Credit Crunch Could Prove Costly for Boeing
Unless there’s some break in the credit-freezing financial crisis, industry-watchers say, potential buyers may hold off on taking their planes or be forced to turn to Boeing for financial help.
“We believe that the amount of funding from traditional aircraft financing sources is shrinking and that Boeing’s customers may face near-term challenges financing aircraft purchases,” Goldman Sachs (GS) analyst Richard Safran says in a note to clients.
Just how much this may cut sales—in 2009 and later—is far from clear. Boeing officials say they’ll be ready to step in and provide financing, if needed, through their in-house financier, Boeing Capital Corp. (BCC). If pressed, they say they might turn for help, too, to the federal Export-Import Bank, which is designed to arrange financing to promote U.S. products overseas. About 75% of the 3,700 planes in Boeing’s record commercial order backlog hail from non-U.S. carriers, especially from the Middle East and Asia.
Still, worries over Boeing’s prospects seem to be keeping a brake on the company’s stock price. Boeing’s shares closed at 58.32 on Sept. 26, down 1.44 for the week. The stock had topped 107 a year ago.
“Far-Fetched Speculation”
While conceding that turbulence in the financial markets is raising challenges, a top Boeing finance executive insists it can keep the planes moving. Kostya Zolotusky, managing director of capital markets development, brands the talk of postponement of deliveries because of financing problems “far-fetched speculation.” He adds: “We’ve never had
Still, Boeing may be forced to pony up to keep buyers taking planes. Safran, in his Sept. 25 note, estimates that the planemaker could have to shell out as much as $3 billion next year to help hard-pressed buyers. If so, Boeing could raise such funds by selling commercial paper or turning to partner banks, Zolotusky says, although it would charge more than the buyers could likely get themselves. BCC, he says, is a “backstop” or “lender of last resort” for buyers.
The financing worries have been amplified by the turmoil at Wall Street investment houses and big commercial banks. Wall Street’s woes were caused mostly by toxic mortgages, which are far removed from aviation economics. Demand, in fact, continues to be strong for planes, especially from carriers in such spots as the United Arab Emirates (with 251 planes of all sorts on order from Boeing) and China (350). Passenger traffic remains strong around the world. But of course other industries, from autos to electronics to retailing, have also assumed they were insulated from the housing crunch. Yet every day brings new, surprising lessons in how interconnected the economy is.
“There are dark, ominous shadows beyond a happy, protected garden,” says Richard Aboulafia, an analyst with the Teal Group, an aviation consultancy in Fairfax, Va. “People are flying. The need for new equipment is very strong, but the potential for global financial disaster is still there in the background.” More
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