How low oil prices may be hurting Boeing Co

The low oil price environment has reduced interest in new airplanes, as more efficient models become less important from a general cost perspective.

So despite strong passenger traffic, this should eventually cause a reduction 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 around the stock to US$135 from US$150, noted that demand for lease extensions remains very strong and lessors are beginning to see 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 a year ago.

Herbert doesn’t think that trend can change given where oil costs are and what the leasing picture looks like.

“Up to the last few months, we feel investors were largely focused on the delivery schedule, the big 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 put a noticeable dent on order backlogs at Boeing and Airbus, he does think investors are beginning to factor in additional risk to Boeing’s delivery schedule, and thereby its free cash flow prospects.

The analyst expects which will eventually trickle down to Boeing’s valuation, in addition to some suppliers.

“We feel Boeing is increasingly trading just like a cyclical stock, the historical pattern, and less on the secular free income growth story,” Herbert said.