Boeing 2009 Annual Report Download - page 33

Segment Results of Operations and Financial Condition
Commercial Airplanes
Business Environment and Trends
Airline Industry Environment 2008 and 2009 were extremely challenging for the world’s airlines as
key external business factors (oil prices, economic growth, exchange rates, financing terms)
experienced high levels of volatility. In the first half of 2008, airlines focused on adapting to spiking oil
prices which peaked close to $150/barrel. In autumn 2008, the airlines’ focus shifted to the fallout of
the global credit crisis and recession as fuel prices fell below $40/barrel for the first time since 2004,
and in 2009 passenger and cargo traffic experienced their worst ever declines. This business
environment curtailed the airline industry profit recovery that started in 2006. As a result, the global
airline industry has now reported losses in seven out of the last ten years, and over 30 airlines have
entered bankruptcy since the beginning of 2008.
In this challenging environment, airlines are adapting their operations to meet the realities of the
markets in which they operate. Airlines reduced global passenger capacity by 2% in 2009 through a
combination of frequency and route cuts in unprofitable markets, lower daily airplane utilization (flight
hours per day) and parking/scrapping of older generation airplanes. Airlines are also replacing older
less fuel efficient airplanes, reducing non-fuel costs and finding new ways to partner through alliances
or via mergers and acquisitions.
These conditions have caused customers to request cancellations, modifications, or rescheduling of
their existing orders and advance payment schedules to meet revised fleet plans or address financing
and cash flow issues. 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.
Near-term global airline industry indicators are improving although many uncertainties persist. Global
economic recovery has begun. Although it is expected to vary significantly by region both in terms of
speed and magnitude, world economic growth is forecast to grow moderately in 2010 following
contraction in 2009. As a result, airline industry forecasts generally indicate global passenger traffic
returning close to 2008 levels in 2010 with many emerging markets posting growth over 2009. Air
cargo traffic is forecast to grow above the long-term trend rates in 2010 following two years of
contraction which have taken traffic back to 2002 and 2003 levels. Due to these improving demand
conditions, airlines are expected to see significantly smaller financial losses globally in 2010.
Beyond the near-term market uncertainties, the long-term outlook for the industry remains positive due
to the fundamental drivers of air travel growth: 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. Our 20-year forecast is for a long-term average growth rate of 5% per year
for passenger and cargo traffic based on a 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 29,000 new airplanes over the next 20 years.
The industry remains vulnerable to near-term exogenous developments including disease outbreaks
(such as avian or H1N1 flus), 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
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