Boeing 2012 Annual Report Download - page 36

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24
Segment Results of Operations and Financial Condition
Commercial Airplanes
Business Environment and Trends
Airline Industry Environment Global economic growth and global trade, which are the primary drivers
of air travel and air cargo growth, remained weak in 2012. Despite this, passenger traffic grew by
approximately 6% in 2011 and 2012 and is forecast to continue at or near the long-term trend of 5% in
2013. There continues to be significant variation between regions and airline business models, with airlines
operating in emerging economies and low-cost-carriers leading growth. Estimates indicate a modest
decline in air cargo traffic in 2012 with continued softness in 2013. The relative weakness of the air cargo
market has impacted near-term demand for new freighter aircraft and freighter conversions, and we
continue to monitor the impact of this trend on our business.
Airline financial performance also plays a role in the demand for new capacity. Airlines continue to focus
on increasing revenue through alliances, partnerships, new marketing initiatives, and effective leveraging
of ancillary services and related revenues. Airlines are also relentlessly focusing on reducing costs by
renewing fleets to leverage more fuel efficient airplanes and by employing efficiency generating service
offerings in a high-fuel-price environment. Net profits for the global airline industry are estimated to total
$7 billion in 2012 and the forecast shows some improvement in 2013. These profit levels reflect low profit
margins for the industry, and risk remains due to ongoing economic and political uncertainty.
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 $4.5 trillion market for 34,000 new airplanes over the next 20 years.
The industry remains vulnerable to near-term exogenous developments including fuel price spikes, credit
market shocks, terrorism, natural disasters, conflicts, and increased global environmental regulations.
Industry Competitiveness The commercial jet airplane market and the airline industry remain extremely
competitive. Market liberalization in Europe and Asia has enabled low-cost airlines to continue gaining
market share. These airlines have increased the 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.
Continued access to global markets remains vital to our ability to fully realize our sales potential and long-
term investment returns. Approximately 15% of Commercial Airplanes’ contractual backlog, in dollar terms,
is with U.S. airlines, including cargo carriers.
We face aggressive international competitors who are intent on increasing their market share. They offer
competitive products and have access to most of the same customers and suppliers. With government
support, Airbus has historically invested heavily to create a family of products to compete with ours. Regional
jet makers Embraer and Bombardier, coming from the less than 100-seat commercial jet market, continue
to develop larger and more capable airplanes. Additionally, other competitors from Russia, China and
Japan are developing commercial jet aircraft in the market above 90 seats. Many of these competitors
have historically enjoyed access to government-provided financial support, including “launch aid,” which
greatly reduces the commercial risks associated with airplane development activities and
enables airplanes to be brought to market more quickly than otherwise possible. This market environment