlines were most exposed to
the fuel price shock due to limited hedging and a weakening dollar, but as the demand environment
deteriorated, airlines in all regions faced lower profit outlooks by the end of 2008.
The near-term outlook is highly uncertain due to the volatility of key drivers such as economic growth
and fuel prices. Near-term air traffic growth forecasts vary significantly but generally indicate minimal to
negative growth in 2009. Early 2009 airline schedules show a 2%-3% decline in world capacity as
airlines attempt to match capacity with air travel demand. Profitability forecasts for 2009 also range
widely both at the global as well as regional levels. Airlines continue to cut non-fuel costs including
distribution, labor and overhead but significant uncertainty remains around fuel prices and revenues.
From time to time certain customers may request cancelations, modifications, or rescheduling of their
existing orders to meet revised fleet plans. Whether such requests will result in a material adverse
impact on our earnings, cash flow or financial position depends on a number of factors including
whether the request is granted, the type of aircraft, how much compensation is paid to us for costs
already incurred and our ability to reschedule other orders to replace those canceled, modified, or
rescheduled.
The fundamental drivers of air travel growth are a combination of economic growth and the increasing
propensity to travel due to increased trade, globalization and improved airline services driven by
liberalization of air traffic rights between countries. Beyond the near-term market uncertainties, our
20-year forecast is for a long-term average growth rate of 5% per year for passenger traffic, and
6% per year for cargo traffic based on projected average annual worldwide real economic growth rate
of 3%. Based on long-term global economic growth projections, and factoring in increased utilization of
the worldwide airplane fleet and requirements to replace older airplanes, we project a $3.2 trillion
market for 29,400 new airplanes over the next 20 years.
The industry remains vulnerable to near-term exogenous developments including disease outbreaks
(such as avian flu), terrorism, and increased global environmental regulations.
Industry Competitiveness The commercial jet aircraft market and the airline industry remain
extremely competitive. We expect the existing long-term downward trend in passenger revenue yields
worldwide (measured in real terms) to continue into the foreseeable future. Market liberalization in
Europe and Asia has continued to enable low-cost airlines to gain market share. These airlines have
increased the downward pressure on airfares. This results in continued cost pressures for all airlines
and price pressure on our products. Major productivity gains are essential to ensure a favorable market
position at acceptable profit margins.
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