The strong dollar and MAX order risk

The rising US Dollar is not a pleasant outcome for airlines and lessors who have orders for the MAX. In June CNBC reported that Moody’s Investor Service said a strengthening US dollar since mid-April has increased the credit risk of several emerging markets due to currency depreciation. Fitch provided this useful table showing how it sees currency risk. They followed with this useful map. The map seems to show several hot spots that don't show on the table. Commercial aircraft are sold in US Dollars. Airbus, though, with a FAL in China can probably offset some of the impacts of a rising dollar. The setting up FALs in the US and China were to soften blows from a rising Euro, where most of Airbus costs structure exists. If we list the MAX orders and add the countries on the Fitch table we see the following. It is interesting that Fitch to ignore Vietnam. In May Reuters reported that "Vietnam’s five-year credit default swaps, which reflect the cost of insurance against default, are at about 245 basis points, or about 80 basis points more than regional peers the Philippines and Indonesia." Should Vietnam be added to the list? We'd guess yes. Here is a Vietnamese view on their increasingly open economy. If we exclude Vietnam from the list and go with the Fitch list, we note that 27% of the MAX order book may be vulnerable to a rising US Dollar. What does that look like on a map? Here we include Vietnam. Airline Economics, in a recent report, noted: "The largest aviation banks also operate globally – a prerequisite for this industry but they too are watching for signs of stress in particular countries as they evaluate new deals and seek to minimise geographical exposures by diversifying their portfolios." But the report also notes "While lessors tend to be concerned more with weak airlines rather than regions in general, they all have very strong opinions about the stresses showing in particular countries." The strength of the dollar has caused some stress in developing countries, but airlines have been helped by the low oil price and, of course, cheap finance. But oil prices have doubled in the past year and that is priced in US Dollars. Airline margins, especially among fast-growing LCCs, have to be wafer thin. If indeed the market currently is "as good as it gets", then things either stay as they are or get worse. Macro moves that are pushing up the US Dollar creates the classic item that changes everything quickly. We asked Boeing for their response to the currency issue and MAX orders. They responded: "Aviation is a long-term business with demand driven by global passenger and cargo traffic growth. We have seen no correlation between the strength of the US dollar and order activity. Our customers evaluate the full life-cycle value of an airplane when they make long-term decisions on their fleets." Boeing also referred to Dennis Muilenberg's comments from the 2Q earnings call "In the Commercial Airplanes market, airlines continue to report robust profits and strong passenger traffic, outpacing global GDP. Passenger traffic in 2018 grew 6.8% through May. Meanwhile, cargo traffic maintained its strong momentum, growing by 5.3% in 2018 through May, as we see trade and industrial production growing in all regions." "Our global customers continue to recognize the compelling value proposition that our new more fuel-efficient product family brings to the market, as reflected in the healthy new order intake we've seen year-to-date." "We continue to see the trend of diverse and balanced demand from a geographical perspective, as well as across the spectrum of airline business models. The changing nature of travel, with the expansion of network city pairs and rising middle-class population in emerging markets, have fundamentally expanded traffic patterns and underpinned sustained growth."

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