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How low oil prices may be hurting Boeing Co

Aircraft retirements for Airbus and Boeing fell to 28 in the past three months, compared to 104 in the same period a year ago.

The low oil price environment has reduced demand for new airplanes, weight loss efficient models dwindle important from an overall cost perspective.

So despite strong passenger traffic, this should eventually cause a reduction in order backlogs for the likes of Boeing Co.

That’s one reason why Canaccord Genuity downgraded Boeing to hold from buy on Thursday.

Analyst Ken Herbert, who also cut his price target on the stock to US$135 from US$150, noted that demand for lease extensions remains quite strong and lessors are beginning to determine more slots available.

He noted that aircraft retirements for Airbus and Boeing fell to 28 in the past three months. That when compared with 104 retirements in the same period last year.

Herbert doesn’t believe that trend will change given where oil costs are and just what the leasing picture appears like.

“Up until the previous few months, we believe investors were largely focused on the delivery schedule, the big backlogs at both Boeing and Airbus, and the subsequent free income generation and harvest,” the analyst said in a report.

Herbert noted that while lower fuel costs have yet to put a noticeable dent on order backlogs at Boeing and Airbus, he is doing think investors are beginning to element in additional risk to Boeing’s delivery schedule, and thereby its free income prospects.

The analyst expects that will eventually trickle down to Boeing’s valuation, as well as some suppliers.

“We feel Boeing is increasingly trading just like a cyclical stock, which is the historical pattern, and fewer around the secular free cash flow growth story,” Herbert said.

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