The low oil price environment has reduced demand for new airplanes, as more efficient models become less important from an overall cost perspective.
So despite strong passenger traffic, this should eventually cause a decrease in order backlogs for that likes of Boeing Co.
That’s a primary reason why Canaccord Genuity downgraded Boeing to carry from buy on Thursday.
Analyst Ken Herbert, who also cut his price target on the stock to US$135 from US$150, noted that interest in lease extensions remains quite strong and lessors are starting to determine more slots available.
He noted that aircraft retirements for Airbus and Boeing fell to 28 in the past 3 months. That when compared with 104 retirements in the same period last year.
Herbert doesn’t think that trend can change given where oil costs are and what the leasing picture looks like.
“Up to the previous few months, we believe investors were largely centered on the delivery schedule, the large backlogs at both Boeing and Airbus, and also the subsequent free income generation and harvest,” the analyst said inside a report.
Herbert noted that although lower fuel costs have yet to place a noticeable dent on order backlogs at Boeing and Airbus, he is doing think investors are beginning to factor in additional risk to Boeing’s delivery schedule, and thereby its free income prospects.
The analyst expects which will eventually trickle down to Boeing’s valuation, in addition to some suppliers.
“We feel Boeing is increasingly trading like a cyclical stock, the historical pattern, and fewer on the secular free cash flow growth story,” Herbert said.