Boeing Deal Shows Need for Fuel-Efficient Planes

As orders go at air shows, the latest deal between Boeing and Air Lease, ALC, is not the biggest one ever done. Still, the $7.2 billion ALC is paying for 75 new 737 MAX airplanes is significant and highlight the continued demand for more fuel-efficient single aisle planes.

Rendering of the 737 MAX
Source: Boeing
Rendering of the 737 MAX

Steven Udvar-Hazy, CEO of Air Lease, says the new planes are needed as quickly as possible: "We are in the middle of the [airplane replacement} cycle and it is accelerating."

With 549 737 MAX planes on order and the backlog expected to grow to more than a thousand by year's end, there are growing concerns about a production bubble in commercial airplanes.

Between Boeing and its chief competitor Airbus, a subsidiary of EADS , there is a race underway to ramp-up production, especially with popular models like the Airbus A320 (including the neo model), Boeing 737 (including new MAX model) and Boeing 787 Dreamliner.

Wall Street is worried that Boeing and Airbus will be unable to get suppliers and production lines to move faster.

Boeing CEO, Jim McNerney, says the concern is overstated: "I think we always worry about demand and supply matching up. I think in this case I am less worried."

McNerney says Boeing has learned from past mistakes when it comes to increasing production and is being careful not to repeat those missteps. He also points out demand for new fuel- efficient models remains strong.

"This is replacing older technology and that tends to lead people to conclusions that it is moving faster than the economy, but the fact is people buy them and it pays back very quickly," he said.

Airbus CEO, Fabrice Bregier, says Airbus will not only be able to increase production, but will do it while also growing profit margins: "If we do a decent job, yes, we will gradually increase the profitability because it is in our backlog and we have 4,500 aircraft in the backlog"

It's a tall order. Historically, airplane makers have struggled to even keep the same level of profitability when they've increased production.