Newsletters Volume 1
January 2012 – January 2013
Contents Introduction ...... 4 No. 1, January 10, 2012 ...... 5 No. 2, January 17, 2012 ...... 10 No. 3, January 24, 2012 ...... 16 No. 4, February 1, 2012 ...... 20 No. 5, February 7, 2012 ...... 23 No. 6, February 7, 2012 ...... 30 No. 7, February 21, 2012...... 36 No. 8, February 28, 2012...... 41 No. 9, March 6, 2012 ...... 47 No. 10, March 13, 2012...... 51 No. 11, March 21, 2012...... 56 No. 12, March 27, 2012...... 61 No. 13, April 3, 2012 ...... 65 No. 14, April 10, 2012 ...... 68 No. 15, April 10, 2012 ...... 72 No. 16, April 24, 2012 ...... 80 No. 17, May 1, 2012 ...... 89 No. 18, May 8, 2012 ...... 94 No. 19, May 15, 2012 ...... 98 No. 20, May 22, 2012 ...... 105 No. 21, May 29, 2012 ...... 111 No. 22, June 4, 2012 ...... 115 No. 23, June 12, 2012 ...... 119 No. 24, June 19, 2012 ...... 125 No. 25, June 26, 2012 ...... 130 No. 26, July 3, 2012 ...... 136 No. 28, July 10, 2012 ...... 139 No. 29, July 17, 2012 ...... 142 No. 30, July 24, 2012 ...... 147 No. 30, July 31, 2012 ...... 150 No. 31, August 7, 2012 ...... 156 No. 33, August 21, 2012 ...... 161 No. 34, August 28, 2012 ...... 164 No. 35, Sept. 4, 2012 ...... 172 No. 36, September 11, 2012 ...... 176 No. 37, Sept. 18, 2012 ...... 182 No. 38, September 25, 2012 ...... 185 No. 39, October 2, 2012 ...... 188 No. 40, October 9, 2012 ...... 191 No. 41, October 16, 2012 ...... 196 No. 42, October 23, 2012 ...... 199 No. 43, October 30, 2012 ...... 202 No. 44, November 6, 2012 ...... 205 No. 45, November 13, 2012 ...... 209 No. 46, November 20, 2012 ...... 212 No. 47, December 4, 2012 ...... 216 No. 48, December 11, 2012 ...... 219 No. 49, December 18, 2012 ...... 222 No. 50, January 8, 2013 ...... 225 No. 51, January 15, 2013...... 228
Introduction AirInsight started its newsletter series on January 10th 2012. We started with a small number of people on a mailing list. But this has grown remarkably. It was never our intent to have a large readership. We wanted the most influential people in the industry. Initially we speculated that if we could reach the top 500 people in aerospace we would have achieved this goal.
More than a year later the readership exceeded our goal. We are not certain if the “top 500” goal has been achieved, but we are comfortable that we reach most of the people we want to reach.
Thank you for your interest in our views and work. We are forunate to work and interact with truly intelligent people in the industry whose enquiring minds are changing the way people travel. If it was not for them, this would be just another boring job. They certainly make sure it is not.
As you read through our newsletters you will see that sometimes we got it right and often we got it wrong. It is impossible to have all the information when we opined. As analysts we do the best we can with the information we have. Here is a compilation of our first ear’s worth of newsletters.
In appreciation, Scott Hamilton Ernest Arvai Addison Schonland
AirInsight || Analysis of Current Events No. 1, January 10, 2012
How Bankruptcy Will Help American Airlines American Airlines and its affiliates and subsidiaries are now bankrupt. There continues to be debate over the benefits of the filing.
General agreement is that AA will shed costs by dumping its pension plan, as did the other US legacy carriers, restructure debt and dump aircraft. American Eagle will be radically restructured. There appears to be a general misunderstanding on some other key elements.
MD-80s will be the main target of financial restructuring and contract rejections. Although AA drove down rates and debt costs on all aircraft following 9/11 in a consensual restructuring outside Chapter 11, the costs are well above market today. The ex-TWA MD-80s leased from Boeing Capital will be a prime target for rejection or massive restructuring. AA had a “Day 1” rejection list. There is a “Day 60” list, too. Day 60 is when AA either has to cure past due payments or return the airplanes.
Boeing 757s will also be a prime target for cost reduction and potential rejection. Maintenance costs are climbing (AirInsight, http://tinyurl.com/ 7kjok3b) on the type. AA’s 737-800sare a bit smaller but can accomplish any domestic mission operated by the 757. AA’s 737-900ERs on order are closer in size and likewise can undertake any domestic mission except Hawaii.
AA can shed routes to cut costs. While one observer notes, correctly, that AA can cut routes outside bankruptcy, he misses the larger point. It is well known that airlines have difficult shrinking to profitability because foundational costs continue: costs of airport facilities, costs of the airplanes. Merely cutting routes doesn’t, well, “cut it,” as long as these other costs remain. Under bankruptcy, AA can now withdraw from money-losing cities by rejecting airport contracts or, if a presence to other profitable routes is required, restructuring these costs. The airplanes assigned to these routes can be rejected or costs reduced. The assertion that bankruptcy brings no benefit to cutting routes is incomplete.
Labor: There is an argument put forth that AA’s bankruptcy had nothing to do with labor costs. We disagree.
AA has negotiated with pilots for five years to obtain a new labor contract that is more economic and productive. The long-standing MOU for 42+58 Boeing 787-9s remains incomplete due to the lack of a pilot contract.
AA has the basis to go into bankruptcy court to argue that after five years, the pilot contract should be rejected. This follows the path that union scourge Frank Lorenzo took in 1983 with the bankruptcy of Continental Airlines. Though labor laws were then much more conducive to unilateral management rejection of contracts, it is still possible today to do so.
AA pilots argue that their wages and benefits are better than some peers but worse than others and therefore management is playing games. There may be some merit to these arguments. But there is no disputing that the Scope clause is a detriment to AA and that Southwest Airlines--now the largest US domestic operation--gets much more productivity out its pilots than does AA.
American chose a path following 9/11 that was admirable in trying to protect employees, lenders, lessors and other stakeholders from the damage that comes from bankruptcy. But the company has been in a major competitive disadvantage as one peer after another filed for Chapter 11 and shed airplanes, gates, costs and pensions.
AA had no choice but to finally succumb and follow suit.
Evening the gap: the GTF vs. LEAP battle
Pratt & Whitney has been the also-ran in single aisle engines ever since it made the disastrous strategic decision to forego offering Boeing an engine for the 737 Classic and ceding this market to CFM as the exclusive supplier for this iconic airplane. PW made the bet that up-gauging was then underway and the Boeing 757 would become the new backbone for the airlines.
PW was only 30 years to soon on its up-gauging conclusion.
With the development of the Geared Turbo Fan, PW is clearly back in the game as a supplier of single-aisle engines.
PW has announced 2,200 orders for the MRJ, CSeries and A320neo family.
CFM, with its LEAP engine, is the exclusive supplier on the new COMAC C919, After a slow start, COMAC has picked up and CFM now has LEAP orders for 2,398 engines for the C919 and 737MAX (251 orders and commitments for C919, according to Ascend data base and 948 orders and commitments for the 737MAX). CFM has an additional 820 LEAP orders for 485 A320neos (through November). This is a market share split of 39.5% for PW and 60.5% for CFM.
But when you look at the only market segment where the two companies compete, the A320neo, the market share is more evenly split. The order book is 410 airplane for PW (820 engines) and CFM 485 (970 engines) (through November). But if you delete the 60 neos ordered by CFM family member GECAS (which buys only GE/CFM engines), the score is PW 410 and CFM 405 aircraft supplied. If you also delete the Frontier Airlines order for 80, where CFM and GECAS combined to financially restructure prior deals, the score is PW 410/CFM 325. This is clearly a major comeback for PW from prior years.
Where is the 100-150 seat market?
Many experts believe the 100-150 seat mainline jet market is the Bermuda Triangle for new jets. They point out that there is a general up-gauging trend. There certainly is no question about this, most recently evidenced by Southwest Airlines and its new order for Boeing 737NGs and the 737 MAX. There wasn’t a 737-700/7 MAX in the order; it was all -800 and 8 MAX. To be sure there are substitution rights to the smaller airplane. Observers also point out the “last” new airplane in this category was the unsuccessful MD-95 (renamed Boeing 717 after the McDonnell Douglas merger).
We argue that the MD-95, which is a very good airplane, is truly nothing more than a shrink and we all know these have limited success.
Embraer is far more successful with its E-195, which seats 122. This and the 100 seat E-190 have sold quite well, actually--because these airplanes were designed for this segment as a clean-sheet offering. The last time there was a clean sheet before EMB were the DC-9, 737-100/200 and the Boeing 727-100.
Bombardier’s clean-sheet CSeries recognizes this, and that’s the point. While aircraft are moving up in size, a vacuum is created in the segment. The A319 and 737-700 REs are better than their older siblings, but still can’t compete on economics. Airbus and Boeing can crush BBD on pricing, and narrow the economic gap. But there still is a market segment that BBD and EMB can fill with better airplanes. And they will. It will only be a matter of time.
AirInsight || Analysis of Current Events No. 2, January 17, 2012
A Three Way Engine Race Again? News emerged last week1 that Boeing has issued Requests for Proposals to all three major engine OEMs for a 100,000lb thrust engine for the conceptual 777X. The significance of this goes beyond the airframe ideas Boeing is floating to meet the Airbus A350 threat. It is another validation of the Pratt & Whitney Geared Turbo Fan concept.
Most will have forgotten by now but at the 2008 Farnborough Air Show, it emerged that one of the Big Two airframe OEMs had approached PW to inquire about the GTF for a 777-sized airplane. Airbus said it wasn't them and while then-CEO of Boeing Commercial Airplanes Scott Carson didn't come right out and confirm that Boeing had talked with PW, he didn't deny it, either. Even then Boeing was thinking about a re- engine for the 777 or for a new, similarly sized airplane.
As Boeing considers a 777X, one option is a variant of the GE90 combining GEnx technology. Rolls-Royce is developing a 97,000lb thrust engine for the A350, the Trent XWB. Would RR further upgrade this engine of come up with an entirely new one? As for PW, studies have already demonstrated the GTF, currently offered from 24,000lbs to 33,000lbs, can be scaled up to 110,000 lbs.
PW, which once dominated jet engines, powering 707s, 727s, 737-200s, DC-8s, DC-9s and MD-80s almost exclusively (a few RR engines were on 707s and DC-8s), made a major strategic mistake by foregoing the 737 Classic and allowing CFM exclusivity. PW
1 http://www.aspireaviation.com/2012/01/11/boeing-eyes-787-improvements-along-with-production-ramp-up/ split the 757 market with RR in a duopoly. Boeing's 747, 767 and initially the 777 used all three engines but GE dominates the 777 market today. PW is not a participant in the 787 program and has limited presence on Airbus widebodies. Only through its JV with RR did it power the A320 family. (PW last year bought out RR from the JV.) Today, GE powers around 92% of Boeing's airplanes. But this relationship has been under tension and there are key Boeing people who would like to see more choices.
The GTF has already sold more than 2,200 engines on single-aisle airplanes. If the GTF is selected by Boeing to power the 777X, this will be a huge breakthrough in the cutthroat engine market.
The 777X RFPs will once again pit RR and PW against each other. The JV had evolved into a contentious relationship. The two companies sued each other over patent claims (PW prevailed). And a new JV was formed with PW and RR to develop GTF variants for single-aisle airplanes. But this kind of awkward competitiveness is not new. PW and GE have a JV for Engine Alliance Partners to power the A380 in competition with RR, while PW and GE/CFM are bitter competitors in the GTF/LEAP marketplace, where some pretty nasty things are said.
GE will move heaven and earth to retain exclusivity on this airplane. Since 777X will be a derivative, Boeing may have no choice in the end for the 9X. Whether there is an opportunity for RR or PW on the 8X remains to be seen.
The GTF is already an established disruptive solution in the single aisle market. It will likely do the same thing in the twin aisle market too.
Assessing the RR-AF A350 dispute The reported dispute2 between Air France-KLM and Rolls-Royce over the engines for the long-awaited A350 order comes down to Rolls’ insistence that it perform the maintenance on the engines and AF’s desire to not only do its own maintenance but to also be free to in-source work for other airlines.
One way engine makers make money on deals is to follow up the orders with MRO/spare parts contracts. It is not uncommon for the engines to be sold at huge discounts, far greater than those routinely associated with “airplane” sales, as long as an MRO/spare parts contract is connected to the deal. It’s also not unknown for the engine OEMs to actually give the engines away, as in free, in connection with an MRO/spare parts deal.
For example, in the lawsuit between Rolls-Royce and Pratt & Whitney, court documents revealed that discounts of around 80% or more were given for the engines on the Airbus A380. RR competes with the PW-GE joint venture Engine Alliance Partnership to supply engines. Engines were being sold for this giant airplane for less than $3m.
Airbus and Boeing have been known to discount their list prices by up to 60%, depending on the customer; 80% is unheard of when it comes to these deals, and of course, neither Airbus nor Boeing have been reduced to giving airplanes away free in return to MRO/spare parts deals.
Ryanair moves on ETS, providing guidance
2 http://www.bloomberg.com/news/2012-01-10/air-france-talks-on-airbus-a350-order-drag-out-on-engine- dispute.html Ryanair introduced its ETS offset fee at €0.25 per person. The airline estimates this would generate between €15 million - €20 million and cover its ETS bill for 2012. Ryanair has made the move with an estimate €0.25 will cover the effective cost. This may work well for a short haul airline, but for long hauls this may be too low.
When one extrapolates that amount across the EU airlines it adds up fast. Using the Association of European Airlines data one can see the EU could be raking in a lot of "new" money. One can readily see why the EU targeted airlines.
Looking back over the last few years note that had the ETS been in force, the EU could have comfortably brought in between €80 billion and €90 billion ever year. With a slowdown in the EU his year, IATA forecasts a growth in EU traffic of 2.5% and in a "bank crisis" sees a -3.7% shrink in traffic. We assume the crisis will be averted and used the 2.5%. For 2011 AirInsight estimates the EU traffic managed to achieve a 2.5% growth rate.
It appears the ETS impact, reviled as it is by airlines everywhere (and now subject to legal disputes), is simply not that big a number for passengers. After all, compare the €0.25 with the UK's departure tax of £26 (starting April 2012) for flying less than 2,000 miles. If the ETS fee is reviled, the UK tax is an order of magnitude worse.
A380 "issue" not all it's cracked up to be
From the start this program has attracted attention - it is the biggest airliner and carries more people than any other. When the A380 first was being built an engineer, Joe Mangan3, attracted a lot of attention by saying the airplane is unsafe. That story was a flash in the pan. The bigger news was the struggle Airbus had with the program. Airbus had to rewire the initial batch of airplanes by hand because the first harnesses were of incorrect lengths. Being the biggest airplane has meant the A380 attracts attention - witness the media frenzy around the QF31 engine failure. A lot of time was spent talking about "what if" - the event was nearly catastrophic, but what that A380 endured and then managed to land safely. This was remarkable. Very few airplanes could withstand such an event and come back as that A380 did. Volumes of credit go to the superb crew handling that flight. Qantas had four senior pilots who managed to deal with the event perfectly. The event demonstrated the A380's inherent structural strength and design.
Now there is frenzy over hairline cracks on five A380s. Two are flying for Singapore, one for Qantas, one for Emirates and on an Airbus factory A380. The A380 has been flying commercially for five years and has carried over 10 million passengers. The airplane's dispatch rate exceeds 97%. It had a rough start, but operators are pleased with the A380's performance and passenger appeal is very high.
The cracks were found in wing ribs. Not only have they been identified - they have been fixed. The airplane remains safe to operate. Lufthansa reported that it has not found the same cracks in its A380s. Other operators include Air France, Korean and China Southern plus the biggest operator, Emirates. Were these cracks of a
3 http://en.wikipedia.org/wiki/Joseph_Mangan threatening nature, you can sure these operators would ground the A380 immediately. Less than a centimeter in length, these cracks were found on the L- shaped feet of the wing ribs. These feet attach the rib (a vertical fixture) to the cover of the wing. The Sydney Morning Herald reports that Airbus "traced the problem to an aluminum material used in the wing ribs – called 7449 – which tends to be more sensitive to the way the parts are assembled on the wing." The WSJ reports the cracks were first discovered on the QF31 A380 being repaired by Airbus engineers.
A lot of media attention is going to be given to the Australian Licensed Aircraft Engineers Association - Steve Purvinas union secretary is quoted by the UK Daily Mail as saying "We can't continue to gamble with people's lives and allow those aircraft to fly around and hope that they make it until their four-yearly inspection". This is language that will attract media attention. There is nothing like the threat of a crash to get attention. It bears consideration that the union has had a running battle with Qantas. Much of the heated language should be discounted as rhetoric.
The cracks are described by Qantas, Singapore and Airbus as "non-critical". We view the rush to turn this news into something bigger as banal.
AirInsight || Analysis of Current Events No. 3, January 24, 2012
India's large aircraft orders in doubt The airline industry in India is failing, largely as a result of government interference in the marketplace. The root cause of the problem is government subsidization of the failing Air India, which is currently pricing at below cost, resulting in massive losses and continued bailouts by the taxpayers. While this has been going on since a botched merger forced by government bureaucrats in which Air India absorbed the domestic Indian Airlines operations, the carrier dramatically increased its financial losses to unsustainable levels.
By setting fares below cost, other carriers in the country are also suffering. Kingfisher’s troubles are well known, and aircraft repossessions are imminent. ATR has removed all Kingfisher outstanding orders from its books as a result of the financial problems. Two carriers were recently cited for safety violations that were attributed by the Indian regulators to their weak balance sheets and cash flow issues, yet the root cause of the problem is being ignored for political reasons.
No unstable situation can last forever, and this week the Indian banks have finally discovered rationality, refusing additional loans to the weak carriers who in the current industry structure have no hope of ever repaying those loans. As a result, a cash crisis is now hitting the airline industry harder than ever, as virtually all of its carriers have gone negative in cash flow and watched their balance sheets erode dramatically as they need to price below cost to compete with the subsidized national airline.
So what will the Indian government do? It appears to be once again putting its head firmly in the sand, with a recommendation for “significant and continuous investment” in airline equities as a way out of the situation. Expecting investment in companies without a clear future potential to generate a return has about the same odds for a profitable return than winning the lottery - about one in a hundred million. No rational investor will throw good money after bad, and this strategy will also fail - just ask Kingfisher why it cancelled its planned stock offering. The vultures will soon be circling.
The net result will be the failure of several privately owned airlines in India. Those large aircraft orders from Airbus and Boeing will be in jeopardy unless the government can deal with the fundamental problem - Air India’s subsidized pricing below cost. Breaking up or privatization of Air India entails political risk, but not doing anything will likely result in the other extreme - no successful private airlines and safety and cash flow concerns for those that somehow manage to survive. Without the ability to earn a fair return, India’s private airlines are doomed.
New leadership at Bombardier points East
Bombardier announced a new President of its Aerospace unit, Mike Arcamone, who most recently was President of General Motors South Korean operations. With 30 years in the automotive industry, he will bring an outside perspective to an organization at a key moment in its history, trying to bring the all-new CSeries to market on time while maintaining cash flow from its existing CRJ NextGen and Q400 product lines that have each experienced significant market erosion during the last two years.
Choosing an executive with significant Asian experience appears significant for Bombardier. With Asia a key target for the CSeries, and Bombardier and COMAC in discussions regarding commercial cooperation, Bombardier’s plans have a strong Asian component. As a Montreal native, he should readily fit within the Bombardier corporate culture, while providing specific skills that complement their geographic strategy.
ETS negatively impact European airlines
Now that the EU does not appear to be backing down from its Emissions Trading Scheme for airlines, the question is how will the impact the competitiveness of European airlines and airports over the long term. We believe the impact will be significant, and negative as this tax package evolves.
Remember that all airlines in the first year have an 85% credit provided by the EU. Of course, like any other tax, this loophole won’t last. US carriers have added $3 per passenger to cover the 15% airlines are responsible for today, but this could grow to $60 per passenger without such credits. As the only two certainties are death and taxes, the long-term direction is obvious.
The key question is will the difference in fares be enough for traffic that currently connects from North America to the Middle East and Subcontinent over Europe choose to connect via other routes. Emirates, Etihad, Qatar and other Middle-Eastern airlines are ecstatic over the potential to bring travelers from the US to India and other destinations without a stopover in Europe, particularly as European carriers are forced to increase fares. The question is whether such increases will be able to shift traffic from Heathrow, Schiphol, Frankfurt and DeGaulle to Dubai, Abu Dhabi or Doha instead.
From a service perspective, the arguments are already compelling: aircraft are more modern, the airports are more modern and on-board service more attractive for the middle-eastern carriers. The question is how quickly they can continue to build their route structures and global connecting hubs, and what proportion of the premium fare business travel market they can attract away from European carriers? From the East Coast USA to Europe, a six hour flight is really too short to sleep well - but a 10- 12 hour non-stop to the Middle-East is ideal for a meal and an evening rest, followed by a convenient connection onward to India or Southeast Asia.
Any factor that can shift traffic is critical to an airline. The EU just provided another weapon to the carriers it complains about being unfair competitors while forcing its own airlines to eat a tax increase to remain competitive. Normally governments protect their own businesses, but the net impact of the ETS is the opposite of protectionism. Fewer passengers lead to fewer flights lead to fewer gates and airport operations, and the net result over a long period could be a downward spiral. How soon can those US airports be ready for A380s?
AirInsight || Analysis of Current Events No. 4, February 1, 2012
“Drip-feed” of Information
The latest kerfuffle in commercial aviation is over the wing bracket cracks in the Airbus A380.
The London Telegraph4 perhaps summed it up best: there was a “drip-feed” of information to come out about this issue, which taken as a whole has been made out to be more serious than it really is. Cracks in airplanes are as old as aviation itself and more often than not (much more often, fortunately), these are discovered and fixed before they become safety issues.
We well remember the issues Boeing had with the early 747s, which were known as “Section 41” repairs. Section 41 is the nose section of the airplane. Here is what was synopsized in the US Federal Register at one point:
This document proposes the supersedure of an existing airworthiness directive (AD), applicable to certain Boeing Model 747-100, -200, -300, 747SP, and 747SR series airplanes, that currently requires repetitive inspections to detect cracks in various areas of the fuselage internal structure, and repair, if necessary. This action would add new repetitive inspections for cracking of certain areas of the upper chord of the upper deck floor beams, and repair, if necessary. This proposal is prompted by the results of fatigue testing that revealed severed upper chords of the upper deck floor beams due to fatigue cracking. The actions specified by the proposed AD are intended to prevent loss of the structural integrity of the fuselage, which could result in rapid
4 http://www.telegraph.co.uk/finance/newsbysector/transport/9043828/Airbus-finds-quick-fix-for-superjumbo- wing-cracks.html depressurization of the airplane.
This isn’t strictly comparable, of course (wing brackets vs floor beams) but the underlying point is made. Cracks in airplanes aren’t unknown. You find them and you fix them. In the case of the A380, the fix is known, it is costly but it’s reasonably easy to accomplish. The hand-wringing about grounding the airplanes is aviation hysteria that emerges now and then, just as it did over the whole business of fires and composites with the Boeing 787. The Dan Rather HDNet report on this issue tended toward hyperbole instead of a comprehensive understanding of the issues then at hand. Composites have been on and in airplanes since the days of the Boeing 727. They are understood and any fire by definition is hazardous to life and the environment.
So it’s time to move on. And we will.
Getting back to the point of drip-feeding information, aviation is unfortunately prone to this all too often. Airbus, Rolls-Royce, Boeing, CFM—all of the OEMS—clam up when things go south, as we say. This forces aerospace analysts and aviation writers to turn to “sources,” “stakeholders,” the airlines and others to try to find out what is going on with a program. “Transparency” is a concept that is all too often foreign. All the OEMs need to be more forthcoming. “Sunshine” news isn’t the only time to be “transparent.”
Boeing’s 787 2012 delivery plan
When Boeing issued its 2011 year-end earnings report and forecast 35-44 787 deliveries for this year, the number seemed very low. Boeing’s Z24 production rate ramp up calls for 45 airplanes to be produced at Everett and Charleston. Then there are the nearly 40 787s sitting around Everett awaiting rework. Surely, we thought, there would be much more than 45 airplanes delivered (new production rate build 45+xx previous build).
So what happened? Simply, the rework that is still necessary on the previous-build airplanes and the rework necessary on half those new build will dramatically slow the delivery rate. It turns out half the new build airplane will require rework that will take up to three weeks each. The previous build aircraft require much more work and much more time.
This is why projected deliveries this year fall below the Z24 production table.
Airbus NEO vs. Boeing MAX
Sole-source Boeing customers American Airlines, Garuda and Norwegian Air Shuttle each ordered the Airbus A320neo. American and NAS split their orders for neo and MAX.
We think there is at least one other customer from the Boeing camp that may place a neo order in the not-too-distant future. It might be another split-decision situation. We also think there is a very good chance the Boeing-minded executives now running United Airlines will order the A321/321neo to replace the aging Boeing 757s at legacy United. The 757s at Continental Airlines are still pretty young and may not be ready for replacement just yet.
AirInsight || Analysis of Current Events No. 5, February 7, 2012
Split Orders-A New Trend in single-aisles? We’ve recently seen two narrow-body aircraft orders in which both Airbus and Boeing have been each been victorious at the same airline - American and Norwegian Air Shuttle. While the orders may to some degree be a result of limited delivery positions available from each manufacturer, the inroads made by Airbus on former Boeing-only customers can’t be sitting well in Seattle and Chicago.
We believe similar announcements may be forthcoming, with one or more airlines preparing to split orders between the two giant OEMs. It appears that the era of winner-take-all orders for narrow-body campaigns is over. The implications are interesting.
First, this means airlines can afford to have mixed fleets without a significant detrimental economic impact from a lack of commonality. We have long held that as long as a fleet has a critical mass (between 50-100 airplanes are certainly critical mass) that the benefits of fleet commonality almost disappear in our economic analyses. These recent and pending orders certainly underlie that point.
This also bodes well for aircraft such as CSeries, which has better economics than the competing A319neo or 737-7MAX, and could be a profitable sub-fleet to serve lower density routes, just as we’ve seen E190s at JetBlue. The Southwest myth that a single aircraft type can meet all needs appears to have been proven false. Lufthansa certainly believes that a mix of CSeries and A320 family makes sense in its group's operations.
Second, we believe that airlines are now also beginning to hedge their bets, and not putting all of their future with one manufacturer. A fair number of airlines are cautious by Boeing after the 787 debacle. Many acquired the Airbus A330 as a result of these delays. Now Airbus is feeling the pinch, with some airlines buying the 777- 300ER as a hedge against delays in the A350-1000 program.
Some airlines question whether the 737MAX will meet either proposed specifications or its projected EIS date, largely because of the continuing uncertainty of the design and work statement. The A320neo is viewed as more mature in design, containing a lower work statement, it could be a lower risk option, and it should be available sooner.
Many in the industry believe the neo will have better economics than MAX, based on the inability to fit a large fan engine under the wing of the 737 without lengthening landing gear. Recent comments by Michael O’Leary at Ryanair cast doubts on the fuel savings of the MAX, as well as on the performance of the LEAP-1B engine, with claims that the engine is overweight.
Combined with the recent pronouncement by Airbus COO John Leahy at a Credit Suisse conference that the GTF will have a 1.5% better fuel burn on neos due to the larger fan, even when accounting for drag, there is additional concern about LEAP, as the development of LEAP for MAX comes later than the neo or C919 versions. There are still issues to work through (which GE will certainly do) regarding fuel burn and weight, as well as improving SFC through higher operating temperatures and pressure ratios. By the time LEAP for MAX enters service, the P&W GTF will have about one million hours in operation across its several applications.
Third, with Norwegian's selection of both the GTF and LEAP for their orders, it means that sub-fleets of different engine types are also feasible in today’s environment. With most engines now covered by “by the hour” maintenance agreements with the OEM, airlines can afford to be indifferent on engine choices, and perhaps in the future even run fleets of different engines on the same aircraft type. With increasing OEM participation in MRO, the economics of engine choice is also changing.
The bottom line: We are now in a new ball game, in which airlines no longer trust the OEMs' ability to deliver on time and on performance. Delays are commonplace, and continuing, with A350XWB joining A380, 747-8i and 787 on the list of aircraft with revised EIS dates. With initial engines not performing to specifications, and PIP kits required after delivery to meet initial specifications becoming more commonplace, there is increasing doubt as to whether 737MAX will initially perform well enough to effectively compete with Airbus A320neo and CSeries. While time will tell, airlines appear to be speaking with their wallets, and hedging their bets.
Bombardier's Q400
The Q400 had a tough 2011. It was significantly outsold by the ATR. ATR sold 157 turboprops in 2011 compared with 80 in 2010. Bombardier's sales of the Q400 have been anemic and its backlog is just 29 aircraft. In 2011 ATR got orders for 13 ATR 42s and 144 ATR 72s, giving ATR 80% market share. Orders were 40% above its previous record year in 2007. ATR holds options for a further 79 aircraft. It delivered 54 units during the period, against 51 a year earlier, including its first ATR 72-600.
There are rumors that Calgary-based WestJet is going to select the Q400 for its 40 turboprop order. Looking at the 2011 sales numbers may not provide the whole story. We believe the Q400 and ATR72 serve slightly different markets. The Q400 is essentially a 50-seat regional jet replacement. It has tremendous performance for a turboprop. It flies 100mph faster than the ATR. This performance comes at a cost though – it burns more fuel and costs more to buy.
The key difference between the airplanes is how they are pitched. Bombardier talks about 500NM stages when discussing its Q400. ATR focuses on 300NM ranges or less. This underscores that the Q400 really is competing with regional jets on ~500 mile routes. Airlines with 50-seat regional jets are trying hard to figure out how to replace them. For many of these airlines who are flying the Bombardier CRJ the Q400 offers a good option. But firs these airlines need to offload the CRJs. A Q400 offers 78 seats compared to 50 seats and operates at 40% lower cost than a regional jet. But that leaves the Q400 as a tightly focused product.
Another item to consider is that Bombardier’s Q400 is a sole offering. ATR offers a family of airplanes. This means airlines can consider a range of sizes and performance characteristics when considering a turboprop. This means the ATR offering is a lot more attractive. Moreover, the ATR is up to $5m cheaper to buy.
EADS is a key ATR shareholder, offering deep pockets and other technical resources Bombardier has to fund itself. This is why ATR has been able to regularly refine its ATR 42 and 72. Bombardier focused its resources on one turboprop and bet on the regional jet replacement market. ATR has been able to focus on the turboprop replacement market – with appropriate pricing and performance.
Bombardier is bullish on turboprop prospects though. Rising fuel costs and increased air travel between secondary cities keep the turboprop popular. Bombardier expects to see its turboprop grow in size – it was first talking about a 90- seat turboprop in 2008. What Bombardier needs is an innovative path that allows customers to see that it is able to leapfrog the ATR72-600 with a Q400X just as the first Q400 was able to leapfrog the earlier generation turboprops. Markets where the Q400 is doing well include India - where SpiceJet appears ready to exercise its option for 15 more Q400s. India is a prime market for turboprops and Bombardier has a foothold with an Indian airline in a growing market.
ATR has been successful with its new generation airplanes because it has been innovative. With better engines, an upgraded flight deck and cabin - enough to be a significant step up for its current customers or current turboprop users without pricing like a regional jet .
Bombardier should rapidly accelerate it plans for an improved Q400 - it too must innovate. The innovation lesson of Airbus’ neo is there for all to see.
P&W, CFM neo competition heats up The coming engine selection by AviancaTaca could be a real test of Pratt & Whitney's new business models for International Aero Engines and its Geared Turbo Fan partnership. P&W bought out Rolls-Royce from IAE and simultaneously agreed to form a new JV with R-R that prioritizes the GTF. This puts P&W on an equal footing with CFM in terms of incumbency for orders for the Airbus A320neo.
CFM was in a position to cut "global" deals on previous contracts for A320s equipped with the CFM56. PW was inhibited from doing so on A320s equipped with IAE's V2500 because there was nothing in it for R-R -- a GTF neo sale contributed nothing to R-R's bottom line and there was no incentive for it to go along with a recasting of any existing IAE contract or to provide cut-rate deals on IAE orders tied to new GTF contracts. Now, with R-R out at IAE and P&W the controlling shareholder, P&W can cut "global" deals. That's where the AviancaTaca deal comes up.
The table below shows some of the most recent orders.
If one were to assume the incumbent engine supplier (at Spirit and Volaris) has the advantage this could mean that the P&W GTF might see another 150 orders. At AviancaTaca there is a mixed engine situation; Avianca’s A320s uses CFM56s and Taca A320s use the IAE engine. This is a real shoot- out and this might actually be the lead of this piece. P&W and CFM can compete on more of an equal footing.
But we also know that CFM -- part of the GE family -- has much deeper pockets and more business opportunities than P&W. GECAS, the mega-lessor, can offer financing on the airframes that P&W cannot. GE can offer engine maintenance deals that P&W cannot. We would never discount the GE/GECAS/CFM combination for overcoming competitive obstacles.
Norwegian has not flown any Airbus’ and its 737 fleet is CFM powered. The A320neo order was matched by an equal order from Boeing for MAX – but this does not automatically mean a CFM win on the neos. When Norwegian takes neo deliveries in 2016, the only engine available will be the GTF. It’s not clear how many of Norwegian’s neos will be GTF powered. The airline will have the engine makers fight over the rest of the order. By buying from both aircraft makers it could be the airline also decides to split its engine buy for the same reason – reduce risk.
There is one more twist here and that is called Bill Franke. His company, Indigo, is a private equity firm (no relation to the Indian airline IndiGo) with interests in airlines all over the world. Among them are Spirit and Volaris. He also has interests in other airlines with A320s, WizzAir and Tiger. Wizz and Tiger A320s and IAE powered. It appears that airlines Mr Franke invests in are likely to go with the P&W engine.
AirInsight || Analysis of Current Events No. 6, February 7, 2012
Delamination Difficulties for 787 - How Serious an Impact? A delamination problem has emerged with the Boeing 787 which Boeing has characterized as minor, but could be costly both in terms of repairs and potential production process issues to correct the problem. A series of never ending problems with quality keep emerging with the program, the latest emerging from the former Vought unit that Boeing has since acquired. The key question is whether this will mean another major delay in delivering airplanes, and how difficult it will be for Boeing to meet its planned schedule of 10 aircraft per month in 2013.
Our view is that while Boeing is trying to minimize the impact as quickly as possible, another delay of a month is likely for existing aircraft under construction, as inspections themselves will require considerable effort for a fleet of about 50 aircraft in various stages of assembly in Everett, and perhaps a bit longer for those aircraft that require repairs.
The difficulty for this problem is with the longerons, which are the side stiffeners running the length of the aircraft. There has been delamination in longerons around Section 48 of the aircraft. This section is where the rear stabilizer joins the fuselage, and the de-laminations have occurred just above and below the indented opening or “bird’s mouth” that holds the horizontal stabilizer.
In composite materials, delamination results when layers of the composite material come apart, reducing structural strength and setting up the potential for additional decomposition should additional moisture further erode the structure. Delamination is a serious problem that needs correction in composite structures, but can be repaired with additional filling materials and epoxy to hold the plies back together. As a result, additional repair work will be required to the three aircraft that Boeing has identified serial numbers 56-58, and a “significant number of additional aircraft” that may also have experienced such problems, according to our sources. Boeing is quietly inspecting the entire fleet for the additional problems, including aircraft already in service.
This particular problem appears to have been caused by components that when placed together have gaps that, once tightened with fasteners, could result in stresses that cause structures to delaminate, resulting in a foreshortened fatigue life. Boeing has faced this problem before, as horizontal stabilizers build by Alenia were assembled without the required shims to ensure that the structure fit together well, and required those assemblies to be torn down for repair. In this case, a similar problem appears to exist, yet Boeing asserts that it can complete the required repairs without tearing down the assembly or removing components from the aircraft.
We understand that Boeing is inspecting more than 50 aircraft to determine how widespread this problem is among aircraft with that section already completed. As the longeron is underneath the skin, which is attached to it, installing a shim would require additional work on the interior of the structure. Boeing has indicated that their repair process, which is under development, will be relatively straightforward, and not impact their production schedule. While we hope that will be the case, until engineers have had a chance to both examine the problems and complete an FAA approved repair process, we can’t yet reach that conclusion. We see similarities to problems Alenia experienced with shims on the horizontal stabilizer, which required them to be disassembled for repair. The key question is whether fasteners and panels will need to be removed to repair the structure, or if it can be “shimmed and filled” in place with resins that will cure the problems in place. Boeing believes the latter, but rumors of problems in additional areas of the aircraft are emerging, so stay tuned to the continuing adventures of 787 growing pains.
The MALÉV gap is quickly filled at Budapest The demise of the long-suffering Hungarian state-owned carrier MALÉV has resulted in a rapid rush by low fare operators to increase operations at Budapest. Ryanair has announced plans for 26 additional routes from Budapest, up from its planned 5, and Wizz Air will base an additional 2 A320 aircraft at Budapest as it takes on additional routes and frequencies to Bucharest and other existing destinations. Lufthansa has announced additional frequencies to Berlin and Hamburg, and Air Berlin has announced an additional frequency from Berlin as well. Smart Wings, an LCC based in the Czech Republic, has also announced fights to Paris and TelAviv from Budapest.
So far, only WizzAir has made an offer to former MALÉV passengers, who were left high and dry. Wizz Air is offering 50,000 seats at about US$45 to those stranded by the shutdown. In the Hungarian bankruptcy, MALÉV ticketholders have lost their purchase price, with little likelihood of recovery.
While not all routes of the former carrier will be immediately filled, as potentially 20 destinations will not be served by other carriers, the ability to travel in and out of Budapest with other carriers will have only short term constraints until new routes can be initiated.
The speed at which the gaps will be filled at Budapest tells us several things about the state of airlines in Europe. First, excess capacity exists that can quickly be shifted to potential growth markets. Ryanair had initially planned 5 flights as it entered Budapest, but was able to quickly expand to 31. The ability to quickly grow service that rapidly implies that aircraft were less than productive on other routes. Second, it tells us that competition in Europe will be cut-throat, with several low-fare carriers pouncing on the opportunity to invade a market once dominated by a national carrier. Will this competition cause this market to also soon become unprofitable? Third, the old line carriers that haven’t been able to restructure, either due to union constraints or other factors will soon be dead as well. The Czech government is seeking bids for CSA, LOT Polish is in a similar position, and with strong low-fare competition in each market from WizzAir and others, these carriers could soon share the same fate as Malév, which was also for sale for a number of years.
The only potential silver lining for Budapest is that the airport, the privatization of which included some guarantees for volume in the event of the demise of the national carrier, may not need to be invoked if the LCCs step up and maintain traffic levels. Let’s hope that is the case, as the last thing the Hungarian government needs is an airport in addition to an airline seeking subsidies. While some in the government hold out hope of a restructuring and re-start, we don’t believe a re-start will be feasible. RIP MALÉV, 1946-2012.
India’s Government is Destroying their Airline Industry, and Kingfisher will be the First to Fall We have spoken quite often of the Indian government’s destructive behavior with respect to its airline industry, propping up Air India with subsidies while the carrier prices it product below cost, forcing competing carriers to match unrealistic prices that are so low it is driving the competition out of business. If the objective is to gain a monopoly for Air India, the strategy is working - but if India wants a healthy airline industry, its counterproductive policies need to be changed, and changed quickly. Airlines in India lose about $20-$30US per passenger today, primarily the direct result of government policy.
Kingfisher, despite efforts to the contrary, is dead. But since airlines take a long time to die, it will still continue to operate for a few more months until it completely runs out of cash. Airplanes have already been repossessed, the schedule slashed, with no hope of profitability in view. The crisis at Kingfisher is finally bringing the incompetence of the Indian government to the forefront, and a proposal that would help the industry by allowing airlines to import jet fuel directly, without paying local state taxes, which can be as high as 28%, is now being considered. This would go a long way to making India’s airlines more competitive, as their fuel costs are disproportionately high, even in a high fuel cost environment. But in itself, it won’t solve all of the problems. The solutions are clear and well known - but the political courage to implement them is lacking in a corrupt Indian government.
The key question is whether the current government and recently appointed Minister of Aviation will learn from the demise of Kingfisher. With a flamboyant CEO, Kingfisher won’t go quietly into the night without making some political waves. Let’s hope that the high profile failure will cause the Indian government to consider reversing the policies that have made it nearly impossible for an airline to be profitable and enabled competing countries to gain market leadership in travel to and from India. Nobody in Indian politics has the will or political capital to cope with a shut-down of the national carrier, but it is now to the point that it should be restructured and privatized. But as that will cost jobs, given the rampant overstaffing at the carrier and with India’s economy slowing as a result of the crisis in Europe that simply won’t fly, politically.
With a growing economy, India has a strong potential for a sound airline sector, but it being held back by woeful infrastructure, which is being addressed, and anachronistic government policies, which are not. Until reform comes to the latter, India’s airlines will languish and fail, while its businessmen choose Emirates for premium class international travel instead of an Indian carrier. With the market capitalization of most Indian carriers at levels below their financing requirements for 2012, this will be a tough year, as the market will no longer be willing to throw good money after bad. Unless some drastic actions are taken, we can expect several Indian carriers to fail this year.
AirInsight || Analysis of Current Events No. 7, February 21, 2012
US takes aim at CSeries If there was ever evidence that the business case for the Bombardier CSeries is sound, the news Saturday (Feb. 18, 2012) that it is now official US policy to take on the airplane on behalf of Boeing is it.
Dominic Gates of The Seattle Times has this story5 that details how the Obama Administration has instructed the US Export-Import Bank to provide financing for the Boeing 737 to head off orders by US airlines for the CSeries if Canada's export bank offers financing for the CSeries.
Boeing has previously largely dismissed the CSeries as a threat to the 737-700 and, subsequently, the 737-7 MAX. Airbus has been even more vociferous in claiming there is no business case for the CSeries.
We believe that when any product becomes the target of official US policy, this validates the threat of that product. In fact, despite the massive PR campaigns against the CSeries by the Big Two OEMs and some credible aerospace analysts, the CSeries had a decent year last year.
Orders in the 100-149 Seat Market
Bombardier didn’t do badly in orders for its CSeries last year if you actually compare apples-to-apples and look at only the 100-149 seat market. Aerospace analysts, some
5 http://seattletimes.nwsource.com/html/businesstechnology/2017537709_obamaexim18.html consultants and most media look at the orders of Airbus and Boeing for the A320 and the 737 families and compare them to Bombardier and say how poorly BBD is doing.
The problem with this approach is that BBD does not compete in the 150-seat and above market, where most of the orders are.
Gross orders In 2011, Boeing recorded orders for 64 737-700s and none for the 737-600. (It hasn’t sold a -600 since 2005 but the airplane is still offered for sale.) Of the 64, Southwest Airlines ordered 40 and lessor Aviation Capital Group ordered 20. Four were ordered by Unidentified customers.
On the Airbus side, there were 31 A319s ordered. (There were two A318 Business Jets ordered, but none from airlines.) Bombardier announced orders for 43 CSeries, all from commercial customers.
When you look at the market share of orders, Boeing was first, followed by BBD and then Airbus.
But the Aviation Capital Group order is somewhat misleading. ACG always orders the 737-700 because this is the least expensive model, which therefore requires a lower down payment than the more expensive 737-800, which it prefers. ACG routinely converts the -700 order to -800s as the build date nears.
If you look at the order market share taking this into account, Boeing still retains the lead on the strength of Southwest, but only barely. And we eventually expect Southwest to convert its -700 orders to -800s in the same fashion as ACG.
Either way, BBD had a solid showing in the 100-149 seat market.
Viability of the 100-149 seat market
What, then of the viability of the 100-149 seat market? Many analysts assert this is the Bermuda Triangle of new airplanes.
There is no question, this is a small market compared with the 150-210 seat segments. But this does not mean it doesn’t exist. It’s been reduced to a niche market. Embraer has done quite well in the market with its E-190/195 airplanes, seating 100-122 in 31 inch pitch. It has sold 676 aircraft in this market segment since the E-Jets went into service in the last decade.
There are thousands of aging aircraft in this market segment that need to be replaced. BBD forecasts a need for about 7,000 in the next 20 years. Embraer’s forecast isn’t strictly comparable because it looks at the 90-120 seat segment it competes in. For this segment, EMB projects a requirement for nearly 5,000 jets.
BBD believes it will obtain a market share of 50%, which we think is optimistic. We believe the market will largely be split four ways. And at the moment, Embraer is leading market share for 2011 orders.
Based on this data, BBD would build 1,350 of 7,000 airplanes over 20 years if its forecasts are correct. But we expect BBD’s share to pick up once the CSeries is flying and after it enters service.
AirInsight || Analysis of Current Events No. 8, February 28, 2012
The Impact of Fuel Prices The refrain is constant – fuel costs are too high. With tensions in Gulf up again, oil is now around $107/bbl and likely to go higher. Airlines are unable to plan reliably because of the pricing volatility.
Airlines face a scenario where fuel is ~50% of costs. If this could be counted on to be a constant for an extended period of time, airlines could adjust. But it is volatility that causes so much cash flow damage. If an airline sells seats 21 days before a flight and then pays the fuel vendor around 90 days later - meaning a gap of approximately 100 days when the airline is exposed to fuel price fluctuations (assuming no hedges). With break-even load factors routinely around 86%--and profits, if any, increasingly coming from fees, even a small variance in fuel prices wreck the finely balanced edge between profit and loss.
The airline cannot go back to its customer and ask for more once the seat is sold. The fuel risk is entirely on the airline, which is why so many airlines now have a fuel surcharge. This highlights an opportunity – why is no airline offering customers an opportunity to share the risk of changes in fuel price? For example instead of a blanket fuel surcharge the airline could create a scheme that puts half the fuel volatility in the hands of a customer. This transparency would go over well as it would be a “fee” that makes sense.
Among US airlines the impact is well illustrated by research from the MIT Airline Data Project6. (See Chart.) Note that fuel charges have risen by 178% while revenue and operating expenses have only risen 138%. Even as airlines have been squeezed by the ever rising price of fuel, note also the positive impact of ancillary revenues. But for this positive impact of ancillary revenues, the problem of higher fuel costs would be substantially worse.
The key take away from this chart is that fuel accounted for ~30% of the airfare in 2010. Airlines simply don’t have any margin to offset fuel spikes. Given the airline business is so risky, it seems clear that airfares need to rise to not only cover fuel costs but also for the ability of the industry to reinvest and provide investors with a return. This squeeze explains in part the rush by airlines to more fuel efficient airplanes. Absent ancillary fees, the chart demonstrates that US airlines cannot make profits.
6 http://web.mit.edu/airlinedata/www/default.html
Without higher fares the industry is in more trouble – which accounts for growing consolidation. Airlines are being forced to consolidate to secure survival. Consolidation ensures higher fares. The boom in cheap air travel transferred economic wealth to consumers is now likely to swing away towards transferring economic wealth to airlines. Promising Biofuels Even as fares go up, we believe an area that deserves much more attention is biofuels. Airlines need these because they can reduce fuel price volatility. Biofuels can be sourced in many places in the world. Places subject to much less political unrest than where oil comes from. A growing biofuel supply is necessary not so much for the positive eco-impact as for fuel price stability.
At the same time, pricing today for biofuels are exorbitant and have a long way to go before becoming an economical alternative to fossil fuel.
Many airlines are conducting biofuel blend test flights. Lufthansa has one planned to cross the Atlantic. Airline industry groups such as IATA are encouraging biofuel development. A primary concern is that biofuel suppliers need to reduce their risk, too. They will not build plants to create fuels based on airline demand alone. They need a steady demand for large quantities - and airlines are too risky a customer base. The only viable customer that can offer the desired level of stable demand is the government – the US military is the ideal customer most often mentioned.
Even as the need for biofuels is obvious, the impact of biofuel production on other parts of the economy is a concern. In 2005 the US had 16 million acres growing corn, and in 2011 46.5 million acres were growing corn. The reason is demand for ethanol production. In 2005 10% of the corn crop went to ethanol production and last year it was 27%. If biofuels impact the food chain then we are solving one problem but creating another. The US Department of Agriculture reported in February 2012 that US ethanol refiners for the first time consumed more corn than livestock and poultry farmers.
The problem with ethanol is two-fold, however. It has less energy than fossil fuels and the carbon footprint to produce it is higher than the benefits achieved.
Consequently the opportunity to develop biofuels from waste materials, algae and biomass which are not part of the food chain is why Boeing, Aibus and key Tier 1 suppliers focus on these alternatives. There are numerous input options so the problem is not insurmountable or massively complex. Governments can play a crucial role at the front end by offering tax incentives to generate supply by growing plants like jatropha and high oil grasses on marginal land unsuitable for crops. Purdue Foods is looking into biofuel production from waste coming from its chicken plants. In addition, governments can encourage biofuel demand by acting as a lead customer by buying blended diesel and jet fuels. A crucial first step would be governments supporting supply development and offering a more certain demand.
In January Airlines for America, the industry trade organization for the leading U.S. airlines, and Boeing today released several recommendations7 to the U.S. Department of Agriculture (USDA) to accelerate the commercial viability and deployment of aviation biofuels. You can download the 49 page report here8. The US Department of Agriculture (the lead agency responsible for feedstock development and production systems) joined with Airlines for America and the Boeing Company to accelerate the availability of sustainable aviation biofuels in the United States, increase domestic energy security, establish regional supply chains and support rural development. Another US-based organization committed to the development of sustainable biofuels is the Commercial Aviation Alternative Fuels Initiative9, an organization that notes "U.S. commercial aviation consumes about 3 percent of U.S. total energy use, it drives about 6 percent of the U.S. gross domestic product and just under 9 percent of national employment." There are many commercial aviation industry people getting behind the process of developing biofuel options for airline use.
IATA anticipates that airlines could be using biofuel blends by 2017 for 1 percent of fuel requirements. At the moment this is still a dream. But it could easily become reality if key players stepped up. The airline industry truly needs this process to get started immediately. The numbers demonstrate that airlines cannot survive current fossil fuel price volatility and current airfare levels. Failing airlines will set off
7 http://www.airlines.org/Documents/Farm_to_Fly_Recommendations-A4A-Boeing-Jan2012.pdf 8 http://www.airlines.org/Documents/usda-farm-to-fly-report-jan-2012.pdf 9 http://www.caafi.org/ downstream impacts on layoffs throughout the travel industry. The EU has seen five airlines fail within the past six months. More are on the brink - from the EU to India.
The fact that a biofuel investment boom produces a cleaner environment is an exquisite coincidence.
AirInsight || Analysis of Current Events No. 9, March 6, 2012
There has been much in the press recently about fatigue cracks in brackets on wings of the new A380 that have been vastly overblown with respect to safety of flight. One general reporter, apparently without a lot of aviation knowledge, expressed concerns about flying on this aircraft (which industry experts recognize as perfectly safe), apparently because of a small problem that is under control, represents no immediate threat to safety, and will be corrected on a timely basis on all aircraft in service.
Another over-reaction included a reader poll by a news organization that was one of the most egregious of the “Chicken Little” style of reporting, and of course, that poll showed that its readers had concerns about flying the A380, primarily as a result of their sensationalist reporting. While over-reaction tends to occur to a degree every time an aviation incident occurs, the media has increasingly become less credible in its aviation coverage, apparently due to a lack of understanding of the processes that underlie aviation safety.
The Airworthiness Directive process is an integral element of aviation and needs to be understood within the context of the industry’s maintenance and safety practices. ADs, as they are called, are issued by the FAA or other regulatory authority as a notification to owners and operators of certified aircraft that a known safety deficiency exists, and must be corrected within a certain time frame for the aircraft to remain airworthy. As a result, compliance is mandatory if the operator wishes to continue to fly the aircraft. While an aircraft manufacturer can strongly recommend change in parts or maintenance procedures, and routinely do, only a regulator can mandate those and require them to be performed.
Most airworthiness directives result from manufacturer service bulletins and recommendations, which are, in turn, based on the experience of their operators with the in-service fleet and their analysis of the literally hundreds of thousands of maintenance reports generated each year. In this case, after a review of the facts, and the discovery of the cracks in some brackets, Airbus recommended to the regulatory authorities that a change out of these components become mandatory, and the regulators concurred with their assessment. Hence, the issuance of the ADs.
The frequency of airworthiness directives, ranging from minor to noteworthy, is higher than those unfamiliar with the industry would think, but in context of an aircraft with millions of parts in which that one-in-a-hundred thousand event can occur, is nevertheless statistically what we would expect each year for each type of aircraft. Most of these are relatively minor in scope, and don’t result in the grounding of aircraft. But on very rare occasions, an emergency AD will be issued requiring immediate compliance prior to further flight. "Grounding" in this context is vastly different than requiring an inspection by a certain point in flying hours or a calendar date.
This last major grounding of a commercial aircraft occurred in 1979 when the Douglas DC-10 fleet was grounded after an engine fell from the wing of an American Airlines aircraft departing from Chicago on May 25th of that year. While maintenance issues, and not the design of the aircraft, were ultimately found responsible for the crash, this was the most severe AD issued since the disintegration of several DeHavilland Comet Jets in the early 1950s due to metal fatigue that resulted in a grounding of that type as well. Two incidents in 60 years demonstrates the strong track record of the industry, and the increasing reliability and safety of aircraft.
Before the Comet, the Douglas DC-6, Lockheed Constellation and Martin 202 were all grounded due to emergencies in the late 1940s. Thus, it is clear global aviation has come a very long way in safety, and the process of ADs has been instrumental in this progress.
Well over 99% of airworthiness directives are more routine items with less urgency, dealing with potential safety defects by requiring either additional inspections or repairs to an aircraft. ADs are fairly commonplace, and typically will number in the hundreds for a typical aircraft as it matures in service as potential maintenance issues are discovered and dealt with through the routine inspection and safety processes in use by the industry.
The A380, the current media target, was introduced in 2007 and has 43 airworthiness directives to date. The other very large jet, the Boeing 747, introduced in 1969, has more than 840 airworthiness directives over its life, and is viewed as one of the safest aircraft in the skies. Yet the 747 had a much more serious structural issue with the fuselage in the forward section of the aircraft, called Section 41, two decades ago. An AD was issued, but as these cracks in structural supports were also caught early, no accidents or fatalities resulted. The Section 41 problem resulted in an expensive inspection and repair process, and was potentially much more serious than the current A380 issues. But once solved, the problem has long been forgotten, as will the current issues with A380.
The new 747-8, which entered service late last year, has since been discovered to have flutter issues with the aft fuel tanks. These have been sealed off pending a fix.
The Boeing 787, recently introduced and now with only five aircraft in service, has issues with its carbon fiber fuselage. Some areas will require shims to avoid potential problems around fasteners. Boeing is currently inspecting all 55 aircraft in process in Seattle before they enter service. At least 15 are said to require repairs. This problem was caught early at the factory. Regardless of how a problem is discovered, the industry has established practices to determine whether they are applicable only to one airplane or the entire fleet, and if the latter, correct the issues on a timely basis to ensure the safety of operations.
Even the popular narrow-body A320 and 737 series have hundreds of ADs, but are considered among the most safe aircraft ever built. And as aircraft age, additional issues can emerge, as is the case with crown skins on some Boeing 737 classics, one of which recently separated in flight on a Southwest flight. Boeing has discovered the cause of the issues, and an appropriate AD has been issued to monitor and correct the situation.
Clearly, the issuance of an AD does not bring aircraft crashing down from the sky, but rather prevents this from happening. Virtually all are issued with the full cooperation of, and typically at the suggestion of, the aircraft manufacturer, as safety is the number one priority in the industry. It is time that the responsible press recognized that strong processes are in place, they work quite well. To those Chicken Little reporters, let me be perfectly clear: The sky isn’t falling and both older and newer model airplanes are taking off and landing safely every day, thanks to thousands of people in this industry who put safety as their first priority, every day, and follow established processes that work quite well.
AirInsight || Analysis of Current Events No. 10, March 13, 2012
Yellow flags waving throughout Commercial Aviation Although Airbus and Boeing came off a record year for orders in 2011 and Boeing is expected to have a record year this year as nearly 1,000 commitments for the 737 MAX are converted to orders, there are plenty of worrisome signs across commercial aviation and throughout the world that this year and next could be worse than appears on the surface.
Airlines and leasing companies are reporting decent earnings. But there not only is plenty of visible evidence that all is not well, behind the scenes there are plenty of concerns.
The visible signs of emerging trouble:
• Aviation in India is an unmitigated disaster, with Kingfisher, Air India and Jet Airways all experiencing difficulties. Kingfisher is on the verge of collapse and Air India is operating only through the largess of the government. Jet is struggling. 10 • Carriers in Asia and Australia are struggling . AirAsiaX found that its low-fare, long haul service is unsustainable in European markets. It used Europe's ETS scheme as an excuse to withdraw, but economics of low-yield service from Asia to Europe as problematic even in the best of circumstances. The fuel pricing environment today hardly falls within that characterization. Australia has seen recent air carrier failures and the financial results from several Asian airlines are poor.
10 http://www.aspireaviation.com/2012/02/29/dark-clouds-over-asiapacific-airline-industry/ • Europe has seen the collapse of several airlines.
• Ryanair and easyJet, which have depended on aircraft sales of middle-aged aircraft to boost income, now find the market for these aircraft dried up with financing unavailable to potential buyers11.
• Fuel prices passed the $100bbl mark again, on the way to $105bbl and even higher. The Middle East's geopolitical situation appears to be getting worse, particularly with the rhetoric of the US presidential campaign heating up. Some Republican candidates are openly advocating military action against Iran and Israel is threatening to unilaterally bomb Iran's nuclear facilities. President Obama is trying to walk a fine line between sanctions and being forced into military action. The situation in Syria remains volatile and the situations in Egypt and Libya remain unstable.
• Some lessors are finding increasing numbers of aircraft between leases or soft lease rates. Boeing 757 lease rates are coming under severe pressure as United Airlines prepares to place a major order next month for a replacement. United's management, dominated by the Continental group following the merger of the two carriers, wants to dump the older, Pratt & Whitney- powered 757s operated by legacy United (Continental's newer 757s are Rolls- powered). This means leases rates being demanded by United from lessors to keep the airplanes for a few more years are reported to be as low as $90,000 per month.
AirInsight is viewing the next 18 months with growing caution as these and other factors build in frequency across the globe. Cargo traffic remains a leading indicator for passenger airlines, and this was softening in the last few months of 2011. Although we fully expect airplane orders to continue to be strong, we also believe the OEMs will face growing skyline management issues.
11 http://www.aviationweek.com/aw/generic/story.jsp?id=news/awst/2012/03/05/AW_03_05_2012_p24- 431328.xml&headline=Despite%20New%20Aircraft%20Surge,%20Used%20Market%20Sags&channel=awst
Competition in twin-aisle race becomes clearer As details emerge on Boeing's 777X, the line-up in the twin-aisle competition is now becoming clearer. The following table is based on known data and our estimates of some of the technical detail.
What is emerging is that the 777-8X--ostensibly a replacement for the 777-200 series- -is in reality closer to the current specifications of the 777-300ER. The 777-9X is an entirely new airplane category, mid-way between the current 777-300ER and the 747- 8. Boeing's proposed 787-10 will be the replacement for the 777-200.
Pax Range- Airplane Length 3 Class NM 767-300ER 218 180ft 5,990 787-8 210* 186ft 7,925
A330-200** 253 192ft 7,200 787-9 250 206ft 8,250 A350-800 270 198ft 8,500
A330-300** 295 208ft 5,828 777-200ER 301 209ft 7,725 777-200LR 301 209ft 9,395 A350-900 314 219ft 8,100 787-10 310 6,950
777-300ER 365 242ft 7,930 A350-1000 350 242ft 8,400 777-8X 345 >209ft 9,400
777-9X 405 250ft est 8,500
748-8 467 250ft 8,000
A380-800 525 237ft 8,300 *158 2-Class B/Y operated by ANA; 210 pax in Boeing estimate **A330-sharklet add 400nm Boeing's 777X strategy is clearly intended to bracket the Airbus A350 but it also threatens to further marginalize the 747-8. Emirates Airlines dearly wanted the 747-8 to have a bit more range to allow non-stop Dubai-LAX service. Even if the 747-8I met its original specifications, the range fell slightly short. A 777-9X with our range estimate of 8,500nm--based on market intelligence, which may or may not prove in the end to be the true number--will make that routing with room to spare. Although the -9X will be smaller than the 747-8 in passenger capacity, would Emirates want an entirely new fleet type for those extra passengers?
The 777X is expected to have composite wings and wing box, a lighter aluminum lithium fuselage, new systems, better aerodynamics and new engines. An interesting fact on the fuselage: Boeing considered an Al-Li fuselage in the original development of the 777-200, but at that time production techniques were too challenging. Today Al-Li is easier to work with. It's 10% lighter than today's metal fuselage and durability in many ways matches composites without the additional cost and hassle.
Based on current information, we believe the 777X will be a virtually new airplane (the 747-8 is about 80% new).
Boeing management is expected to seek from the Board Authority to Offer (ATO) the 777X this year, with a launch next year. EIS is currently being projected for around 2019. Airbus projects EIS for the A350-900 in 2014, followed by the A350-800 and finally the A350-1000 in 2017.
Kingfisher ATR orders canceled It comes as absolutely no surprise that as India's Kingfisher Airlines continues to implode, ATR has canceled an order for 38 ATR turbo-props. As our affiliate Leeham Co wrote12, ATR would be a big loser with Kingfisher's fortunes spiraling downward. This means ATR had a net 119 orders for the ATR turbo-props in 2011.
12 http://leehamnews.wordpress.com/2012/01/23/airbus-atr-big-losers-in-kingfisher-turmoil/ AirInsight || Analysis of Current Events No. 11, March 21, 2012
Republicans ratchet up attack on Ex-Im Bank In a fight started by Delta Air Lines that now pits the carrier against Boeing over the US Ex-Im Bank financing, Republicans in Congress--including the House Majority Leader Eric Cantor--are ratcheting up their attacks on the funding of the US Ex-Im Bank.
This article from The Hill13 and this one from The Seattle Times14 are good summaries.
The Republicans call this a "partisan" fight (because the Obama Administration wants to renew the funding). The politicians also call this a subsidy. Neither is true.
Ex-Im has been around since 1934 to promote US sales of goods overseas. Boeing, today, is the chief beneficiary but it is not the only one. Most importantly, Boeing is the USA's largest exporter of good in an era where US balance-of-trade is routinely lopsided with the US importing more than it exports. The funding support provided by Ex-Im helps mitigate this.
Equally important, without the Ex-Im Bank, billions of dollars of Boeing airplanes could not have been financed in the 2008-2010 Great Recession. This means jobs, which Republicans assert is their top priority. This means billions of dollars in exports by Boeing, equipped with GE and Pratt & Whitney engines.
13 http://seattletimes.nwsource.com/html/soundeconomywithjontalton/2017789359_boeings_bank_is_essential_to_u.html 14 http://seattletimes.nwsource.com/html/soundeconomywithjontalton/2017789359_boeings_bank_is_essential_to_u.html We find it unfortunate that the only partisan politics being undertaken are those practiced by the myopic Republicans who are against anything coming out of the Obama Administration.
As the Seattle Times artice points out, Delta Air Lines is the beneficiary of subsidies. We would add bankruptcy to this as a market-distorting mechanism that was used by Delta and its merger partner, Northwest Airlines.
The Aircraft Sector understanding reset fees and pricing to eliminate cost-of-funds disparities effective January 2013.
Congress needs to quit playing around and renew the Ex-Im funding.
ISTAT 2012 The Phoenix ISTAT Conference15 started on Sunday evening in Scottsdale, Arizona, with Airbus and Boeing the headliners on Monday and as usual sending barbs and snipes at one another. The events planned can be seen here16, with today's events headlined by the lessors' panel at the end of the day,
The main story Monday is, of course, Airbus vs Boeing. This year's event was rather more aggressive than last year. Boeing's Mike Bair spoke of eliminating Airbus from the large twin market. Andy Shankland from Airbus headlined their 2011 record year - 534 deliveries and 1,419 net orders, a market share of 64%--one of the best drubbings Airbus has given Boeing. About 40% of 2011 deliveries went to lessors. All the 2012 deliveries to lessors have already been placed with airline customers. Airbus took a few digs at Boeing, comparing the neo to the MAX. Airbus dismissed Boeing
15 http://www.istat.org/Events/ISTATAmericas/Registration/tabid/176/Default.aspx 16 http://www.istat.org/Events/ISTATAmericas/Schedule/tabid/267/Default.aspx claims that the MAX is more economical than neo, concluding that neo will have a 7% cost advantage over MAX vs. the Boeing claim MAX will be 8% more efficient than neo.
Part of the discrepancy is the different assumptions each user. Boeing assigns 162 seats to its -8 MAX while Airbus only allows 157. Both use 150 for the A320. Boeing uses a 500nm range wile Airbus uses 800nm, a figure that more closely represents actual operations and one that gives additional credit to the new sharklets being installed on the A320 family; sharklets are more efficient the longer the haul. The companies use different maintenance assumptions. The biggest disparity relates to the assumptions over the fan diameter size. Airbus claims size is all-important for the fan and Boeing claims it's not as important because the 737 is lighter and requires less thrust than the A320, so a smaller fan diameter works just fine vs the larger diameter required for the larger engine on the A320neo. Each claims "physics are physics" but perhaps only a rocket scientist can be the arbiter on this one.
Boeing's Mike Bair alluded to today's era being like that when the first high bypass fan engines were launched. Boeing is focusing on the middle market - where it pits its 787 and 777 against the A330 and A350. Adding in the 747-8 vs the A380, Bair declared that Boeing intended to put Airbus out of the twin aisle business--a declaration that, frankly, was met with widespread derision among media and delegates in the hallway talk after the presentation.
He noted that Boeing is of the view that backlogs are too large and they wanted to bring theirs down. An eight to nine year backlog is too great for customers they believe. But hallway talk, as well as Adam Pilarski of Avitas Aviation, a widely regarded industry analyst, believes that there is an order bubble (much like the housing market, in the words of some) that is inevitably going to burst.
Bair went on talk about the "pretty obvious" 787-10. The aim is 50% lower costs with the same capacity as the A340-600. He spent some time on a chart showing Airbus planes eclipsed by Boeing products - obviously the A340 is the poster child. (He said nothing of the A330 eclipsing the 767 in its day) Boeing is thrilled the 787 is able to do what they wanted - open new markets and San Diego-Japan got special mention. Mr Bair stated ANA is "ecstatic" with the airplane. One fascinating tidbit - the 747-8 wing offers 7% better performance than that of the 787. Parts of Boeing's presentation lacked assumptions to explain how they derived their numbers.
Among the interesting points Mike Bair made was that the MAX could compete with the neo even with a smaller fan. Airbus makes the point that the larger fan on the neo provides substantially better fuel burn. Boeing responds that a bigger fan means more drag and weight. Bair spoke of the formula of SFC+weight+drag being key when considering a new engine. We discussed this formula with an engine company at ISTAT and they confirmed the formula as valid, but offered an interesting insight. When asked to weight this formula they told us 80+10+10 respectively. In other words the bigger fan still generates the most impact by an order of magnitude. Which would seem to support the Airbus contention their neo will be better than the MAX in fuel burn. Of course the addition of sharklets only serves to further improve the neo's numbers.
In terms of other insight picked up that caught our attention is talk around the 100- 149 seat segment. Embraer is a big player in this segment and its speaker, Luiz Chiessi, Director of Marketing Strategy said the company intends to defend its market share. This clearly demonstrates the market is worth the fight. It seems to us that this is a signal to Bombardier, whose CSeries is expecting its first flight later this year. A leading leasing firm pointed out to us that they view this market as "interesting and it has been interesting for thirty years". This lessor pointed out that the big challenge is can one produce an airplane for this segment? They pointed out that shrinks (737- 700 and A319) don't do well economically. But the E-190 has done very well and it was a new design rather than a shrink. Clearly the CSeries will have a fight on its hands if it starts to take away business from Embraer. Airbus and Boeing of course will do whatever they can to squeeze the market from the top to ensure it is as small as possible. They will use pricing and production capacity to do this. However, these two strategies might be less than effective as both OEMs see their backlogs grow so large, because of orders for larger members of their single aisle families, remove the ability to react quickly enough. Bombardier continues to believe this segment is going to require 7,000 airplanes - that is a very big market.
What does all this mean from the first day. Frankly, not much. The bashing back-and- forth between Airbus and Boeing is expected and tiring. The smaller airframe OEMs are more informative and generally have less barbs toward their competitors (or at least are more polite). The real news is expected to come out of the lessors' panel, where leasing godfather Steve Udvar-Hazy is expected to make some news.
AirInsight || Analysis of Current Events No. 12, March 27, 2012
Winglets - A Triumph of Marketing over Reality One of the great success stories of the last decade in aviation has been the development of winglets, an Aviation Partners success. Now factory installed on virtually all Boeing 737s, these devices are becoming ubiquitous with “modern” commercial aircraft and are often thought of by the public as differentiating a newer model from an older aircraft. The “conventional wisdom” in the industry is that winglets significantly increase fuel economy, and provide about a 5% benefit in fuel economy for aircraft that utilize them. The reality is that those benefits occur only in specific high altitude flight regimes, and that a more realistic average fuel savings benefit, for typical domestic operations, is about 0.5%.
The reality certainly doesn’t match the hype, and even Airbus will soon be offering “sharkets” on its A320 because competitively its airplanes, despite being more efficient with their small wingtip fences for most flight regimes, don’t look like the new Boeings. So why is everyone installing winglets on their aircraft? Hype, and not fully analyzing the advantages and disadvantages associated with them.
Winglets change the operational characteristics of an aircraft, and while they operate well at high altitude, above FL390, they require a slower climb to be as efficient as a non-winglet equipped aircraft in that regime. As soon as you speed up during climb, the fuel efficiency advantages of a winglet equipped aircraft turn negative, and rather than climbing at 330 knots after 10,001 feet, a winglet equipped aircraft needs to climb at 250 knots at FL100, 260-270 knots at FL150, 270-280 knots at FL180 to match climb fuel economy of a non-winglet equipped aircraft.
While more efficient at high altitude, for many flights on the east coast and west coast, where heavy traffic areas exist, a flight may not get above FL270, and never reach the altitude at which the efficiency of winglets kicks in. And at those lower altitudes, cruising at more than M 0.71 will result in an increase in fuel consumption because of the weight of the winglets and parasitic drag.
Airlines operating aircraft in a mixed fleet of winglet equipped and non-winglet equipped aircraft need to modify their operational speeds to maximize efficiency as well as procedures, as aircraft that are winglet equipped handle differently than those without winglets. This can be particularly important on landing, particularly on wet or snowy runways.
Winglets add lift to the wings, which results in faster speeds for the aircraft in ground effect. While jets typically increase speed by 7-8 knots in ground effect, winglets exacerbate that process, with speed increases of 10-12 knots once power is off. Without different operating procedures, it is easier to overrun a runway in a winglet equipped aircraft than one without winglets, as the speed change in ground effect can increase landing distances. And because winglets generate additional lift, the effectiveness of braking can be minimized unless pilots pull back on the yoke to firmly transfer weight from the nose wheel to the main gear and wings, which is not a part of normal operating procedures at many airlines. The potential for a runway overrun is more significant with a winglet equipped aircraft unless operational procedures are modified, as evidence by a couple of recent events.
In addition, winglets add weight to the wingtips of an aircraft, more than 1,000 pounds for a typical Boeing. This has an impact on the strength of the wing, effectively weakening wing torsional rigidity and introducing aero elastic issues that must be compensated for, currently accomplished by the installation of about 100 pounds of depleted uranium in the leading edge to reduce the twist on the wing generated by the winglet installation. A basic 737 has a high gust tolerance, well in excess of regulatory standards, but one modified with winglets will lose much of that margin above regulatory requirements.
A rule of thumb for most aircraft is that its cost is about 3% of any additional weight carried in fuel each hour. For a winglet equipped aircraft, operating on short-haul routes with virtually no fuel efficiency benefit, a winglet equipped aircraft could, depending on operating procedures, have a negative, rather than positive, impact on fuel economy.
If you don’t believe the numbers, run a flight plan for a short-haul flight that doesn’t go above FL330 for a winglet and non-winglet equipped aircraft. The fuel differential will be about 0.5% better, not the 5% commonly repeated by pundits in the industry. The position we take is not unique. Russian aerospace, for whom winglets are not a new technology or idea, have decided not to use them on the Sukhoi SuperJet or on the forthcoming MC-21.
The reality is that the payback for winglets will take about 10 times longer than the marketing brochure would imply, unless all your flights are long-haul operations operating above FL390. For Air New Zealand’s 767s, winglets make perfect sense for their long-haul operations. For short-haul domestic operations, one must question the payback of winglets, which certainly isn’t going to be quick with a 0.5% fuel benefit. We wonder whether taking on 1,000 pounds of revenue belly cargo, rather than saving 0.5% of fuel with winglets, might generate a better economic result for an airline.
Winglet’s don’t appear to make financial sense for short-haul operations. Can I have my NEO with wingtip fences, instead of Sharklets, please.
AirInsight || Analysis of Current Events No. 13, April 3, 2012
The Boeing 737 MAX and the GTF It's a story that won't die, and the buzz around ISTAT 2012 was that Boeing continues to consider offering the Pratt & Whitney GTF on the 737 MAX.
Wall Street analysts are talking about it and FlightGlobal17 sat down with Steven Udvar-Hazy, considered the Godfather of leasing, at the ISTAT AGM in Arizona last month to talk about the MAX. Hazy urges Boeing to put the GTF on the 737, but doesn’t think it will happen.
We’re not so sure.
We continue to hear that Boeing is seriously evaluating adding the GTF as an offering on the MAX, a move that would likely result in a battle royale between Boeing and GE/CFM, which has been the sole source engine provided since introduction of the 737 Classic in November 1984. The current model, the Next Gen, entered service in 1998.
It’s well known that GE/CFM has an exclusive supplier contract to power the 737, but it’s not as ironclad as one might think. In March 2011, Boeing’s Mike Bair, vice president of Advanced 737 Product Development for Boeing Commercial Airplanes,
17 http://www.flightglobal.com/news/articles/737-max-not-a-long-term-solution-udvar-hazy-369728/ told AirInsight’s colleague Scott Hamilton that Boeing has the flexibility in the contract to put a competing engine on the 737 if the engine and commercial terms are superior to any engine offered by CFM. The CFM engine has to be “competitive,” and Boeing gets to define the term, Bair said then.
What does this mean? Neither Bair nor a spokeswoman will say, but those familiar with the situation believe that the GTF would have to provide an installed advantage over the CFM LEAP engine proposed for the MAX of somewhere between 3% and 5% in fuel burn.
It’s entirely possible that CFM could make up for any shortfall through economic support. Airbus’s John Leahy told a Credit Suisse conference on November 30 last year that the GTF on the A320neo provided about 1.5% better fuel economy than the LEAP.
It’s also well known that CFM is much more aggressive than P&W in providing guarantees and economic concessions in GTF-LEAP competitions. It’s also well known within the industry that the International Aero Engines V2500 (of which P&W is now the dominate partner) is 1%-2% more fuel efficient than the CFM56 on the A320 family, particularly on the A321, and that CFM often makes up for this in commercial terms.
But would CFM be able to overcome a 3%-5% disadvantage to a MAX equipped with the GTF? To maintain a 45%-50% market share vis-à-vis the A320neo, this would be a very expensive proposition.
Boeing’s Bair, at the ISTAT conference, said the CFM LEAP (picture) will have a 68.4 inch diameter fan, which is within an optimal range of 3-4 inches of a “bucket”-like curve for optimization of the engine. CFM is designing a smaller core for the engine, essentially downsizing the one developed for the COMAC C919 and for the A320neo family. But the LEAP’s Low Pressure Turbine’s length and diameter remains a challenge for the low- slung 737 and weight is also said to be an issue.
Boeing has promised increased fuel efficiency of 10%-12% for the MAX vs the NextGen, but many sources inside Boeing say they are not there just yet. A combination of airframe and LEAP designs remain slightly short of this target today, though all believe Boeing and CFM will achieve this goal by the projected EIS in 2017—five long years away.
In the meantime, Boeing has converted fewer than 500 commitments to firm orders, with about 600 commitments remaining that have been announced by Boeing but not identified. Only Southwest Airlines, Lion Air and Norwegian Air Shuttle have announced conversion of their commitments to orders.
Aviation Capital Group announced it has committed to the airplane but so far has not converted the orders. American Airlines announced its plans to order the MAX, but the bankruptcy stalled any conversion (as is also true with American’s announcement to order the A320neo family).
Boeing and CFM will only say they have a contract with each other to provide power for the MAX. But we don’t think this story is over just yet.
AirInsight || Analysis of Current Events No. 14, April 10, 2012
Combining American, US Airways: Which hubs survive?
The speculation runs rampant: will American Airlines survive bankruptcy alone or be the target of a takeover by one of three companies most often mentioned: Delta Air Lines, US Airways or private equity group TPG.
The consensus is that a Delta-American combination would have enormous anti-trust issues and divestiture of key slots, gates and routes would be required to pass muster. Clearly there wouldn’t be any problem with a TPG investment, and TPG has a track record of successfully investing in bankrupt airlines as they emerge from reorganization.
But many consider an American-US Airways combination the most likely outcome. US Airways is the smallest legacy carrier and the two systems are largely complementary. Very few routes overlap and only two of eight hubs present duplicative situations: New York JFK/Philadelphia and Charlotte/Miami.
JFK and Philadelphia are 90 miles apart. On the surface, it makes little sense to maintain these two hubs. JFK is the international gateway to Europe on the East Coast for American and Philadelphia serves the same purpose for US Airways. Indeed, many of the same routes are served by both airlines.
Charlotte and Miami are 670 miles distant. There are fewer duplicative routes to Europe from these two hubs.
American Airlines and US Airways Routes to Europe AA City AA JFK US PHL US CHL Miami 1 Abu Dhabi 2 Amman 3 Amsterdam 4 Athens 5 Barcelona 6 Berlin 7 Bermuda 8 Dublin 9 Dusseldorf 10 Frankfurt 11 Glasgow 12 Helsinki 13 Lisbon 14 London 15 Madrid 16 Manchester 17 Milan 18 Munich 19 Paris 20 Rome 21 Tel Aviv 22 Venice 23 Zurich
Sources: Company Web Sites, Executive Travel SkyGuide; Does not include code-sharing routes.
American and US Airways service to the Caribbean is largely duplicative from Miami and Charlotte. American dominates service to Latin America, especially to South America, from New York and Miami compared with US Airways’ Philly and Charlotte service.
The four hubs have distinct different differences that argue for retaining them rather than phasing one or two of them out in the name of cost reduction. American’s JFK hub remains a throwback to the old “trunkline” era when Pan Am and TWA ruled international travel. The two airlines used JFK as a connecting hub for domestic traffic rather than origin-and-destination service (O&D). TWA relied on New York LaGuardia, closer to Manhattan, for its domestic service. Pan Am was barred from domestic service, though under deregulation it began feeder service to its international flights.
American largely follows the same pattern, with log-haul domestic flights supplementing international routes while LaGuardia is the key domestic airport. Low cost carrier JetBlue is the only airline to use JFK as a full-blown domestic hub.
New York, of course, is the largest airline market in the US and one of the top in the world. JFK remains the primary portal serving the New York area, with Newark a hot competitor.
US Airways, on the other hand, uses Philly as a full-blown connecting hub domestically and internationally. Thus JFK and Philly are complimentary rather than duplicative. Furthermore, JFK and Philly bracket Newark, which is 75 miles from the latter and across the bay from the former. A combined US Airways-American Airlines could become a powerful means to divert traffic from United Airlines, whose primary hub is the former Continental Newark operation.
Furthermore, the Philly catchment basin at one time (and may still be) was the fourth largest in the US. This would be a large area to dismantle.
Charlotte-Miami, nearly 700 miles apart, is less duplicative by distance. But like Philly, Charlotte serves a domestic connecting function that Miami—largely a domestic destination city—does not. Although the cities are highly duplicative to the Caribbean, the international service to deep South America is dominated by American’s Miami hub. We asked Doug Parker, US Airways’ CEO, which hubs might be duplicative in a merger. He ducked the question, saying he could not talk about specific potential airline combinations.
As the reader knows, US Airways retained advisors to evaluation a combination with American. We believe it likely a combination will be proposed, but American wants to wait until it is out of bankruptcy and in control of its own destiny again. As long as it retains exclusivity for a bankruptcy reorganization plan, it could fend off a hostile takeover. But the powerful creditors committee can also force a deal, whether AA’s management likes it or not.
Hubs of American and US Airways
American US Airways New York JFK Philadelphia Miami Charlotte Chicago O’Hare Phoenix Dallas-Ft. Worth Washington Reagan National (focus city) Los Angeles
JP Morgan believes American should dump its Chicago hub, ceding the market to United. We doubt a combined American-US Airways would do so, nor do we think it should.
Thus, we believe that what you see today in the hub operations will pretty much be what you get if AA-US combines.
AirInsight || Analysis of Current Events No. 15, April 10, 2012
The Demise of the 50-seat Regional Jet It was an amazing run – from 1991 through 2011. Bombardier’s first 50-seat CRJ flew in 1991 and the last was delivered in 2006. Embraer’s 50-seat ERJ first flew in 1995 and made its last delivery in 2011. The chart illustrates the amazing run the 50-seat regional jets had.
Source: OEMs Both OEMs have started to focus on larger versions of regional jets as the $20 oil price of the mid-1990s gave way to over $100 oil today. What happened here is not that the 50-seat regional jet was eclipsed by changes in travel demand, but that industry economic conditions simply obsoleted it.
There are many communities for whom air service requires a few 50-seat flights per day to connect them to a larger hub or city. These communities travel requirements remain the same, but the costs of providing such air service has changed dramatically.
Service to small communities has primarily been the purview of regional airlines. These carriers fly smaller airplanes, providing branded “feed” to network airlines operating out of larger cities and hubs. The business model for “regionals”, as these smaller airlines are known, has changed significantly.
The days of regionals operating on a cost plus basis are gone. Long-term, fixed-fee contracts (capacity purchase agreements or CPAs) that the regionals signed with network airlines that afforded them margin protection while eliminating revenue risk are gone.
The chart illustrates how significant the role of the 50-seat regional jet is. Nearly 60% of flights conducted by regionals use these airplanes.
The reasons for the changes are numerous, but essentially can be ascribed to one key issue – fuel price. Many markets served by regionals only need a 50-seat airplane which creates challenges for regionals. Twenty years ago 19-seat turboprops were standard, and then they were economically obsoleted. Markets grow or die, and airplanes, no matter how popular, follow the market. Now it is the 50-seater regional jets that are in the process of being obsoleted.
The success of the 50-seat regional jets led to the deployment of 70-100 seat regional jets. As can be seen these larger jets already account for more than a quarter of the flights by regionals, and more than a third of available seats, and is the growth sector for the regional airlines.
Part of the early success of regional jets was the restrictive nature of scope clauses among the network carriers. Post-bankruptcy, scope clauses are being changed significantly. Network labor costs are no longer significantly higher than this for regionals. Scope clauses previously limited to 50-seat regional jets have been changed to 70-seat regional jets, and may soon provide for 90-100 seat regional operations.
These changes among the airlines have all been driven by economics. This has left many US communities fearful of losing air service. Is this fear reasonable?
Our view is that communities will retain their air service provided that airlines are able to cover their costs. The US airline industry is in far better financial shape now than it was in 2008; the industry today has better pricing power because it has maintained tighter capacity discipline.
We foresee a shift in air service among smaller communities - it will likely be supplied by high-speed turboprops. Today’s turboprops, as shown by T-100 data showing actual speeds and stages lengths flown by regional aircraft, demonstrate that a high-speed turboprop can perform the tasks of a 50-seat regional jet with only a small increment in flight time.
For example the Q400 flies at roughly 80% of the speed of a regional jet. This translates into an acceptable time increase for a typical flight (about 10-15 minutes). Since current fare levels are likely to reduce regional jet air service, the lower operating costs of a turboprop make it a more attractive choice. Absent this airplane, many communities might lose air service completely.
The table below illustrates a possible operating day for a regional airline using three different aircraft, starting at 06:30 and ending by midnight.
The regional jet flies faster and therefore completes more operations before midnight than either turboprop. The regional jet manages 12 operations, the Q400 manages ten operations and the ATR manages nine operations. The 50-seat regional delivers 600 daily seats, the Q400 740 daily seats and the ATR delivers 630 daily seats.
The Q400 therefore offers significant additional revenue opportunities and it costs 12% less than a regional jet to operate. Comparing the turboprops, the speed tradeoff and fuel burn becomes a focal area.
The proposition that a high-speed turboprop can accomplish these missions within the limits of airline economics is supported by real-world examples. Horizon Air (Alaska Airlines) deploys Q400s to compete with Southwest Airlines’ 737s in certain US western markets. Southwest withdrew from Seattle-Spokane as “part of a cost-cutting package of schedule changes”, while Horizon continues its 20 daily flights between the two cities.
Canadian airline, Porter, successfully uses Q400s to develop routes from Toronto’s downtown airport (which cannot accommodate jets) into the northeastern US and Canada. Canada’s WestJet is about to add turboprops to its 737 fleet and is in the midst of a tough competitive selection between ATR and Bombardier. Clearly modern turboprops are an alternative to 50-seat regional jets.
The issue of fuel burn by 50-seat regional jets and competing turboprops gets lots of attention. The chart below illustrates how one can make the case that the ATR 72 is by far the most efficient (and by extension lowest cost) airplane.
Source: EADS The story is more complex than merely fuel burn. Airlines need to study costs in relation to revenue. A high fuel burn is not a problem if the aircraft burning the fuel can charge a premium to offset the cost. In the case of the regional jet it is increasingly clear this is not the case.
According to Embraer VP Sergio Chiessi, Embraer projects 2,670 jets with 70-90 seats will be delivered over the next 20 years. One of the main drivers in this segment will be the 50-seat replacement and the US Scope Clause relaxation (at American and United). There are nearly 1,650 50-seat regional jets (average age 11 years) in service that need replacement over the next 20 years. Mr Chiessi also notes that more than 80% of 50- seat regional jet operations are on mid-long distance sectors (>300 sm) which are not appropriate for turboprops.
To create a more level playing field one uses costs on a per seat basis. The turboprops seat over 70 while the regional jet seats 50. The chart above now looks a lot worse for the regional jet. On a 300 mile segment, the 55% greater fuel burn with 32% fewer seats than an ATR means a regional jet operator really has a tough job making the numbers work.
The tradeoff between the regional jet and turboprops can be illustrated with the following two charts.
The 50-seat regional jet has been eclipsed by the high-speed turboprop because flight time saved does not justify its operational cost. Among the first airlines to face a large scale regional jet replacement will be the biggest US regional, SkyWest. It has a fleet of 318 airplanes, of which 44 are Embraer E120 30- seat turboprops and 159 50-seat Bombardier CRJ200s. It also has 94 CRJ700s and 21 CRJ900s. The airline has to consider its 159 50-seat regional jets obsolete (given current economics) and we could see many of these retired when its CPAs come up for renewal. But the airline is familiar with the communities it serves and would want to maintain the revenue stream from serving them. It could accomplish that by reducing frequencies and using larger RJs, if the market can accommodate the larger aircraft, or utilize a more fuel-efficient turboprop for those markets with appropriate stage lengths. We anticipate SkyWest will use a mix of high speed turboprops and larger RJs as it rationalizes its fleet. Indeed one might say, absent a new and more fuel efficient 50-seat regional jet and continued high fuel prices; the future success of the high speed turboprop appears inevitable.
AirInsight || Analysis of Current Events No. 16, April 24, 2012
The Resurgence of the Turboprop in Regional Operations Last week we examined the limited future for the 50-seat regional jet, which are now out of production. We believe that a mix of high speed turboprops and jets in the 70- 90 seat sector are the most likely replacements, but we see a resurgence of turboprops taking a larger market share in today’s high fuel cost environment. Today’s best-selling turboprops are in the 70-seat range, and both major manufacturers are examining 90 seat turboprops to support regional markets in the future.
This chart demonstrates the resurgence in turboprops at the same time we see a relative decline in regional jet sales. Fewer regional jets are being sold, but these are typically nearly double the size of the previous generation, so the drop is seat count is not as severe.
The turboprop market is growing again. From 2009 to 2011 orders more than doubled. The reason appears to be fuel price. The following charts illustrate the correlation between fuel prices and turboprop orders. With currently high fuel prices projected for 2012, it should be another good year for turboprops.
The Market Today Where are turboprops being sold today, and what are the current market trends? It appears that each manufacturer has developed its own market niche, geographically and by type of airline. Let’s examine their customer bases, geographic presence, and types of customer to understand why airlines of various types are choosing turboprops for their operations.
Recent demand for turboprops has been driven primarily by emerging markets. ATR had a very good 2011, with 157 sales (net of 119 cancellations plus 79 options). ATR noted that in 2011 it acquired 10 new customers who were replacing earlier generation turboprops. Bombardier sold only seven Q400s last year, in what we believe is a reflection of a sales department in transition during the restructuring by the new sales chief, Chet Fuller. Bombardier is off to a better start this year. EuroLOT put in a firm order for eight Q400s plus 12 options. This order is important because these Q400s are set to replace ATR72s at the airline. ATR and Bombardier are facing off at WestJet and Garuda, the former a potential order for up to 40 aircraft.
ATR is more focused on Asia and saw strong demand in 2011 from the region, as the next chart illustrates. Looking forward, we see that based on current orders, ATR remains Asia focused.
Bombardier, on the other hand, is more EU and North America focused as the chart illustrates.
Taking a look at the regional breakdown side by side we can clearly see where each OEM is focused.
Since 2000 Bombardier has delivered 386 (55%) Q400s and ATR has delivered 314 ATR72s. But ATR has a larger customer base as is shown the next chart while Bombardier has fewer but larger customers.
We believe the customer size and route structure has influenced the choice of aircraft. The Q400 has higher penetration with network airlines than the ATR, which may be a factor of aircraft speed. The additional speed provides a larger feeder radius around a hub enabling longer feeder spokes routes and operational flexibility.
AirInsight’s independent analysis of the competitive economics between the ATR72 and Q400 demonstrate how close the two alternatives for airlines really are. The following chart clearly shows the relative economic strength of turboprop aircraft, and the numbers are surprisingly close.
If an airline is looking for a turboprop to serve smaller markets 300 nautical miles apart, then the ATR looks to be marginally the better choice from a purely economic perspective. The crossover point in our view is at about 275 nautical miles.
But economics aren’t the only factors in the decision process.
• The Q in the Q400 name stands for the noise and vibration reduction technology that Bombardier pioneered. Although ATR uses passive noise dampeners, the Bombardier Active Noise and Vibration Suppression is a much more sophisticated offering.
• If an airline has to handle mountains in excess of 11,000 feet, or flies through areas that provide challenges where additional engine power would be useful, then the Q400 is the clear choice, as its more powerful engines provide a single engine service ceiling of 17,000 ft versus 11,000 for the ATR. Short field performance is superior and climb-time to cruising altitude is faster.
• If an airline needs an airplane to develop long, thin, routes over 300 miles the Q400’s performance and economic advantages grow steadily with range beyond 275 miles.
Turboprops have made a comeback because of high fuel prices. As the turboprops are the original open rotor engine, they are inherently more fuel efficient than turbofans. They have also made a comeback because of the strides in cabin comfort levels that now match regional jets. (like ATR’s new Armonia cabin) These aircraft now sport glass flight decks, head’s up displays and essentially all the features of a modern jet airliner. We expect to see the resurgence continue for the remainder of 2012.
AirInsight || Analysis of Current Events No. 17, May 1, 2012
India Plans a 90 Seat Turboprop - Don’t Count on it Soon The Indian government announced an initiative to build a 90-seat turboprop for domestic service, which will provide Indian airlines an alternative to aircraft built elsewhere. While the effort and recognition that the 90-seat turboprop will be the next market niche are laudable, the execution of this process will need to dramatically change if India is to really deliver.
Building a turboprop has been tried before by the very same group, National Aerospace Laboratories, which was selected to head this project. The 14-seat SARAS turboprop aircraft project, begun in 1991, had its maiden flight in 2004. After a fatal crash of the test airframe in 2009, the program received an order from the Indian military for training and coastal surveillance in 2011. First deliveries are to begin in 2013, some 23 years after the program was launched.
Indian aircraft development programs, including the SARAS and light helicopter from Hindustan Aeronautics, have been notoriously late, have failed to meet initial specifications, and have been passed by as newer designs were introduced into the market before the Indian programs could be completed.
For India to develop a 90-seat turboprop, it will need a new level of sophistication and management. And the participation of India’s industrial base, which is slowly moving into aerospace. Auto producers Tata and Mahindra have each established aerospace units, with Tata taking on subcontracts for Boeing and Mahindra purchasing Gipps Aviation from Australia, and it plans to produce several aircraft in India. But each of these companies is learning to walk before they run, and would not undertake such a venture on their own. And given the track record of Indian government developments, we don't expect a domestic 90-seat turboprop until 2030, by which time open rotor technology may obsolete turboprops
While India should be given credit for setting high goals, it needs to recognize that private, rather than public sector leadership--particularly given rampant corruption--is a necessary ingredient for success. Would a better strategy for India be to partner with Bombardier or ATR on a future turboprop program? Should Indian partners build some key components at low cost in India, and perhaps even assemble aircraft under license? Many observers would think so, just as China has learned from having McDonnell Douglas, Airbus and Embraer build aircraft there.. That experience, combined with experienced gleaned from building Russian designs has led to China moving forward much more quickly and now building their own designs, including the ambitious C919 program.
India’s policy makers have never been kind to the aviation sector--from high import taxes on foreign built aircraft to high taxes on aviation fuel to cripplingly poor infrastructure--government decisions have led to strangled growth. With an emerging middle class and increasing demand for air travel, India is now reaping what it has sown. It is upgrading more than 60 airports, building infrastructure, and stimulating demand for air travel through below cost pricing by the national carrier, Air India. But unfortunately, the lack of attention to aerospace manufacturing can’t be cured overnight, and the plans for a 90-seat Indian turboprop seem a reach too far given the realities of India’s aerospace sector.
NDI for Composites - New Technology Needed The use of composite materials for aircraft has accelerated dramatically in recent years. A composite material is, by definition, comprised of two or more materials with different properties that are fused together. In aviation, carbon fiber reinforced plastics, or CFRP, are the most common composite material used for aircraft.
Aircraft have been built with components made from composite materials for small components, such as landing gear doors, body to wing fairings and vertical tails for many years, with good maintenance success. As fuel prices have risen and the premium on aircraft weight become more important, the percentage of CFRP on new aircraft has risen quite rapidly, from about 8% on today’s narrow-bodies to 25% on the Airbus A380 (more by weight than on the Boeing 787, which is 50% composite) to 53% on the forthcoming Airbus A350XWB.
For traditional aluminum structures, non-destructive testing has progressed from examining nicotine stains from cigarette smoke (back when you could smoke on aircraft) and eddy current testing to find cracks to more advanced digital x-ray of parts to reveal what’s underneath the skin. But these proven technologies for aluminum don’t work well for CRFP, which require different technologies. Even digital X-rays can’t detect a delamination in all cases. The result has been that “tap testing” is still used as an in-service check with no use of a quantitative measurement tool for some carriers.
But with critical structural areas of the aircraft now being made from composites, instead of metal, different approaches are required. Failure modes for CFRP are different than for metal, as is the appearance of damage. If you hit an aluminum fuselage with a baggage cart, the metal will dent, and it will be fairly obvious that the skin was hit. But CFRP is different, and damage is more difficult to detect. A carbon fiber fuselage could be hit by the same baggage cart, but the surface will bounce back rather than dent and look undamaged on the outside. But inside, the impact could result in a tear in the surface that might allow water to get inside, which could lead to delamination of the material over time that could potentially result in a catastrophic failure. But since the inside surfaces of structures are not routinely examined (as you would need to remove the interior of the aircraft to visibly ascertain damage), new techniques for NDT are needed.
Two technologies are now being used to detect damage to CFRP materials - ultrasonics and thermography. Ultrasonics will return a different pitch from a damaged area than a pristine one, and thermography different temperature gradients. But training, calibration, analysis and restoration of these are quite different from other techniques, and will require new skills for MRO providers.
For line maintenance operations, new technologies are emerging that can be used to detect damage. GE has developed a hand held ultrasonic unit for ramp personnel to determine whether there is any damage to a composite aircraft skin. This device is used to map the suspect area, and measures the thickness of the skin. Much like a stud finder from your hardware store, it has a display with red and green indicators, with green indicating a consistent skin thickness and red an unanticipated change. This will help ramp personnel to decide whether to dispatch the aircraft, or whether it needs a further NDT evaluation.
But when further NDT is needed, it will require a more significant investigation as to the nature of the damage and degree to which it could become problematic. Emerging technologies in this area, including phased array sensors, computed tomography, and potentially robotic inspection, along with image comparison software and highly accurate positioning software, will change the nature of NDT inspection for aircraft over the next few years. Fortunately, devices initially applied in other industries can be adapted for testing CFRP structures on aircraft, with several manufacturers having hand-held or portable units that could be used by MRO facilities.
Two key issues remain with respect to NDT that emerging firms are dealing with. One is the repeatability of a scan. Hand held scanners are easy to use, but it is difficult to exactly duplicate a prior scan, as the scanners are manually positioned. The second is the ability to analyze scans on an automated basis, to free up inspectors to focus on areas with differences that could indicate problems. Today, if a scan could be determined to be the same position, software could help determine whether images taken of the same area were different, or the same as in a prior scan. Eliminating the 99% of the airframe that hasn’t changed to focus on the 1% that might have changed would be a huge productivity benefit for MRO facilities.
We are aware of leading-edge technologies under development that could revolutionize NDT for both aluminum and composite aircraft, dramatically increasing productivity and reducing cost. As development progresses, we’ll highlight those technologies in future newsletters.
AirInsight || Analysis of Current Events No. 18, May 8, 2012
With the announcement last week by Boeing that the aerodynamic changes are done on the Boeing 737 MAX, any further gains in fuel efficiency must come from the engine and architecture improvements still to come.
Boeing hopes to have the architecture changes—whatever they are—completed by the third or fourth quarter of this year. We presume at least some of these will be geared toward weight reduction (as was the fly-by-wire spoiler change) to offset at least in part the weight gained from heavier, new technology engines, and improvements to the flight system.
Officials claim the new “Boeing Advanced Technology Winglets” (BATW) add up to 1.5% in reduced fuel consumption depending on the length of the flight on top of the advertised 10%-12%.
Window has passed for GTF option
Prior to the addition of the BATW, Boeing was still short of meeting the goal; market sources claim CFM is still working to meet the targeted savings on the engine design of the LEAP 1B, a task observers say will occur by the time the 737 MAX enters service in 4Q2017, more than five years from now.
The uncertainty over CFM’s current ability to meet Boeing’s desires means Boeing has evaluated adding the Pratt & Whitney GTF as an engine choice. The chances today of GTF powering the MAX appear slim. On the 1Q2012 earnings call, Boeing CEO Jim McNerney said that “right now,” the company is focused on proceeding with CFM and at the PW Media Day call, PW CEO David Hess said that he doesn’t see an opportunity to put the GTF on MAX.
We believe that as Boeing closes in on the goals, the need to offer the GTF declines. We believe the opportunity has passed.
Still waiting for order conversions
Although Boeing is narrowing the definition of the MAX—final design won’t be done until next year—there remains enough ambiguity that at least some of the customers who have signed “commitments” for the MAX aren’t ready to convert these to firm orders.
“They still don’t know what the airplane is,” one customer says.
Boeing acknowledges that it continues to talk with customers to further define the MAX. Boeing says the plane will have the same passenger capacity and a bit more range than today’s 737NG, but the final weights and range remain unclear.
All Weights in Pounds 737- 737-8 737-8 (Under 800 (Initial) Consideration) Maximum Taxi Weight 174,700 174,700 181,700 Maximum T/O Weight 174,200 174,200 181,200 Maximum Landing Wgt 146,300 150,300 151,100 Maximum Zero Weight 138,300 142,900 143,600 Operating Empty Weight 100,080 105,180 105,880 737- 737-9 737-9 (Under All Weights in Pounds 900ER (Initial) Consideration) Maximum Taxi Weight 188,200 188,200 195,200 Maximum T/O Weight 187,200 187,700 194,700 Maximum Landing Wgt 157,300 161,300 162,000 Maximum Zero Weight 149,300 153,900 154,600 Operating Empty Weight 104,880 109,940 110,640
Boeing continues to evaluate how close it can bring the 737-9 to 757 capabilities. Boeing acknowledges freely that no matter how much more range is added to the 737-9, it won’t match the 757’s maximum range/capacity of about 3,200nm. Current, preliminary indications are that the -9 “standard” (our term) has a range of about 2,000nm. A 737-9 HGW (High Gross Weight, also our term) has a maximum range/payload of about 2,500nm. Range goes up as payload goes down in both cases. While the 757 with winglets is used on trans-Atlantic routes and Hawaii, even the 737-9 HGW falls short on trans-Atlantic routes with maximum payload but appears to be able to do some Hawaiian service. The 9 MAX appears to be able to make some trans-Atlantic routes under payload restrictions.
With continuing ambiguity on fuel burn, weights and range, how can Boeing have provided guarantees to those customers who have placed firm orders and convince those with commitments to convert?
According to customers, Boeing offered contracts with a tiered set of provisions. First, it is important to understand that guarantees offered by any OEM are within ranges rather than absolutes. With this in mind, customers tell us that MAX contracts have been structured as follows: If performance falls within one range, then the price is X. However, if the performance falls within a different, sub-optimal range, then the price is a lower Y, thus making up for the short-fall in performance.
This concept is hardly new. Commercial terms are often structured to offset higher operating costs with lower price. Boeing routinely claims that Airbus sells more A320 family members than what it claims is the more efficient 737 by cutting price. Airbus rejects Boeing’s underlying claim (that the NG is 8% less costly in cash operating costs than the A320) and therefore the larger assertion, but the point is made and plenty of industry participants validate the thesis that aircraft and engine OEMs will offer commercial terms that may offset underlying performance disadvantages.
Expectations for Farnborough Air Show
Boeing has about 1,000 orders and commitments for the MAX, with 451 of these confirmed orders. This leaves around 550 commitments to be converted to firm orders. (The oft-reported anticipated order for 100+100 737 NGs/MAXes from United Airlines is over and above the previously announced number.) We believe Boeing will be ready to announce conversions for perhaps 400 of the commitments to firm orders, possibly more. Five of the biggest leasing companies all have commitments: GECAS, ILFC, CIT Aerospace, Air Lease Corp and Aviation Capital Group, which is the only one to publicly announce its commitment. ALC reportedly is talking about 60. GECAS will likely be a big number and we would expect ILFC to be hefty. Not all may be prepared to convert their orders by Farnborough.
We also expect some airlines to be ready to convert their commitments.
Despite the addition of BATW and commitment conversions, we believe Boeing and CFM still have a fair amount of work to do. We also believe that the two OEMs will “get there.”
AirInsight || Analysis of Current Events No. 19, May 15, 2012
Southwest Evolves into Legacy LCC Southwest Airlines has evolved into a Legacy Low Cost Carrier, with high labor costs and is struggling to hold costs, remain productive and now is a very different airline than it was in its first 25 years.
The 41 year old carrier remained profitable through the 1991 Persian Gulf War period, post-9/11 and following the 2008 financial collapse. Almost all other US airlines entered bankruptcy in one or more of these major events. Southwest remained profitable largely through its creative fuel hedging. But these early contracts expired years ago and Southwest now is struggling to increase revenue and maintain its now-mythical image as the low fare airline.
In fact, lower fares can often be found on competitors.
Southwest retains its important culture created under founders Herb Kelleher and Lamar Muse. Corporate culture at Southwest focuses first on employees and on customers second, but these are so intrinsically linked as to be virtually indistinguishable.
The business model propelled Southwest from a three-plane start-up in 1971 to one of the largest US domestic airlines, operating more than 600 aircraft—as large as American Airlines’ global mainline fleet. The following chart has system ASMs, including international seats for the legacy network carrier. Notable is that prior to the Delta-Northwest and United-Continental mergers, Southwest’s ASM matched even the total system ASMs.
By the end of last year, Southwest’s US domestic market share increased to just under 18%. It now ranks as the third largest US domestic carrier.
Even following the mergers of the legacy network carriers, Southwest—after its merger with AirTran—nearly matched Delta and United and has more airplanes than American Airlines.
Southwest continues to tout that it is not a hub-and-spoke airline, and to be sure its connecting traffic trails legacy carriers. But Chicago, Baltimore, Dallas, Houston and Phoenix—just to name several cities—clearly are connecting hubs. The prime difference is that these are “continuous hubs” rather than “bank hubs.” Continuous hubs provide more productivity and gate utilization than bank hubs. But it remains a myth that Southwest isn’t a hub carrier. The acquisition of AirTran was to gain the Atlanta hub. This, as much as anything, demonstrates the changing character of Southwest.
Other key changes:
• Peak/Off Peak pricing disappeared ages ago. Now there are Business Select; Anytime; Wanna Get Away; Web Fares • Southwest eschewed code sharing for years, but entered into it with the late American Trans Air and explored other opportunities since then (Volaris).
• Southwest used to avoid the top, highly congested airports. This was given up years ago.
• Southwest is moving toward offering international flights and likely service to Hawaii.
Labor costs used to be among the lowest ratio to expenses in the industry. Now it is the highest.
CEO Gary Kelly has been open with employees that as legacy carriers cut costs through bankruptcy—with cross-town rival American Airlines now in Chapter 11 to do just that—Southwest is pressed harder than ever to maintain employee productivity, cut costs and increase revenue.
As Southwest grew larger, and its fuel hedges ran out, it was forced to increase fares and prices in line with the remainder of the industry. We selected three airports where Southwest is the primary airline. The chart clearly illustrates how fares in these markets have risen so that the gap in earlier years has substantially closed. In 1Q95 the airfare gap between the averages of these tree airports and the national average airfare was 61% and by 4Q11 the gap was only 21%.
To demonstrate just how powerful Southwest’s culture is take a look at the final chart. Southwest is among the biggest US domestic airlines. It may have as many airplanes as network carriers. It may have the highest labor costs in the industry. But it also has the most productive employees at any major US airline.
Southwest, as a Legacy LCC, continues to evolve. It has major challenges ahead of it to maintain its industry leadership in an environment that bears no resemblence to its roots.
AirInsight || Analysis of Current Events No. 20, May 22, 2012
Lower oil prices will benefit airlines, but will slow impetus for new aircraft Oil prices are critical to airlines, the highest single element of cost. But when prices come down, the pressure often temporarily comes off, depending on whether the airlines are stuck with higher priced hedges. The impacts can be quite significant in terms of profitability, as the elasticity of downward yields has recently not been quite as rapid as declines in oil prices.
We are now in the midst of another drop in oil pricing. Of course, examining the long- term trends, airlines understand the cyclical nature of the market, and that they can’t be assured of lower prices forever. Some, like Delta Air Lines, have taken aggressive action to "backward-integrate," purchasing a refinery to ensure supply and capture the “crack” spread of roughly 20 cents per gallon, which makes the payback for the refinery a “no brainer” economically, as shown in the following chart excerpted from Delta’s SEC filing.
Source: edgar.sec.gov
The chart below illustrates the last five years of oil prices, showing the massive run-up that exacerbated the economic recession, and the most recent drop, in which prices reverted to the $80 per barrel level. The trend appears to be honing in on $100 crude as the new norm.
If oil falls, and the pressure lessens for the more fuel efficient new models, will we begin to see a decline in demand for new aircraft, and perhaps a burst of the current “order bubble” that has Boeing and Airbus virtually committed for nearly the next decade.
We’ve already seen the first deferrals of aircraft orders, with Southwest pushing off some 737-800NG deliveries by 4 years to preserve capital expense. These are likely to be converted to Max models by the time they are delivered. Combined with the exhaustion of the Ryanair order book, Boeing will have a chance to balance its overcommitted 737 production line.
Both Airbus and Boeing are planning production line increases and considering additional capacity, given the high backlog of orders that have virtually sold out delivery slots thru 2015 for existing models and 2018 for the next generation of aircraft. We believe that might be a mistake.
There is a significant chance that the order bubble will burst, likely just after the OEMs and their suppliers add additional capacity. Airlines can’t afford to ground the current generation of aircraft in the short term and replace them all with the more fuel efficient re-engined models. Is a 15% reducing in fuel cost enough to obsolete the previous generation of aircraft? The short answer is no, but it will impact the market values of those aircraft negatively, as the market adjusts to the economic differences in the aircraft.
The market adjustment will take place through lower residual values that will offset the operating cost differential, and the values of 737NGs and A320 family ceos will necessarily fall once the 737Max and A320 family neos enter service. Once a critical mass of new technology aircraft are in service, lease rates will follow the lower values. We wouldn’t want to be taking delivery of new models of the current technology aircraft without substantial discounts over and above normal levels.
Historically, residual values for aircraft delivered in the last few years of production have not held their value as well as those delivered earlier, as their economic obsolescence arrives much sooner. With the new aircraft already in development, the handwriting is on the wall that newly delivered 737NGs and Airbus ceos won’t hold their values well after 2020.
Southwest’s decision to defer 30 737 deliveries for four years means those aircraft will likely change from 737NG to 737Max models, which makes good sense for the carrier. The bad news is that the carrier isn’t growing as fast as it has in the past, and can’t afford to fund additional growth. The good news from the deferral is that they will obtain a more fuel efficient aircraft when they do take delivery.
The Euro Crisis Will Benefit Airbus on costs Airbus, unlike Boeing, must also manage to exchange rates as an integral element of its business. It sells aircraft in US Dollars, but at least half the content is priced in Euros, including all of its employees in France and Germany. As a result, exchange rates can provide a significant swing in costs and profitability without any changes in Airbus operations. Every 10 cents in Euros means a $1bn swing in profits.
The Euro is currently under pressure, and it appears that Greece, after a bank run and riots in Athens, will soon exit the Euro. The impact of this action on exchange rates could either slow the slide, or exacerbate it as speculation of Spain and Italy following the Greek actions could push the Euro down further. The following chart shows the exchange rate history over the last five years, and the trend line from peak-to-peak is showing a longer-term trend. Is it time to short the Euro? What direction is George Soros trading these days?
The Euro relationship against the dollar is current in a downslide, down about 6% from one year ago and continuing to fall at this writing. More importantly, the general downward trend, which is favorable for Airbus as it reduces the Euro cost component while the dollar revenues remain constant, appears to be trending downward. The net result, over the last year, is about a 3% gain in margin from foreign exchange for Airbus, since a bit over 50% of its costs are Euro based. Should the Euro continue to significantly drop, this would be a boost for Airbus and help it in the current price war with Boeing.
AirInsight || Analysis of Current Events No. 21, May 29, 2012
Price matters in Airbus vs. Boeing comparisons The Airbus A330-300 has an economic advantage over the Boeing 787-9 of $113,000 per month, or $1.36m per year, claimed John Leahy, COO-Customers, at the Airbus Innovation Days last week.
How can this be, you might ask?
It's all in the assumptions. Laying out the information in a chart that follows the format we've seen since 2006 when Leahy first began comparing the A330-200 with the 787-8, Airbus comes up with this:
Let's look at the fine print. The assumptions are:
• 2,000nm trip;
• "Typical marketing rules"; we don't know what this means;
• Lease rates: A330, $900,000/mo; 787-9 $1.2m/mo;
• Fuel at $2.50 per US gallon
We'll add a couple of other factors into the mix. The A330-300 at January 1 had a list price of $231.1m and the 787-9 a list price of $227.8m. This is a difference of $3.3m or 1.45% more for the A333.
Note particularly the lease rates assumed, which based on our decades in the business believe suggest a blue-chip airline (if there is such a thing anymore) and a lease rate factor of 0.8%. To get to a monthly rate, you take the purchase price of the airplane, divide by 12 and multiply by the lease rate factor.
Using this methodology, this suggests a sales price for the 787-9 of around $172.8m and a price of the A333 of $129.6m. These numbers equate to an assumed discount price of 44% for the A333 and 24% for the 787-9.
We'll be the first to admit that there could be, and probably are, flaws in our pricing model. Only Airbus and Boeing truly know what they sell the airplanes for and how much the discounts are, as well as what the lease rate factor used in the Airbus assumption is. But what we can conclude from the chart above is we have reservations. First is the use of a 2,000nm trip. We've actually asked Airbus about this before and it claimed then that this is the average mission for the A330. We think Airbus must be using intra-Asia or intra-Europe, because this range sure isn't the typical mission from the USA to Europe or Asia.
Next, using $2.50 as the average price per gallon strikes us as nearly a buck too low. What is the figure for the 787 fuel advantage if today's pricing is used?
Finally, the ownership cost strikes us as out of kilter without "looking under the hood." The A333 is a more expensive airplane, even if not by much. We can't imagine Boeing is only discounting the 787-9 at 24% for a blue chip customer. But let's set that aside and say the customer is not blue chip. A 24% discount by Boeing is probably not unreasonable. But look at that 44% discount for the A333. We don't think that's unreasonable, either.
Boeing likes to say Airbus makes up for a less efficient airplane by price (though the context has typically been A320 v 737). This illustrates Boeing's point.
Still, let's take all the Airbus assumptions at face value. All-in-all, it would take very little change in the assumptions to shift the advantage back to Boeing's 787-9. And that's why we like to rely on information from airlines and our independent analysis. In this case, we haven't reached out to airlines. But in March, AirInsight conducted an independent analysis of the prospect of an A330neo which included a look at the A330- 300 and 787-9 in a more narrowly-based economics analysis than the Airbus slide above. Here's what we concluded, using $3 per gallon:
The 787-9 has a substantial fuel cost per ASM advantage over the A333, which Airbus acknowledges.
Airbus is undertaking Performance Improvement Programs (PIPs) for the A330, consisting of the usual engine tweaks and likely the addition of sharklets. These could reduce fuel consumption by several percentage points, making the plane more attractive. But from Airbus' own figures above, it looks like price discounting is what will keep the A333 competitive.
AirInsight || Analysis of Current Events No. 22, June 4, 2012
Coach Seating and Comfort The use of the terms together seems an oxymoron. Passenger comfort in coach class is notoriously missing, despite the best efforts of the OEMs to design cabins that restore it.
As any passenger knows, it’s the airlines that ultimately decide the seating configuration. Interestingly, the UK is the only country that has regulations18 defining the minimum size of passenger seats and the space between seats.
Boeing designed the 787 with comfortable eight abreast seating in mind and airlines immediately chose to narrow the seating and cram in nine abreast. The 777 was intended to have nine and airlines chose 10. None of this speaks to seat pitch.
Airbus, at its recent Innovation Days event spent significant time explaining how its cabin design team is offering the industry’s widest seats.
18 http://www.bata.uk.com/Web/Documents/data/pitch/Seat%20Pitch%202010.pdf
Even as Airbus touts these wider seats, reality among airlines is something different. Researching at SeatGuru.com, we discovered that many Airbus customers do not make use of the OEM’s offerings. We included data for the 737 for comparison purposes. The following table listing seat widths on typical single aisle airplanes in service.
The highlighted cells show the most common economy seat size for each aircraft type. Airbus A320-family airplanes seem, on average, to have a slight edge in seat width.
As one considers the table above, note in the last column the number of sub types within each airplane type. Airlines have a plethora of seating layouts within each type. The Airbus offerings may be more numerous as their cabin is wider, offering more customization as a result.
Among these airplanes, 34% of A319s, 89% of A320s, 87% of 737-700s and 83% of 737-800s have seats narrower than 18 inches. This appears to indicate that even when Airbus offers the ability to provide passengers with higher comfort levels, airlines are less enthusiastic.
Airbus now offers a new coach seating option with two 17-inch seats and a 20-inch seat at the aisle. One would think a seat that is nearly 18% wider would be an attractive ancillary revenue opportunity for airlines. Airbus suggests the ancillary revenue could be worth over $3m NPV over 15 years. We will see if the idea takes off. The challenge for airlines is integrating this new concept into an existing fleet.
Unfortunately, when offering the 20-inch seat (on the aisle) the other two seats go to 17-inch width. Which means that if deployed, one third of passengers get the more comfortable seat and two thirds go back to 17-inch width compared to today's 18- inch width. Airbus argues that offering the wider seat actually means more comfort for the other two seats as there is a sense of much less crowding. As Airbus puts it: "Providing adequate seat width for those that need it most, improves the travel experience for those sitting close by." Of course the argument is bolstered by the fact that the 17-inch seat is what is typical on competing 737s.
In linear terms, Airbus says that a one inch seat width increase is equivalent to a 1.6 inch pitch increase. As anyone in an economy seat can comprehend, those inches grow logarithmically more valuable with each 30 minute segment of flight length.
The 17 inch seat width dates back to the start of the jet age in the early 1960s. How have people changed during that period? Average height has not changed; American men are about 5 feet 9 inches and American women are 5 feet 4 inches. Height speaks to seat pitch. With respect to seat width, consider this. Americans have grown a lot larger over the period and need that extra inch of seat width.
Results from the 2007–2008 National Health and Nutrition Examination Survey, using measured heights and weights, indicate that an estimated 34.2% of U.S. adults aged 20 years and over are overweight, 33.8% are obese, and 5.7% are extremely obese. Disturbing statistics for those of us living in the United States. And probably why so many Americans find airline seats growing smaller.
AirInsight || Analysis of Current Events No. 23, June 12, 2012
Right-sizing in the 100-149 seat market The conventional wisdom among many aerospace analysts and some consultants is that the 100-149 seat market is the Bermuda Triangle of new airplane designs.
We disagree. While it is true that efforts for the past several decades hardly suggest this segment has been a winner, the reason it has been a loser is that either weak and dying companies offered new or derivative products or legacy OEMs offered shrink designs.
Boeing, Douglas and British Aircraft Corp offered new and successful designs in the 1960s. But others, such as Fokker, were already on a downhill slide by the time its derivative F100 was introduced in the 1980s. British Aerospace’s BAe146/Avro RJ was simply a poor design.
Boeing’s 737-300/700 was successful but the 737-500 recorded only modest sales and the 737-600 was a dud. So was Airbus’ A318, the double shrink of the A320 and the stable mate of the successful A319.
But rising fuel prices have made the A319 and the 737-700 economically obsolete. The A319neo so far has booked only 26 orders and the 737-7 MAX hasn’t booked any. Airbus and Boeing are concentrating on the larger models and giving the 100-149 seat segment short shrift. And this leads many observers to conclude this market segment is dead.
On the contrary, Airbus forecasts a market of more than 5,000 in the next 20 years. Bombardier is more aggressive, predicting a need for 7,000. Embraer, which forecasts the 90-125 seat segment, sees more than 4,000 aircraft required during the same period. Boeing doesn’t publicly break out this segment from its single aisle forecast, but in 2011 said it sees a market a “few thousand” less than the Bombardier forecast.
This is hardly insignificant. Why do we think this is a fruitful segment?
Aside from the raw numbers cited above, driven by traffic growth and retirement, there is a clear trend toward right-sizing toward more economical, smaller aircraft designed for the thin routes that cannot be served by hybrid solutions such as re- engined aircraft or cheap lift requiring high utilization and which are becoming high- cost maintenance airplanes.
The former, of course, are the A319neo and the 737-7 MAX. The current generation are already heavy and “too much airplane” for the routes served by Embraer’s E- 190/195. With a range of 2,200nm, the E-Jets can serve about 90% of the routes. Note this analysis from Rolls-Royce in 2008:
Here are some examples of right-sizing:
• EgyptAir Express is evaluating the E-Jet and the Bombardier CSeries to replace 737-500s.
• US Airways replaced all but one A319 flight on its Boston-New York Shuttle with the E-190.
• Alitalia ordered E-Jets, planning for domestic and intra-EU flights where the smaller airplanes can replace A319s and MD-80s.
• Armenian airline Amravia, the Sukhoi SuperJet (SSJ) launch customer, replaced an A319 for its flights between Moscow and Yerevan. These two airlines represent the movement from utilizing aircraft that have been shrunk to market size to realizing it may be more efficient to start from the bottom and utilize aircraft that are stretched to market size.
• American Airlines is unable to take full advantage of the plus-100 seat E-Jet, CRJ or CSeries in its American Eagle operations due to its pilot Scope Clause at the mainline carrier. However, American is also rethinking airplane gauge, replacing the 180-seat Boeing 757 with the smaller, 125-seat A319 on some thin Latin American routes where it eliminated flights due to over-capacity. American hopes to shed the most restrictive features of its Scope Clause in bankruptcy, allowing larger “small” jets that potentially could open the door for the 90 seat aircraft offered by Bombardier and Embraer.
There are many more examples, of course. And clearly the OEMs see a viable market. There are now seven models and 16 sub-types offered by five manufacturers for this segment:
Airbus A318, A319, A319neo The A318 is really a non-entity. The A319 was quite successful, especially for a shrink; it has sold more than 1,000. But sales in recent years have fallen to a trickle as fuel prices escalate and airlines seek a more economical solution. The A319neo so far has booked on 26 orders.
Boeing 737-600, 737-700, 737-7 MAX The -600 hasn’t sold a single airplane since 2005. Sales of the -700, like the A319, have trickled off. So far not a single 7 MAX order has been placed.
Bombardier CRJ1000, CS100 and CS300 Bombardier has three entries in the 100-149 seat market: the 100 seat CRJ-1000, the 120-seat CS100 and the 145 seat CS300. The CRJ1000 is offered as a family member of the CRJ700 and CRJ900 and a range of slightly more than 1,500sm. In two-class, the CRJ1000 becomes a 90-seater and, along with Embraer’s E-Jets, a contender for the much-anticipated American Airlines order for regional jets after it emerges from bankruptcy. The CS100 and CS300 are the first clean-sheet airplane designs for this segment since the E-Jet in the 1990s. After first flight—planned for year-end—look for orders to begin picking up. The CSeries has short-range (2,200nm) and long-range (2,950nm) sub-types.
Embraer E190/195 These E-Jets, derivatives of the clean-sheet E-170/175 of the 1990s, seat 108-122 and have become the market-leader in terms of sales in recent years for the 100-149 seat segment. There are short-range and long-range sub-types. Embraer elected to forego proceeding with a new, clean-sheet airplane to compete against the CSeries, neo and MAX and instead plans to announce its re-engine plans by year end, thus providing yet another entry into this market segment.
Sukhoi SSJ100 Russia’s Sukhoi offers the 100-seat SSJ100 in a joint venture with Italy’s Alenia. Although its Russian heritage immediately makes it suspect—the old Soviet Union’s airplanes were never well regarded and didn’t sell outside the Soviet bloc—the SSJ has racked up 53% of its 250 sales outside Russia. We don’t expect it to be a “barn- burner,” and the crash of one into a mountain in Indonesia raised the old safety concerns. But we believe the crash was a CFIT (Controlled Flight Into Terrain) that will not reflect on the airplane itself once the investigation is complete. Sukhoi is already talking about a 130-seat model.
We anticipate the long-term, dominate players in the 100-149 seat segment will be Bombardier and Embraer, with Sukhoi, Airbus and Boeing becoming niche participants. Airbus and Boeing will focus on the 150-210 seat single aisle segment. Sukhoi will have limited success with its airplanes.
AirInsight is completing a study of the 100-149 seat market segment that will be published next month. We look at the programs, economics and other issues in this 80-page study.
AirInsight || Analysis of Current Events No. 24, June 19, 2012
Why the COMAC C919 threat is overblown China has made production commercial aircraft a national goal, highlighted by the C919 which is intended to compete with the Airbus A320 and Boeing 737 at the heart of the narrow-body market. With government support, strong capital investment, low labor costs and western suppliers bidding against each other to have their technology included on the new Chinese aircraft, many pundits observed that the C919 can become a serious competitor to the traditional duopoly players in their “cash cow” market. Some believe the Chinese could become a global competitor if the C919 is a success and become a future threat to Boeing and Airbus as China’s reputation, experience and sphere of influence continue to grow.
Twenty or 30 years from now, this may be true. In the short-term, we do not believe that the C919 will be a strong competitor, primarily due to the internal culture at COMAC, which is hindering the development of both the C919 and ARJ21 aircraft currently underway. The current business culture in the PRC is well suited to following orders - witness the ability of the Chinese to produce the Airbus A320 family to Airbus specifications in Tianjin. But when it comes to developing new products, the management and corporate culture currently in place throughout the PRC is a major reason for failure. With the Chinese practice of not wishing to lose face, program failures tend to be under-reported in both the local and western press. But if one pieces the parts of the puzzle together, the future of the C919 is not as bright as many pundits predict.
COMAC operates as many Chinese companies do, with decision-making on almost everything centered at the top of the organization, even small decisions that would never reach the purview of a Western CEO, and the concept of delegation of decision- making is foreign to the organization. Of course, in such a structure, bringing bad news to the top is typically a route to a pink slip. So, when a potential problem emerges, it tends to be hidden rather than addressed, and no one will stand up and challenge a decision made by senior management for fear of being ostracized at best, and losing their job at worst.
Building an aircraft requires a strong foundation, which is superb engineering and design. Engineers require the freedom to design an aircraft to meet the anticipated requirements in service and for certification by producing designs for approval by senior management. But in China, rather than have those with functional and technical skills decide between alternatives and trade-offs, completing an analysis and strongly recommending one alternative over another to senior management, the trade-off decisions are often sent up the chain of command without a clear recommendation. Employees are afraid of making a poor choice, and virtually all decisions, from where to put a tea pot in the office to the design of a wing, are sent upward in the organization.
More often than not, the senior manager making the decision has scant background on the issues at hand, but cannot lose face by asking the technical expert “What do you think” as it would reflect weakness in their culture. As a result, some decisions that the staff knows full well are wrong and would fail result from the “saving face” culture that in the west would be described as “cover your ass.”
Developing an aircraft is a complex task, requiring integration of a substantial number of subsystems into an aircraft structure, and ensuring that each component works not only itself, but in concert with other systems. COMAC has selected a number of western vendors for the C919, and given them subsystem integration authority for their own functional areas. These vendors are experienced, and will deliver high quality components that meet the functional requirements of the aircraft well. But they still need to be integrated into the overall architecture of the aircraft, which is the fundamental weakness in China’s capabilities to effectively build the aircraft.
Systems integration requires collaborative efforts, with give-and-take among the participants until a solution is reached that meets the needs of potentially conflicting requirements. The culture within Chinese organizations precludes such cooperation, leading to failures, of which we’ve seen several examples.
China has been able to build aircraft, but most have either been copies of Russian designed military aircraft, or managed by a foreign manufacturer, such as Embraer or Airbus. The native Chinese designs, however, have caused the country’s industry to lose face. Domestically developed military aircraft are not yet up to world class standards, and the first attempt to build a civil jet, the ARJ21, appears to be a growing failure. The key question is whether COMAC can learn lessons from prior failure and modify its management system to enable it to succeed, or retain a top-down, face- saving culture that is doomed to failure.
The best evidence of COMAC’s weakness is the ARJ21, a 90 seat regional jet, a project mired in difficulties. The ARJ21 is several years behind schedule, and significant flaws have been identified in its wings, computer systems, wiring and integration, despite the use of world-class suppliers in the program. The ARJ21 was to be China’s initial success at internationally certifying a commercial jet, and to set the stage for the C919. Instead, it may end up delaying the C919 by several years.
A engineering flaw in the design of the ARJ21's wing in 2010 resulted in a premature failure during a routine stress test, which required a re-design of the wing quite late in the game, as prototype aircraft had already been flying. With something so fundamental as basic strength of materials, using conventional metal technology, this is a major setback for COMAC and for the Chinese regulatory authorities, as typically designs are reviewed and approved prior to physical testing to confirm the engineering of a wing. Apparently neither COMAC’s engineers, nor China’s regulators, caught the flaw before stress testing; raising doubts about the strength of Chinas regulatory capabilities.
The US FAA, whose certification is essential for either the ARJ21 or C919 to be successful internationally, has indicated that it will not even consider accepting China’s certification for the C919 until it has completed a technical assessment of the Chinese regulatory authority and its capabilities to certify the ARJ21 to FAA standards. With the ARJ21 program now several years behind schedule, and having problems with wiring and computer systems as well as the wing, the ability to obtain FAA certification for the C919 appears to be pushed back at least several years.
The C919 itself has more western content than the ARJ21, with a number of key western suppliers providing components and subsystem integration engineering for the aircraft. But because those subsystems must still be integrated into the aircraft as a whole, having experienced western suppliers doesn’t solve the problem.
The C919 is currently scheduled for introduction in 2016, but as is normal for China, the program is shrouded by a veil of secrecy. We believe the program will be at least two years late, with entry into service in 2018 rather than 2016, behind rather than ahead of the re-engined models from Airbus and Boeing.
While China’s ambitions in aviation are quite large, it has taken on a challenge that few manufacturers internationally could even fathom. Can COMAC join Airbus and Boeing to form the ABC of aviation? Eventually. But a lot of things that are currently shrouded from view need to change before China can become a viable designer or aircraft, rather than simply an assembler of the designs of others.
AirInsight || Analysis of Current Events No. 25, June 26, 2012
The Continuous Improvement of the A330 Airbus’ A330 was born in the shadow the A340, an aircraft intended to be the long- haul workhorse in the Airbus stable. The A330 would be the medium-range aircraft.
The A330 and A340 were developed simultaneously and derived from the A300. The A330 and A340 were launched in 1987, with EIS in 1994 and 1993. The A330 was the first Airbus that had a choice of engines from all three engine makers.
But the development of the Boeing 777 and further acceptance of long-range, twin- engine over-water operations eventually doomed the four-engine A340 and prompted Airbus to upgrade the A330 to long-range operations never envisioned when the plane was designed. The following table illustrates this.
The A330-200 has seen a 3.5% increase in MTOW while achieving over 8.7% more range. The A330-300 has seen its MTOW rise by 10.9% but its range is now up 43.6% from EIS.
Clearly the A330-300 is now a significantly more capable airplane. This capability growth occurred at a perfect time. Airlines have been repeatedly hit by exogenous shocks. Between 1996 and 1998 it was the Asian financial crisis, then came 9/11, 2004 through 2005 brought us SARS, from 2006 to 2007 fuel prices peaked to all-time highs and in 2008 through 2009 came the global recession.
On top of this, came the Boeing 787 production delays from 2008, giving Airbus the time and the ability to improve the A332 and A333, boosting sales sharply. The enhanced A330 entered service in 2004 so had been decided before the 787 was even launched. However having a mature product when the 787 got itself into a pickle was great timing. The enhanced A330s proved fortuitous: the right airplane with the right improvements at the right time at the right price and with the ability to be delivered on a timely basis. Airlines that needed long range twins had no options – there was only the A330 to buy (and get a delivery).
Even as Boeing’s 787 program was struggling, Airbus kept improving the A330. Airbus was able to deliver its A330 as airlines were scrambling to find better fuel burning lift in the long range twin market. Boeing’s 767 was uncompetitive and its 777 too large. Airbus had a product it could deliver on a highly predictable schedule and it started to build its customer base. In the midst of so much market uncertainty, the A330 was a predictable source of lift. It was a well-known and understood product.
The following chart illustrates this. The green circles illustrate how Airbus capitalized on 787 delays with customers ordering the A330 as airline patience started to run out with repeated delays.
It turns out that the A330 may be much more influential to Airbus’ success than is typically recognized. The A330 has been crucial to Airbus’s financial results in the past half-decade. This, along with the A320, provided the cash flow to a company drained by the A380, A400M and A350 programs. The following chart shows the steady increase in production that provides the cash flow and contributions to the meager profits reported.
This is probably why recently Airbus’ John Leahy championed the program’s success. With the demise of the A340, the factory that built both airplanes now focuses on the A330. So Airbus is talking of growing production 11 airplanes per month.
Airbus also contends the A330 has stacked up well against the 777 and the 787. The A330-300 is sized about the same as the 777-200; the A330-200 is somewhat larger than the 787-9 and substantially larger than the 787-8.
We would point out, however, that with an order backlog stretching to 2017 and repeated delays, Boeing could hardly be expected to book many 787 sales during this period, whether by quantity or new customers.
Still, Airbus’ performance is impressive by any standard. The A330 now has more than 1,000 orders, an achievement that places it in the same class as the 747 (1,500), 767 (>1,000) and 777 (>1,000).
Just as the A330 cut short the 767 program’s success, Boeing has said their 787 would cut short the A330’s success. Boeing Capital MD, Kostya Zolotusky, has said that the 787 “will do to the A330 what the 777 did to the A340.″ In 2010 Nicole Piasecki, vice president of Business Development & Strategic Integration, said “…I can tell you if we develop a 787-10, which I would put in the likelier category, I would expect the A330's days would be numbered..." However, even as the 787 is a new generation airplane with compelling capabilities, its target continues to evolve.
Airbus is considering adding sharklets to the A330, undertaking an engine PIP and increasing MTOW once again, potentially giving the airplane even greater range and reducing fuel burn. Such a performance growth will mean the 787’s target will have moved once again—and that is what Boeing intends with the 787-10X.
In addition to delivering an increasingly capable airplane, Airbus also has the ability to be creative on pricing. Whereas Boeing is trying to recover is investment on the 787 and reluctantly works on discounts, Airbus’ A330 program is far down the investment recovery path. Airlines faced with a choice of a new generation 787, with 20% better fuel burn, could be persuaded to order an A330 discounted by 50% to be economically equal. Moreover this A330 would almost certainly be delivered before the 787. Even as Boeing is able to offer newer technology, one cannot dismiss the A330 just yet.
If one looks back over the recent decade and considers the tremendous shocks airlines have had to face, perhaps we can explain the A330’s success.
• 787 delays
• Airbus significantly improved the A330’s performance
• The A330 was available and would be delivered on time
• The A330 was a design that allowed for continuous improvements that lead to the ability to grow the aircraft's capability whilst very much minimizing any rise in costs
• Airbus could price the A330 to acquire customers because the program had achieved its breakeven point
AirInsight || Analysis of Current Events No. 26, July 3, 2012
Huge backlogs presenting dilemma for Airbus, Boeing Huge backlogs have been a public concern for Airbus and Boeing for a year or two, with focus on the inability to offer early delivery positions. The companies are sold out on their current A320 and 737 lines until 2016-17. The A320neo and 737 MAX are sold out to 2020. The 787 and A350 lines are sold out to 2018 and beyond.
But what hasn’t been discussed—and what is inhibiting sales, according to customers—is that the extended delivery dates affect pricing via standard escalation clauses. Escalation in the price is typically pegged to inflation, protecting the OEMs against rises in costs.
With deliveries of the current generation of single-aisle airplanes now four-five years or more away and the re-engined aircraft eight years or more away, the escalation clauses are seen by customers as a huge risk. Since nobody can guarantee what inflation will do between now and delivery, the acquisition cost could escalate to a point where the economics of the airplane no longer makes sense.
John Leahy, Airbus’ COO Customers, mentioned this challenge to us during the Airbus Innovation Days when responding to a question why there have been few sales recently for the A350. Why, he asked rhetorically, would anyone want to take the escalation risk eight years out?
Since then, we’ve talked with customers who make the same point with respect to Boeing and the 737 MAX. The entry-into-service for the 8 MAX is currently slated for the fourth quarter of 2017. The 9 MAX follows in 2018 and the 7 MAX in 2019. Production ramp up is crucial, and Boeing hasn’t given any indication this far out how quickly it will come up to rate. Boeing will be at 42/mo by 2014 and the MAX will create a third assembly line at the Renton plant, which has the theoretical capacity to match the 21/mo of Lines 1 and 2. But as with any new airplane program, there is a learning curve. Also unknown is how quickly demand for the NG will taper off. Boeing, like Airbus, anticipates a two-three year transition from NG to MAX.
What this means is that it could be at least two years before the MAX rate matches the NG rate and perhaps longer if Boeing takes rates well above 42/mo. With 1,000 orders and commitments already for the MAX, this is two years of solid production at current rates.
There are, of course, essentially only two ways to deal with this issue: cap the escalation costs or lower the price of the airplane. The natural dynamics and competing interests between the customer and the OEMs make a resolution difficult.
A third way, which only partially addresses the problem, is to up production rates to provide nearer term delivery slots. This won’t help the A350, which is challenged to meet its mid-2014 EIS target date. Initial production ramp up will be slow, and in any event we envision an EIS slip of perhaps six months. It could help the 787; officials are considering rates of 12-14/mo from the announced 10, which has a goal of the end of 2013 (and which nobody we talk to believes will be met).
Airbus just announced it will create an A320 assembly site in Mobile (AL), to become operational by 2015, when the A320neo is scheduled to enter service. With the 737 MAX following two years later, this additional production capacity can give Airbus a major competitive advantage over Boeing and the MAX.
AirInsight || Analysis of Current Events No. 28, July 10, 2012
It's day one and there’s already a fight going on--and not between the usual suspects, Airbus and Boeing. This one is between CFM and Pratt & Whitney over their competing engines for the single aisle market. The market is huge and easily enough for both to do very well. But even though it’s still early days, the companies are competing vigorously, as if their lives depended on winning.
CFM claims that its new LEAP engine will generate customers’ savings of $4m over 15 years compared to the Pratt engine. The reaction was fast - Pratt's president David Hess told Aviation Week, “Effectively they’re defying the laws of physics and the laws of economics. The geared turbofan has six fewer stages than the conventionally configured CFM engine. That’s 25% fewer stages and 2,000 fewer airfoils – or 50% fewer. Plus it runs cooler. So someone needs to explain to me how you take that and translate it into a $3 million to $4 million advantage in terms of net present value.”
The engine war is hot because the segment both companies are trading in is the largest by numbers. Airbus and Boeing have thousands of twin engined single aisle airplanes to replace with their new models. The engine contracts will be quite possibly the largest the industry has seen. For the first time airlines that buy and operate these airplanes will have a significant difference in engine technology to choose from. Pratt's design is a departure from the typical turbine engine since its uses a gear. CFM's solution takes the turbine design to the next level by utilizing a lot of new exotic materials like ceramics. Both engines are likely to meet their targets - which are identical.
To underscore their engine's performance, Pratt announced that Philippines' Cebu Air selected their PurePower engine for their A321neos on order. Cebu operates A320s and these are powered by the CFM56, the competitor engine. Pratt has managed to overturn a customer which is no easy thing. Pratt also announced that Norwegian selected their engines for its fifty A320neos on firm order. Norwegian also has a big MAX order in place which will be powered with the CFM Leap. (It should be noted that CFM, for its CFM56 model, also snared a PW/IAE customer last year; engine switches are uncommon but not unknown.)
Meanwhile Boeing announced an order for 75 (60 -8; 15 -9) 737 MAX with Air Lease Corporation. This order is more important for the customer name than the order size. Its CEO Steven Udvar-Hazy is very influential figure in the industry. "The 737 MAX is an excellent addition to our portfolio and the ideal complement to our growing fleet of Next-Generation 737-800s," said Steven Udvar-Hazy, chairman and CEO of Air Lease Corporation. "The 737 MAX represents a step-change improvement that our airline clients need to compete in the future." Keen observers of the industry will note with interest that Boeing has sold MAXs in -8 and -9 form but none in - 7. Airbus has only sold a small number of A319neo. This seems to provide market evidence that among the two major OEMs, the smaller models are not getting attention.
But this does not mean there is no market. Despite naysayers, Bombardier maintains its measured success - it booked another 15 (5 -100; 10 -300) CSeries sales. The customer is another unannounced type - now the CSeries has one third of its customers defined this way. Rather than poke fun at this, one needs to consider that the airplane may indeed be so disruptive that its customers do not want to telegraph their strategy. That's the good spin of course - Bombardier would clearly like to announce more orders. The reaction to news that Bombardier's President met with Air Asia's CEO at the Grand Prix to talk about a 160 seat CSeries was met with mirth at the Airbus chalet. We suspect that CSeries will continue to see orders trickle in through the year and then accelerate once the airplane makes its first flight. Bombardier provided a compelling presentation of why they are confident in their production timeline. Show buzz-heard around the grounds on Day 1
• A rumor doing the rounds is that Sukhoi's SSJ is not doing well technically. We heard reports that Aeroflot's small fleet has more of these airplanes under repair than in flight. This is clearly disconcerting and we will be approaching the OEM to discuss this in the ensuing days.
• The CS undisclosed order may be from Air Baltic.
• The lack of orders for -7 MAX and A319neo means that Bombardier has it right. Its new technology airplane is superior to hybrid solutions.
• Boeing's first show demo flight in 28 years came with interesting backdrop - Boeing's pilots contacted those at Airbus to get suggestions. Pilots are happy to help each other no matter what they fly.
• Boeing is pleased with the 747-8i performance and anticipate more orders. Lufthansa confirmed to AirInsight that the -8i "is 15% more fuel efficient than the B747-400".
• This does not mean the -8i is more fuel efficient than the A380 - Lufthansa reports that its A380s are its first “three-liter aircraft” (fuel consumed carrying one passenger for 100 kilometers) which is equivalent to 78mpg.
• The A380 continues to earn a premium in average fares.
• Airbus would like to target ElAl for A380s for the JFK-TLV route. The recent success in Israel with Arkia gives them hope.
AirInsight || Analysis of Current Events No. 29, July 17, 2012
Farnborough fails low expectations The Farnborough Air Show failed to meet even the low expectations that had been forecast before the bi-annual event.
No one expected FAS 2012 to meet, or even come close to meeting, the order frenzy at last year’s Paris Air Show. The PAS was driven by the run-away success of the A320 New Engine Option, an order frenzy that surprised even Airbus.
But there were high expectations that Boeing would firm up most of the balance of commitments for the 737 MAX. Instead, Boeing was reduced to identifying two lessors who had commitments but still didn’t firm up deals. More about this below.
The show was largely about announcing “commitments,” MOUs, LOIs and other public relations fluff rather than actual contracts. There’s a saying in Texas: All hat and no cattle. This pretty well sums of this year’s Farnborough. Airbus Dismal is the only word for it. No one expected Airbus to remotely match last year’s PAS but market buzz had Airbus in contention for at least 200 orders. Not even close; it ended with 115 orders, MOUs and commitments. Widely rumored orders failed to materialize. Boeing Mixed, but in the end, well below hopes and expectations. Going into the show, Boeing tried mightily to convert 737 MAX commitments to orders from five lessors to come out of FAS with about 1,000 firm orders. Only Air Lease Corp. converted its commitment to an order for 75 MAXes. GECAS and Avolon came out of the Unidentifieds that were part of the +1,000 orders and commitments that have been touted since last year. Lessor Alafco became a new customer and commitment for the MAX. But Boeing failed to convert any other of the 1,000 to orders—a major disappointment. But this disappointment doesn’t mean Boeing’s FAS was a flop, not by any means. A week before the FAS, Virgin Australia announced a firm order for 23 MAXes. Boeing ended the show Thursday with a firm order for 100 -9 MAXes and 50 737-900ERs from United Airlines. The order was announced in Chicago, the headquarters city for both UAL and Boeing, and broadcast to FAS. Boeing now has 649 firm orders for the MAX and around another 600 commitments. No new orders for the 747-8 (either model) were achieved. At least one order has been expected. Bombardier Exceeded expectations, but they were so low to begin with that this may not be saying a lot. Significantly, though, BBD won its first order in a contest that was up against both the 737-7 MAX and the A319neo. Also coming out of the Air Show: word that Bombardier is talking with AirAsia about 100 160-seat CS300s. While we think this may be a bit of a long shot, the fact that BBD is now talking about a 160-seat CSeries validates what we said in our 2010 study of the CSeries Business Case: a third, larger family member is needed. SkyWest Airlines of the USA placed an MOU with Mitsubishi for 100 MRJs and media reported this as a “blow” to Bombardier. Given the total requirement SkyWest has for fleet renewal, we think this reaction is premature.
ATR, Embraer A handful of orders each. Mitsubishi As noted, SkyWest gave the slow-selling MRJ a major boost. Engines Where there is competition for engine orders between CFM and Pratt & Whitney on the A320 and A320neo families, PW was the winner. And a new cat fight broke out. See below.
What didn’t happen
• There were expectations that Turkish Airlines would order the Airbus A380 or Boeing 747-8I.
• Pegasus Airlines was expected to order 100 A320neos or 737 MAXes.
• Aero México was expected to order 10 Boeing 787s and a large number of MAXes.
• Some Boeing 777-300ER orders were expected.
Engine Wars break out into the open The undercurrent at the recent Farnborough show wasn’t about orders. Everyone was told to have low expectations and that was appropriate. Everyone loves to see a splurge of orders because it boosts a huge global supply chain.
This year we noticed something else happening. There’s been an Engine War going on for a year, but it’s largely been one of those “inside baseball” skirmishes that everyone knows about, but only a few talk about. But it broke out into the open at FAS.
CFM got under the skin of Pratt by questioning their GTF performance in a most public way. To make these claims is all part of the game, so-to-speak. Airbus and Boeing have been doing it for years. But Pratt’s CEO David Hess bridled – he was quick to react and during his own press briefing said “Their claim defies the laws of physics and economics…if CFM was able to produce the geared turbofan, they would be manufacturing it.”
He went on to claim the GTF will run 100 degrees cooler than the CFM LEAP engine – but did not qualify where this difference occurred in the engines or even if the number has any meaning (for example, is this 100 degree difference at 2500 degrees? ) There is clearly a tough battle going on here and CFM takes every opportunity to question P&W’s engine.
Meanwhile, Pratt had an excellent week selling engines on numerous OEM campaigns in which it competes with CFM. This battle is not going away and will grow even hotter as the year goes on. Then there is another engine battle going on between GE and Rolls-Royce over the 787. GE says they contractually tie themselves to guarantee to have the lowest fuel burn on the 787. If they miss this, then they are obliged to pay their customers. They were pleased to point out that in Boeing’s 787 engine audits the GEnx engine was delivering 2% lower fuel burn than the Rolls Trent 1000. GE pointed out that when you add back the effectiveness of their “variable bleed valve” (door like structures inside the cowling between nacelle and core that opens at low speed to ensure that no FOD enters the core), they think there is another 1.5% better fuel burn. Rolls was unimpressed with these issues and said if the numbers between them are so great, why has Rolls won the eight out the last 10 campaigns? (GE has a comfortable market share on the 787, however.)
Rolls announced another series of improvements to improve their fuel burn even more and, they claim, keeping their engine as best in its class. To best understand why these fights are low key, but intense, take a look at this chart.
Each one of these firms fights like crazy in public but has cooperative deals with each other on selected programs. There is no fight like a family fight – not necessarily public but really nasty all the same. Perhaps a great illustration of how intense the fight can be is to cite Engine Alliance (GP7200) President Mary Ellen Jones when she excitedly explained they had taken 200 pounds of weight out of their engine. The engine’s dry weight is 14,800 pounds so they have saved 0.1% and they are excited. This explains the nature of commercial aero engines – the tolerances are of Swiss watch dimensions. It is a very tough business and engineers literally seek decimal point advantages.
We expect the battles to continue. And, truthfully, analysts and industry pundits love a good fight.
AirInsight || Analysis of Current Events No. 30, July 24, 2012
Assessing the MAX Story
Boeing’s 737 MAX is beginning to take off nicely.
It still has less than half the firm orders of the Airbus A320neo and Boeing failed to convert as many commitments to firm orders during the Farnborough Air Show as it had hoped, but progress is being made.
Perhaps a bit surprising is the strength of the 737-9. Boeing identifies the 737-800/8 MAX as the heart of the market but the -9 has so far picked up 40% of the announced orders and commitments.
737- Company 737-8 9 Air Lease Corp 60 15 ALAFCO* 20 Aviation Capital Group* 35 Avolon* 10 5 GECAS* 75 LionAir 201 Norwegian Air 100 Southwest Airlines 150 United Airlines 100 Virgin Australia 23 Total 473 321 *Commitments 60% 40%
Announced Orders and Commitments at July 23
Considering the slow sales of the 737-900ER since its introduction, this is a commendable showing. The -900ER has garnered only 15% of the sales in the 800/900 class (less if the smaller -700 were figured in) since the first order in June 2005 by launch customer Alaska Airlines. But following a push by Boeing to increase sales of the airplane that began last year, the -900 collected 34% of the 800/900 sales. This year, the -900ER represents 41% of the announced orders.
Why is the 9 MAX doing so much better?
Boeing has increased the range to nearly 3,600nm (when one auxiliary fuel tank is added), which is more than comfortable for US trans-continental range and West- Coast to Hawaii. It doesn’t quite make unrestricted trans-Atlantic flights, however, and therefore won’t replace the 50 757Ws that are performing this mission today.
The 9 MAX range also makes the airplane more competitive in the European charter scene, where the A321ceo has dominated vs the -900ER.
There is, however, an offset. The entire MAX line is 5,000-7,000 lbs heavier than the NG and so far it doesn’t appear the engine thrust is going to be materially different than that offered on the NG. CFM International, on its web site, lists the LEAP-1B thrust at 20,000-28,000 lbs, which is the same range as the CFM56 powering the NG. Boeing and CFM have yet to define the specific thrust ratings for the LEAP engines. This means, at present, the heavier airplanes will not be compensated by higher- thrust engines. And this affects field performance.
One airline tells us, “What appears to be disappointing for operators planning to use the MAX at its maximum weights (e.g. as a 757 replacement) is that take-off performance for the 737-8 appears to be worse than the -800. It will be interesting to see how much worse the -9 will be to the -900ER which already has a dismal runway performance. “Boeing is keeping the same wing, but increasing weights.
“As an example, according to Boeing, a B737-8MAX will be unable to take off from Minneapolis at MTOW. Minneapolis is at 800 ft but its longest runway is 11,000 ft. This makes you wonder about the -9MAX. Will it need 11-12,000+ ft at sea level? The -900ER already needs almost 10,000ft at sea level on a standard day.”
What the MAXes gain in range may be offset by a lack of increased thrust. This is one reason Boeing is going with the Advanced Technology Winglets, attempting to get back some of this field performance. While winglets are advertised as a fuel-saving device, less well known is that they also improve field performance.
Of course, maximum payload operations are few in the context of total missions.
Boeing claims the 737-9, with its one-aux tank range of 3,595nm, is superior to the A321neo, citing a range of 3,110nm. However, this appears to be comparing apples and oranges. Airbus says the range of the A321neo is 3,750nm with two auxiliary fuel tanks and an MTOW of 93.5 tonnes. There have been 90 A321neos ordered to date.
AirInsight || Analysis of Current Events No. 30, July 31, 2012
Why New Technology Airliners are Late The conventional wisdom from the 1960s through early 2000s that when Boeing or Airbus announces a new airplane, you can expect entry into service 48 months later no longer holds true. We’ve seen significant delays for A380, 787, A400M and 747-8. Now, despite major lessons having been learned, additional, albeit smaller delays for A350XWB have been announced and we believe the first flight for the Bombardier CSeries will see a delay from December into the first quarter.
These delays occur despite longer development periods and additional slack in their schedules aimed at accommodating the “unknowns” that crop up in development. What’s changed in the industry that is causing these delays, and will OEMs ever get “back on schedule” of delivering new technology aircraft on time?
Each of the new technology airliners under development had different reasons for delays, with one common thread -- the complexities of supply chain integration and ensuring that multiple independent business entities were all pulling in the same direction at the same time. All it takes is the failure of one part, or one fastener, and an aircraft can’t fly. But aircraft have always had thousands of parts from a variety of suppliers. Why can’t the industry handle it today, especially since we have better communications than we’ve ever had? Companies share CATIA files across the Internet and we have e-mail and instant messaging. We should know much faster when we have a problem than in the 1960s, when communication relied on long distance calls, couriers, express mail and snail mail.
The New Realities of the Industry Many delays relate to the management of complexity and the management of global supply chains, coordinating everything to come together at the right time. In the old days, before the concept of offsets required OEMs to manufacture components in backwater locations to provide local content for aircraft, everything was done centrally, under the watchful eye of a management team that translated the drawings from engineering into metallic structures. Today, an engineer in Seattle, Toulouse, Montreal or San Jose de Campos may design a structure using CATIA that will be produced by someone who speaks a different language, in a different culture, half a world away.
If that isn’t enough of an issue, add to that the complexities of using new materials, with new regimes for testing, new manufacturing processes, and the associated learning curves that come with each. While the engineering software for analyzing strength of materials has advanced markedly, the designs being produced have often become more difficult to manufacture. As a result, one of the lessons learned from earlier delays is to build manufacturing mock-ups to determine whether the designed concocted by engineers can readily be build on the assembly line without the need to hire contortionists to fasten components together. Both A350 and CSeries benefit from such mock-ups, which will allow optimization of manufacturing processes and hopefully help move more quickly down learning curves.
Has the Industry Learned from Prior Failures? Let’s examine some of the reasons programs have and are running late, and how the lessons that have been learned are currently being applied to new models.
The Airbus A380 story is now well known -- as one part of the company upgraded to CATIA V while the other part was still using CATIA IV, and software incompatibility resulted in the massive bundles of wires on these aircraft to be a few millimeters short, resulting in excessive labor to rework the problems and long program delays. It seems that everyone has learned this lesson, and today software version control is an essential element for every OEM and their suppliers - you must use this version of the software and not change during the development of the project, with every software update coordinated globally at the same time.
Boeing suffered multiple issues with its 787, ranging from tolerances of fuselage sections that didn’t fit well to a shortage of fasteners in the supply chain. Boeing’s problems primarily flowed from the lack of experience in managing an international supply chain, compounded by the issues related to manufacturing learning curves with new technology composite primary structures. The results were tremendous rework, and multiple delays to the program that cost it the strategic advantage it would have obtained if its planned Y1 new narrow-body development had followed an on-time 787 program. Instead, it was forced to compromise with the Max to compete with the Airbus neo, costing it an opportunity to leapfrog Airbus technologically and gain market leadership.
Boeing has learned how to manage an international supply chain, which Airbus has known for years based on its structure, and Bombardier from its international supply chain for business jets and turboprops. But the issues illustrated at Boeing caused each to beef up their program management efforts to ensure those issues wouldn’t occur with A350 or CSeries.
Why are We Seeing Delays? So why are A-350 and, likely, the CSeries at the precipice of additional delays, if we’ve learned from the mismanagement experiences associated with other programs? The answer is technological complexity and automation. Software, rather than hardware, has become the major sticking points in the development of new aircraft.
While program management is improving, with iron birds for testing and fully integrated communication systems with international suppliers, two areas remain that continue to cause delays. One is the learning curve with advanced materials, which is improving over time, and the second is keeping up with the more advanced requirements for software as manufacturing moves to multi-axis automated machinery and aircraft move to integrated digital systems for avionics and flight controls. Advanced Materials While both Airbus and Bombardier have experience with high technology materials, the extent of use in the two programs currently under development are higher, and more complex, than earlier programs. The use of composites for primary structures is much more extensive for A350 than other Airbus products and the system of skin on structure, while more traditional, requires new techniques and tolerances for composites that are more complex than for simply tail structures used on older programs. While Bombardier has experience with composite wings from the Global Express, and a facility experienced with resin transfer molding, it is also pioneering Aluminum-Lithium alloys for the fuselage. While manufacturing techniques are similar to those used for aluminum, the characteristics of Al-Li alloys behave slightly differently, resulting in minor but important changes to the manufacturing process.
The good news is that the industry is working well down the learning curve for advanced composites, just in time for the next generation of composite technologies to be introduced and re-start a new learning curve. Second generation CRFP materials will be even lighter and stronger than first generation materials, but will introduce new wrinkles for manufacturing. Keeping up with new technologies, after building from aluminum for many years, is a major cultural change for a manufacturing organization, and despite being dealt with well at both Airbus and Bombardier, can remain a source for delays, albeit not nearly as extensive as with 787. Software The latest potential delay for A350 relates to software at a manufacturing plant for wings in Broughton, as this software is needed to control the robot that will drill holes in the wing. This is an example of how information technology has become a critical path element in aircraft development programs. Because managing software engineers has often been likened to herding cats, this is the other major area of concern in developing aircraft today. Problems at Airbus appear to be confined to the manufacturing side rather than the fly-by-wire and flight management systems for the aircraft, as Airbus has considerable experience in this regard.
At Bombardier for the CSeries, concern remains over Parker, which is designing the fly-by-wire system for the aircraft and is rumored to be behind schedule. Margins are already gone in the program. Delays in software development today can result in shutting down an aircraft programs development while a supplier catches up, and ensuring the quality of millions of lines of code can be a difficult task.
We know a software expert from a major aerospace supplier in charge of quality control of software who explained how experts sometimes had difficulty translating comments from Russian and Hindi into English to understand fully how programs worked. Double-checking everything takes time, and when software for flight critical systems is outsourced internationally, that can be even more difficult to accomplish. We’re glad that they are working diligently to make certain things are right.
The Bottom Line While the time frame for the development of a new aircraft appears to be stabilizing, it looks like five to six years (If not longer) will be the new normal from launch to entry into service. Each of the major companies have learned the lessons from failures to communicate and coordinate supply chains, and the importance of providing specifications to suppliers with enough lead time for them to produce their products. While future programs will be better managed, and build on the collective organizational knowledge to more rapidly execute designs, it appears that software will become the constraining factor in development time lines. Despite more advanced software tools, it appears that IT and software development have become the major constraints for new program development, and the next area of emphasis for OEMs.
AirInsight || Analysis of Current Events No. 31, August 7, 2012
The 100-149 Seat Segment is viable, if now a niche Many industry analysts and consultants believe the 100-149 seat segment is the “Bermuda Triangle” for airplane manufacturers. We disagree, and here’s why. it has been the wrong market for some OEMs and for some airplanes. When OEMs tried to meet market demand with shrinks, usually it doesn’t work, or work efficiently. (The A319 was an exception) When weak and dying OEMs tried to fill this market segment with solutions, it did not work (see BAe, Fokker, Dornier, Fairchild, and McDonnell Douglas). It is better described as an unforgiving market segment.
As our first piece of evidence we offer this chart from Embraer. They have shown themselves to understand this market very well and offered the right plane, the E- 190/195 designed specifically for the market, and the market responded well. This success demonstrates that there is a market. And once the E-Jets met EIS, orders accelerated. The chart below reflects all E-Jets, but 64% of the orders are for the E- 190/195.
The following chart shows how this market segment fits in the overall market for single-aisle aircraft. There are 10 new aircraft types from six manufacturers that will enter this market segment over the next six years – a segment that Airbus and Boeing had to themselves early in the previous decade.
There are new firms like Superjet and Mitsubishi who are bringing new “right sized” airplanes and these are being ordered by airlines who like the numbers.
At the same time established segment suppliers like Bombardier and Embraer are seeing most interest is focused on the larger of their offerings. A slow rate of orders for Airbus A318, A319ceo and A319neo is matched by a recent slow rate of orders for Boeing 737-600, 737-700 and even 737-7 MAX, which as yet hasn’t landed a single order.
The demise of the Boeing 717 is not a failure of the segment. It was a failure of its designer, McDonnell Douglas, which was already dying. Despite being a credible airplane (AirTran wanted a longer range version) Boeing wanted to protect its 737 line over enhancing the 717.
The airplanes that are shrinks are simply too heavy. The 737-700 was the baseline but in MAX terms the baseline has grown to the -8 MAX. The 320 family and 737 family are much more successful as they get bigger.
Historically, the mid-size programs sold best, followed by smaller and then larger variants. Today, the order has reversed, with the larger aircraft gaining more orders than the smaller. Airlines are upsizing to capture better seat mile economics in a high fuel cost environment.
Look at the section with a violet background. The chart shows that there are new players coming at the bottom and the existing players are moving up in seat size. The seat mile economics are the driving factor as airlines try to maintain competitive fares. The cost of adding some seats is much lower than adding another airplane for increased frequency.
Note that Airbus and Boeing are keeping their offerings of core programs going, despite a distinct lack of sales momentum for these products. The reason for doing this is that this a signal to the new players – consider it a tripwire. Bombardier crossed that tripwire and the reaction from Airbus and Boeing is there for all to see. The CS300 caused the neo program at Airbus which begat the MAX at Boeing. Embraer sent a clear signal that it was not going to cross the tripwire – for now. We suspect they will have to because the market is shifting under their feet.
If the segment were a Bermuda Triangle why would Airbus and Boeing lay down the tripwire and defend it? We believe the segment is not only attractive in its own right; it also acts as a superb training ground to build bigger airplanes. Once an airline likes your small airplane it is quite likely to want your bigger airplane. Bombardier has shown that, growing its 50-seat RJ to 100 seats. Airbus and Boeing are going do whatever they can to derail Bombardier’s momentum. They have to because a duopoly is much easier to work with than something bigger.
AirInsight || Analysis of Current Events No. 33, August 21, 2012
Will the bankruptcy process result in a stand-alone business plan for American? American Airlines' request to abrogate union contracts with its pilots and impose cost reductions after an impasse in negotiations was rejected by the bankruptcy court last week, as AMR failed to demonstrate that a successful reorganization required ending restrictions on domestic airline marketing accords and pilot furloughs. While the ruling was narrow, it demonstrates the strength of the US Airways merger proposal, as that carrier has already received the support of American's unions and could avoid protracted negotiations for a new contract.
The powerful creditors' committee responded to the court ruling by urging management and labor to reach a consensual agreement.
Under the bankruptcy code, American has the exclusive right to propose a restructuring plan through the end of this year. The question is whether that plan would be acceptable to the parties in the bankruptcy, including labor and those holding both secured and unsecured debt. Our read of the situation is that those parties are now leaning the other way, and that unless American can produce something miraculous, the parties will invite the alternative proposal from USAirways for consideration once American submits its plan.
Labor is already in favor of the merger, and each of its major unions, APFA, APA and TWU, have all reached pro-forma labor accords with USAirways. If labor were to obtain shares in exchange for their concessions, they would likely vote for the merger.
The depth of labor problems at American is illustrated by the fact that negotiations with its pilots have been ongoing since 2006, and have remained apart on a contract for the last six years. American plans to resubmit a request and impose contract changes if the bankruptcy court approves them. But there are a host of reasons the court shouldn’t, and instead support the proposed merger with USAirways that its lenders and creditors favor.
American will still be required to negotiate a long-term contract with its pilots union, whether in bankruptcy or after emerging. Flight attendants are currently reviewing a contract vote on a “final” offer from American, while ground workers and the TWU have already ratified new contracts that include givebacks.
There are a number of reasons that the bankruptcy process should consider the USAirways merger as an alternative to a stand-alone business plan. First, it could provide better returns for the secured and unsecured debt holders, and has already reached labor accords with employees. A USAirways acquisition would enable the combined companies to match the mass a reach of Delta, which acquired Northwest and United, which acquired Continental. American, formerly the industry leader in attracting high yield corporate traffic, has become a second tier player as the two larger carriers can offer truly global coverage. This is demonstrated through their higher passenger revenue per available seat mile, 14.23 cents per seat mile for Delta and 13.57 cents for United against 12.33 cents at American. Even with cost reductions, when you have 13.3% lower revenues than a major competitor, you will still have trouble at the bottom line. American has lost its edge, and needs critical mass.
Second, the management team at USAirways could replace the key executives at American who failed to address their problems on a timely basis, and are an impediment to labor negotiations, having paid themselves large bonuses while extracting concessions from unions.
Third, the route networks would be quite complimentary. American in a filing mentioned Virgin America, Alaska, Frontier and jetBlue as potential merger partners. None offers the critical mass and synergies that USAirways would provide.
So why won’t American recognize the handwriting on the wall and include USAirways in their business plan? Traditional arrogance and the desire of senior management to determine their own fate appears to be the answer, despite the obvious handwriting on the wall. Their debt holders, unions, and most industry experts agree that a USAirways acquisition of American would yield better results than a stand-alone American emerging from bankruptcy. Let’s hope the bankruptcy court agrees, and will hear alternatives that would better serve the constituents the process is intended to protect.
AirInsight || Analysis of Current Events No. 34, August 28, 2012
Boeing and the Sporty Game of Product Strategy John Newhouse, of the New Yorker magazine, in his 1982 book The Sporty Game, described the “bet the company” decisions involved in developing commercial aircraft. In recent years, with the difficulties with the A380 and 787, his analyses once again resonated through the industry. As we look at the industry 30 years later, and the game of leapfrog between Boeing and Airbus, the decisions of that era are long past, but decisions being made today will dramatically impact the future of the industry.
With the Boeing 787 now in service, and the backlog of aircraft in Everett that require rework slowly starting to show improvement, we can conclude that the 787 program has turned the corner. Now, the 787-10 and 777-X are the next targets as Boeing readies its 737 Max series to compete with the A320 neo family. But Boeing, which had favorable reactions to information on both new wide-body models after discussion with airlines, appears to be waffling from previous, unofficial commitments to launch these programs in 2012, after the change in CEOs at Boeing Commercial Aircraft. Former CEO Jim Albaugh appeared ready to take recommendations to the Board of Directors by year-end. His successor, Ray Conner, will only say the recommendation will go to the Board when it's "ready," but still vows an EIS by the end of the decade.
With two new models that could bracket the A350XWB in the marketplace, industry pundits are speculating on why Boeing appears to be nebulous.
Has Boeing Lost its Edge? Apparently, Boeing is now undecided more than ever before whether a major make- over In the form of the 777X is the best course or a minor makeover of the 777- 300ER will be as good as the A350-1000. From media reports, and inference from Conner's own statement, a recommendation won’t be going to the board for approval in 2012.
Boeing is apparently still considering different alternatives for the 777 replacement aircraft, including (from our sourcing) an all new airplane in addition to the current proposal with new engines, a new composite wing, and aluminum-lithium alloys replacing the current aluminum fuselage. Boeing’s customers, in the meantime, are clamoring for a new aircraft sooner, rather than later. We believe that an all-new aircraft, rather than a re-engining and major overhaul, may be needed to compete effectively with the new technology A350XWB. We believe the market has begun to agree, with Cathay Pacific, a 777-300ER operator ordering 26 A350-1000 models. Reaction in the industry to Boeing’s indecision has been negative, including some very frank comments by Tim Clark at Emirates.
Our perception is that Boeing appears to be stuck in a risk-averse mode and by failing to execute its original product development strategy has ceded market leadership in key segments to Airbus, despite having them “on the ropes” just a few years ago.
Airbus has made the “leapfrog” investment in A350XWB, and will have a far more economical and superior product than today’s 777. Even Boeing's own analysis concludes the A350-1000 has much better trip costs.
Boeing needs to rapidly have a competitive answer, having lost a key customer to the competition, but appears to have its finger in the air trying to figure out which way the winds are blowing. The delay in the 777-X and 787-10 launch, both of which are still under consideration at Boeing, indicates that some second thoughts about whether the new model will eclipse the competition have arisen, and whether the proposed offering is differentiated enough to find long-term market success. Our independent economic analysis of wide body models, as shown in the chart below, illustrates the need for 777-X, as 787 and A350XWB are in a different class of economic performance, largely because of the lower weight of their composite structure designs.
When two major customers question whether the company has confidence enough in a new design to launch it, and likes what they’ve already been shown enough to place an order, it begs the question of Boeing’s confidence in its ability to deliver on multiple programs. With a shortage in engineering talent, some as a result of previous downturns and employees lay-offs, can Boeing rebound and handle multiple developments at once? Has the 737 Max, which will be a tough development to meet its design goals, taken top priority? Has the experience of robbing the 747-8 development team to support the 787 exposed a resource constraint forcing management into a more risk-averse position?
What’s Gone Wrong in Seattle The failures can be traced to senior leadership and Boeing’s board, which has been exceptionally risk averse and dramatically cut spending on product development. When Alan Mulally wanted the 787 program, the board refused to fund the program internally as it had in the past, and he was forced to fundamentally change Boeing’s strategy to include risk-sharing from suppliers to get the program approved. Unfortunately, we now know how an initial risk-shared development and an engineering team ill-equipped to coordinate such efforts led to a three and a half year delay, and a financial disaster for the company. While cash flow is starting to turn, program profitability is still some years away for the 787, and the order book continues to languish below its initial peak prior to cancellations due to program delays. With late deliveries, Boeing is continuing to pay for the recalcitrance of its risk averse board in penalties to airline customers still waiting for aircraft that should have been delivered three years ago.
Has Boeing learned a lesson, and will they make the investment necessary to develop these new airplanes internally, as they know how to do, or are Boeing financials such that it may not be able to afford new development, particularly in light of forthcoming defense cuts that will impact the military side of the business. We have previously commented on how the McDonnell Douglas acquisition changed the culture of the organization, and it appears that the defense business may once again be pulling down opportunities to leapfrog their competitors commercially.
Reacting to Competitors is Not Market Leadership Boeing management today appears reactive rather than pro-active, as demonstrated by the launch of the 737 Max. Jim Albaugh, former CEO of Boeing Commercial, was leaning towards an all new narrow body, for obvious reasons, as the 737 fuselage and basic design was derived from the 707 program in the 1950s.
The 737 Max was launched quickly, as an emergency reaction to the American Airlines decision to order Airbus A320neo aircraft rather than the 737NG. American has been a key Boeing customer for many years, and is also an existing 737-800 customer. That order was not simply a wake-up call, but a nuclear bomb. Boeing wasn’t ready to offer their customers what they needed, and Airbus took advantage of its more recent design to press a short-term advantage in the market rather than launch its own new aircraft, since after the A380, A400M and A340-500/600 expenditures, the company was suffering cash flow issues.
The 737 has been a venerable airplane for Boeing, and remains the best-selling model in history. But introduced in 1967 with low bypass cigar shaped engines, the 737 lacks the ground clearance necessary for today’s new technology engines with larger fan sizes. The difference between the 78 and 81 inch fan engines offered on neo and 69 inch fan on Max is significant to engine performance. Even the 737 classic series needed to flatten the bottom of the nacelle of the CFM-56 to fit, and the 7 inch cabin width differential of the A320 was providing a competitive advantage in seat size and aisles. While the NG series refresh in the late 1990s kept the aircraft competitive and slightly better economically than A320, Boeing was looking squarely at their competition introducing an A320 replacement by 2020, and focused on a new aircraft to match.
When Airbus moved more quickly to re-engine the A320, recognizing the threat of the Bombardier CSeries, Boeing was left without a competitive offering in the narrow- body space. Forced to scramble to win a portion of the American order, Boeing rapidly launched the 737Max, with claims of economic equivalency to the A320neo family. But given the dated design of the 737, it will require many more changes than the A320neo required to reach equivalent performance levels because of engine size restrictions, the need to lengthen landing gear, and aerodynamic improvement required to optimize the new configuration. As a result, it will be more expensive to develop than A320neo, which is 95% parts compatible with the current A320 - and Airbus will aggressively compete on price - as Boeing management has complained about this year. Boo-hoo, that’s called competition.
Leadership Lost With the 787 issues behind it, Boeing appears to be poised to regain the leadership position in commercial aircraft deliveries it lost to Airbus over the last decade, but at the risk of a bubble in the narrow-body market with increased production rates. But even this recovery is nowhere near where Boeing should be today.
What Could, and Should Have Been Let’s examine where Boeing might be if it executed its original strategy and the Board had decided to fund product development at historic rather than the current anemic level back in 2002, and examine whether the strategy developed by Alan Mulally would have succeeded?
The 787 was one of three critical aircraft families that Boeing has identified in their strategic plan early last decade as Yellowstone or Y2, with Y1 being a 737 replacement and Y3 a 777 replacement aircraft. In 2002, when planners assumed four years from go ahead to entry into service for a new aircraft, the strategy appeared to be as follows:
In 2002, Airbus was wounded. The A380 was consuming cash at an incredible rate, and Airbus was throwing massive resources at a market niche that Boeing correctly believed to be small niche in a world of route dispersion and hub avoidance.
Had the 787 have been on time, Boeing would have achieved a strategic advantage over Airbus that it could have exploited for decades to come. Early in the decade, Airbus was struggling with delays to its A380 program, and proposed an A350 make- over of the A330 that airlines and leasing companies flatly rejected as not competitive with 787, causing a trip back to the drawing board. The company was perfectly positioned to introduce the 787 and then attack the Airbus cash cow, the A320 family.
Had Boeing succeeded in bringing the 787 to market on time and on budget, a 797 would be flying today and making the A320neo family economically obsolete, and forced Airbus to react. With the 797 in place, Boeing would then have turned to the large twin market to replace the aging 777 with a new technology model that would have matched or eclipsed the Airbus A350XWB.
While one can’t cry over spilled milk, Boeing had a strategy to take market leadership in small wide bodies (which it is finally achieving), narrow-bodies (which at best may now be a tie with or slight disadvantage to Airbus, as our independent analysis indicates that Boeing’s claim of 8% better economics is unlikely to match reality, with further threats from Bombardier, COMAC and Irkut forthcoming), and large wide body twins (777 today is not competitive with A350XWB). One for three might be good in baseball, but not for a company attempting to regain the mantle of industry leadership. In the Sporty Game, leapfrog is essential, and jumping to the same stone isn’t good enough.
AirInsight || Analysis of Current Events No. 35, Sept. 4, 2012
A320, 737 Values at Risk Airbus and Boeing claim demand and record backlogs thousands of A320s and 737s requires them to boost production rates to record levels. There’s little doubt that this is true.
But while the two OEMs also claim that there is no effect on aircraft values and lease rates, there is sharp disagreement from lessors. Values of late model airplanes—those as young as five to seven years—are being “crushed,” one lessor tells us.
Additionally, useful lives of modern single-aisle aircraft are being reduced to 20 years. At one time, useful lives were as much as 35 years.
Although Boeing likes to argue that the 737-800 holds its value better than the A320 because, in Boeing’s view, it’s simply a better airplane, the answer isn’t as simple as that. To a large degree, the values and lease rates evolve from different sales philosophies of the two firms dating back at least two decades.
Airbus engaged in an aggressive sales campaign to lessors early in the A320 program, while Boeing then focused more on airlines. The airliners were slow to accept operating leasing as a strategic fleet management tool. Legacy carriers preferred ownership or leveraged and finance leases with the attendant tax advantages. Operating leases were viewed as tools for weak airlines, third world carriers and temporary requirements. Operating leases were also the tool for start-up airlines, an industry that began with deregulation of the US airlines industry in 1979 and eventually became a global phenomenon.
Lessors put the A320s and other aircraft out on medium-term leases, typically 5-7 years. The new aircraft had maintenance holidays of, as it happens, 5-7 years. Although most start-up airlines failed, a few survived and some began arbitraging the maintenance holidays by churning the fleet when the operating leases expired, replacing them with the same aircraft coming with new maintenance holidays. This churning created a surplus of A320s and lease rates dropped to find homes for them the second time around.
Legacy airlines began seeing the advantages of operating leasing for fleet flexibility, spurred on by tightening capital markets and global instability due to disruptive economics, terrorist acts and a succession of Middle Eastern wars, conflicts and oil price shocks. It’s one thing to ground airplanes that are burdened by long-term debt or finance leases. It’s quite another to ground jets on operating leases that expire in the short-to-medium term.
As legacy airlines increase the number of airplanes on operating leasing, they now have the flexibility to churn the fleet for maintenance holidays or put these airplanes back into the market in a down-turn, depressing values.
American Airlines, with its order for nearly 500 Airbus and Boeing aircraft in July 2011 (still to be affirmed in bankruptcy, so none shows on the order books of the OEMs yet), will lease every single airplane. The order includes a mix of current generation A319s, A321s and 737-800s as well as the NEO and the MAX. American hasn’t said, but the scuttlebutt is that the current generation airplanes will be leased as long as it takes to get the re-engined airplanes into the fleet in quantity. So much for residual values on the current generation airplanes.
As lessors proliferated and gained market share, Boeing increased its sales to them but Airbus had been there first. Still, Boeing faced the same problem, albeit in smaller numbers, that Airbus did on the churn.
But that’s not all. Start-up airlines starting buying, rather than leasing, A320s directly from Airbus. It’s been conventional wisdom in the industry that Airbus’ backlog was defined by more risky sales than Boeing and that’s been true—precisely because Airbus took the flier in selling large numbers of airplanes to start-up airlines. The result, as with deregulation, has been mixed. Success stories include JetBlue, Frontier, Indigo and AirAsia. Notorious failures include Skybus in the US (which had a goofy business plan) and, as it has proved, Kingfisher Airlines. Even some legacy carriers proved failures for Airbus: Pan Am and Mexicana come to mind.
The failures dumped scores of Airbus airplanes on the market, driving down prices.
Boeing was later in selling to start-up airlines, but plunged into the field in a big way. LionAir is a high profile example. One troubled airline that remade itself so dramatically that one could argue in extremis that it was a start-up became a huge Boeing customer: Ryanair. But Boeing was more conservative in its risks than Airbus and found fewer 737s dumped on the market due to large failures.
Today, Airbus and Boeing are engaged in a market-share war. Airbus wants to gain market share. Boeing wants to preserve its share. To be sure, backlogs of five or more years aren’t especially healthy or ideal so there is production demand. But as new airplanes are rolled out the factory doors (and especially if Airbus and Boeing boost production beyond the announced 42/mo), values of the predecessors will drop. Hence recasting useful lives to 20 years.
AirInsight || Analysis of Current Events No. 36, September 11, 2012
Comparing the OEM Aircraft Market Forecasts Airbus released its Global Market Forecast last week. And, true to form, trying to compare it with Boeing’s Commercial Market Outlook is not easy. The two firms define the segments differently. This requires some editing liberty on the part of analysts.
Here’s how the two OEMs define the period from 2012 to 2031. They have a significant difference in their projections of the total number of aircraft to be delivered, with a nearly 6,000 aircraft difference, primarily in single aisle aircraft. At $75 million per aircraft, there is a difference of about $450 billion between the two companies' forecasts. Who is more accurate is the half a trillion dollar question?
There is an important item to note – Airbus does not report on regional jets under 100 seats whereas Boeing does. Airbus responded “…we focus our results and publications on the markets that we are involved in (≥100 seat aircraft)”. We assembled our own view on these two outlooks as follows:
Airbus estimates the VLA market (over 400 seats) to be more than twice as large as Boeing, which has been the case since at least 2000. Airbus believes in the need for the A380 to serve crowded hubs, while Boeing has touted smaller aircraft and route dispersion. The difference in forecasts to some degree reflects their market intelligence and competitive positioning resulting from those forecasts.
When we adjust the numbers to be comparable, we produced the following table for freighters. But even then the 9.5% difference is clearly more subtle when you look at the breakdown. Boeing includes both 777 and 747-8F in the “large freighter” category and the A330 freighter in the other category. Once again, the forecasts appear to reflect the company’s product lines and competitive positioning within each segment.
Boeing estimates the VLA freighter market 55% bigger than Airbus. But Airbus sees the smaller freighter market 58% bigger than Boeing estimates. Perhaps the absence on an A380 freighter is likely why Airbus large freighter market assessment is so much smaller than Boeing’s -- or because the 747-8F is doing far better than the 747-8i passenger version, Boeing emphasizes that sector. In the single aisle category – which is by far the biggest commercial segment (69% of Airbus’ total and 68% of Boeing’s total) – the two OEMs are 19% apart. They are much closer on the twin aisle segment with only an 11% difference.
Even if the explanations for the differences are definitional, the overall market difference remains more than 20% apart, which is substantial. The differences are substantial when one realizes that Airbus estimates the market at $4 trillion and this is the lower of the two estimates. Removing the regional jet component from Boeing’s numbers the difference shrinks to 11.9% in airplane numbers – which is still substantial.
The question is whether the forecasts are colored by the product lines of each OEM, or whether the product lines have been developed from different forecasting methodologies and assumptions about the marketplace. Is Airbus gung ho on the 400+ seat market because their A380 is showing strength in the market and they foresee good times, whereas Boeing’s 747-8i is struggling and therefore they are of the view that market is more limited?
Airbus’ VLA-passenger forecast of 1,330 requires orders of 67 per year (747-8i and A380). In the Rolls-Royce-Pratt & Whitney lawsuit, Rolls’ filing revealed Airbus expects to deliver ~650 A380s over 20 years. That is half the amount needed to match its forecast, but matches Airbus’ contention that it will capture 50% of the VLA forecast. But Airbus does make a compelling case that we are likely to see continued growth in air travel between mega cities. Currently there are 42 cities (i.e. New York, Tokyo, London, Paris, Frankfurt, etc.) that handle more than 10,000 long haul passengers per day and Airbus expects over 90 by 2031. The A380 is right in the sweet spot to serve such traffic at airports with fixed slots.
In the twin aisle market (250 and 400 seats) both OEMs are closer in market estimates. This is the area where the A330 and A350 battle the 787 and 777. For most airlines these aircraft are their primary long range tools and both OEMs make a lot of money in the segment. Airbus has a highly developed product in the A330 which is delivering better results than probably either OEM expected. A350 development continues apace and it appears Boeing is biding its time on a 777 update. But, as experience has shown, (most recently neo vs MAX) dithering on development can bite. Despite unsettling comments from airlines in the Gulf, Cathay voted for the A350 over waiting for updated 777. The 11% difference between forecasts for this segment, while relatively small, appears to indicate both OEMs will continue to fight over every order.
The backup information both firms provide does not give an indication of precisely how they develop their forecasts. Clearly the methodologies are not going to be shared publicly. The table below is a guide we find somewhat comparable. The table on the left comes from Boeing while the two charts on the right are from Airbus. Both make it clear the future lies in the Asia market. Boeing shows its results for estimating airplanes by market – but Airbus does not.
Airbus sees a global passenger fleet growth between 2012 and 2031 at 109% compared to Boeing’s 100%. But Airbus says the 2011 passenger fleet was 15,560 while Boeing says it was 19,890 – so they differ by 28% before they even get to 2012. Perhaps this is because Boeing includes regional jets in its analysis, and Airbus does not. But the net result is that differing by 21% in 20 years’ time brings them closer rather than farther apart.
Airbus says that 2/3 of the passenger fleet flying today will need to be replaced by 2031 (10,350 aircraft out of the 15,560 in service). Boeing says that 70% of the fleet will be replaced by 2031 (14,110 out of 19,890 in service today).
Even as they disagree on definitions and therefore overall numbers, there are a few things they agree on: - Emerging markets are where the growth will be o Growing middle class drives travel demand o Particularly in Asia - Fuel costs are manageable o Boeing sees rising supplies o Both OEMs cite rising efficiency of new airplanes - The biggest growth segment will be single aisle fleets at more than two-thirds of orders o This will be driven by LCC growth o Boeing believes LCCs will account for 19% market share by 2031
AirInsight || Analysis of Current Events No. 37, Sept. 18, 2012
EADS-BAE merger could lead to 'commercial' company The proposed combination of EADS and BAE Systems could lead to a fully 'commercial' company, based on information as we understand it.
By 'commercial' company, we mean one that is largely free of government interference.
As we understand it, the management structure of the new company would be devoid of government requirements to rotate between French and German executives every five years. (We hope this understanding is correct.) We also understand that the Board of Directors would be free of government representatives. (We hope this is true, too.) There is no disputing that the current government shareholdings of the French and indirectly the Germans will be diluted. This is certainly a good thing. We don't like government ownership, though the US bleating over government ownership of EADS and Airbus has, in our view, been overstated.
What will a new structure mean for government launch aid, a practice that drives US politicians and Boeing batty? We suspect this practice will still be available in the future as long as jobs are tied to the program. We don't like launch aid, nor do we like any corporate welfare, but let's face it: culturally, Europe simply takes a different view on this than does the United States. Whereas corporate welfare is plentiful in the US in the form of tax breaks, land deals, fee waivers and the like--all of which is available to Airbus as well in Europe and in the US--launch aid is simply something that is foreign to the thinking in the US.
(We won't get into the topic of defense-style and NASA aid to Boeing; it's not our intent to re-litigate the WTO rulings in this brief note.)
Launch aid is now required to be on commercial terms, rather than at below-market rates, so in principal what's the problem?
The problem is that the governments become a source of cash available to Airbus in capital markets that might otherwise be restricted. Boeing certainly doesn't have this resource available to it. On principal, we don't feel Airbus should either. But we also recognize that the political and social culture in Europe is far different than that of the United States, and it's pretty arrogant of the US to attempt to impose its culture elsewhere.
More to the point, the US is also incredibly hypocritical. The Chinese and the Russians--and even the Japanese--are subsidizing their new airplane programs, the Comac C919, the Irkut MS-21 and the Mitsubishi MRJ, with direct government aid. The US remains silent about these unfair practices. (Of course, Boeing outsources a lot of work to China and Russia and it has a partnership of cooperation with Mitsubishi, as well have benefitting from government largess to the Japanese Heavies in the 787 program.)
Regardless, we hope the EADS-BAE merger goes through and government influences are eliminated.
What does the merger mean for EADS and Airbus and the competition with Boeing?
EADS and BAE are largely in defense segments that are different to each other and to Boeing. The combination will diversify EADS' reliance on Airbus for revenues, cash flow, profits (and losses). EADS also is thrust into a major contractor to the US defense establishment rather than being a bit player. For BAE, which once owned 20% of Airbus, selling this stake to EADS in 2006, re-diversification into civil aerospace comes at a time when defense budgets in the US and Europe are under pressure.
For Boeing, the move doesn't mean much--today. But five or 10 years from now, when the KC-Y USAF tanker competition begins, EADS will be far better positioned to argue it is a major US employer and contributor to the US economy than it was in the KC-X bidding. And if our understanding of the management and board structure is correct, EADS will also be able to argue that government influence is minimal at best.
AirInsight || Analysis of Current Events No. 38, September 25, 2012
New LCC battle shaping up in Asia A new head-to-head battle appears to be shaping up in Asia. Indonesia’s LionAir announced plans to create a new LCC, Malindo, which will be based in Malaysia and take on AirAsia.
AirAsia previously announced plans to acquire Indonesia’s Batavia Air—a deal that’s under regulatory review and which may or may not consummate—in a bid to further penetrate the Indonesian market against LionAir.
AirAsia and LionAir are the two behemoths in the region, excluding flag carriers. AirAsia operates 100 Airbus A320s and has 272 more on order. It is poised to place an order for up to 100 more any day now. AirAsia was a launch customer for the A320neo and has been urging Airbus to proceed with a re-engining of the A330 to produce an A330neo—a move Airbus has so far resisted.
LionAir operates about 70 Boeing 737NGs and has an astounding 337 on order. It is the launch customer for the 737-9 MAX and was the first customer to sign a firm contract for the airplane. LionAir is poised to order 100 Airbus A320/A321 neos, presumably for the new venture.
Skeptics doubt LionAir will take delivery of the large number of Boeing orders, given its somewhat spotty history of financial performance and safety concerns. The EU has banned LionAir from flying there.
Although little has been revealed about how LionAir plans to finance its large order, it’s likely that a large part will come from the US ExIm Bank. President Barack Obama thought the order significant enough to participate in the announcement of the MAX order (which was supplemented by NGs). Although the MAX and follow-on NG orders won’t deliver until after Obama leaves office in 2017 (or 2013, depending on the outcome of November’s election), we believe indications of ExIm intent probably accompanied the deal.
There are some doubters about AirAsia as well. Although CEO Tony Fernandes points to a market potential of 600 million in the region, which is larger by far than either the US or Europe, the sheer volume of airplanes and financing required gives some observers pause.
Citi Research has a Sell rating on AirAsia, in part because too little is known about LionAir’s plans for Malindo. Nor does Citi like the prospective purchase of Batavia, writing, “We remain cautious on AirAsia’s outlook following the company’s official announcement to purchase Batavia Air in Indonesia From a top-down strategic perspective, the deal appears attractive, but our analysis of industry data leads us to believe that Batavia Air may pose significant near-term earnings drag on AirAsia….”
Fernandes isn’t worried. He says the large Airbus orders will be financed through continuing use of Export Credit Agencies and with bank debt. Although AirAsia isn’t a rated company, he says there are plenty of banks knocking on the door interested in financing.
He also plans to begin fleet turnover in 2020, when the first A320s hit 15 years old. These will be replaced by the more fuel-efficient A320neos.
Fernandes also has grand plans for AirAsia X, the long-haul company sharing the brand but which is separate. There are more than 20 Airbus A330s on order. Another six will be leased from mega-lessor ILFC. There are A350-900s on order. The flamboyant Fernandes has ambitious plans. It will be a real challenge to successfully meet the growth plans he has laid out.
AirInsight || Analysis of Current Events No. 39, October 2, 2012
The Pratt & Whitney Geared Turbofan is Much More than Simply a Gear Recently, AirInsight had the opportunity to meet with two senior engineering executives at Pratt & Whitney to provide additional insight into the PurePower 1000G series of geared turbofan engines. Our focus was not on the geared configuration, which has been well covered by the industry press, but rather the other technologies used in the engine, with a focus on the core. Our full Technical Analysis will be published at www.AirInsight.com, and this newsletter summarizes some of the key findings.
PW has developed an entirely new core for this engine that is state of the art, leveraging several advanced technologies:
• Scalability through modern computer-aided design
• Use of advanced materials, including composites and hybrid metals
• Advanced aerodynamics optimized to higher rotational speeds in the core
• Advanced cooling technology to reduce temperatures
• Advanced additive manufacturing technology for uniquely shaped parts
Scalability The PW1000G series is scalable to 100,000 pounds of thrust, accomplished by mating an appropriate fan size to the scalable core. Having designed the core initially from small to large, tight clearances increase as the engine size increases, and the design moves upward in size quite easily. While the fan size and mounting need to be customized for each application, PW can more rapidly develop a version of this engine for an application than in years past.
Advanced Materials The engine has a variety of new materials, including hybrid-metallic fan blades (a PW secret alloy) that are light weight and efficient, uses a composite fan case, but avoids the need for ceramics in the core because the temperature increases over existing engines is small, and cooling can be accomplished with coatings rather than exotic materials.
Advanced Aerodynamics The gear enables the core to run at higher speeds, about the same speed as the venerable JT8D spun before engine began to become slower with large fans. This enables the core to provide more throughput per rotation, increasing efficiency. But with higher rotational speeds come additional stresses, and airfoils, blade roots and other components have been optimized for the higher speed environment.
Advanced Cooling Technology The pure power design using advanced cooling technology derived proven in PW’s fifth generation military engines. While PW won’t discuss this technology in detail, their design enables more cooling with lower airflow, maintaining the efficiency of the engine, as well as proprietary coatings to maintain lower temperatures for metal parts despite higher air temperatures in the core.
Advanced Manufacturing Technology PW is building many of the parts for this engine, particularly those with unusual shapes, using lasers and powdered metal to build up a part using computer controlled processes. One of the industry leaders in additive manufacturing technology, PW is able to create unique shapes using this technology that enhance the aerodynamic performance of the engine.
Key Features of the PW1000G Examining the engine from front to back, each section introduces advancements that enhance fuel economics and performance. The following chart summarizes those benefits:
For additional details, please see our Technical Analysis post at www.airinsight.com
AirInsight || Analysis of Current Events No. 40, October 9, 2012
Appoint a Trustee at American Airlines The time has come to appoint a trustee at bankrupt American Airlines.
The incumbent management--whose long-term mistakes and poor decisions thrust American into Chapter 11--has had a year to come up with a viable reorganization plan. It hasn’t done so.
Instead it continues to war with the unions and it dilly-dallied and resisted the prospect of a merger with US Airways. Then when it decided the time had come to consider merger partners, who did it identify as prospects besides US Airways? Virgin America, Frontier Airlines, Alaska Airlines and jetBlue.
Is this really the best management could come up with? Virgin has never made money and brings nothing to the party. Frontier is remaking itself as an ultra-low cost carrier and the last thing American needs is to engage in a hub battle with United and Southwest airlines at Frontier's Denver hub. Alaska wants no part of American. Neither does jetBlue, though this carrier would actually bring strength to AA at its New York JFK hub.
But American has also screwed up every acquisition its undertaken since deregulation in 1979. This management has been part of most of those deals and there is no reason to believe it wouldn't screw up another if it was the surviving management.
How the once mighty and proud (or some might say arrogant) have fallen. With seats literally coming out of their tracks last week, continued labor disputes with pilots resulting in increasing flight cancellations, American has lost its reputation for on-time service and dependability.
Some on Wall Street are now talking of a Chapter 7 liquidation of American.
The accumulation of events is the death knell for a carrier that relies on business travelers, for whom reliability and dependability are the key criteria in selecting an airline. Delays are intolerable for road warriors, and after this latest week of delays, we are beginning to see some road warriors moving away from AA.
Of course, other carriers are happy to match frequent flyer status for those who are willing to switch loyalty and ask for gold or platinum statuses based on their AA status, and are reveling at the fall of the once haughty competitor.
There is a way out for American, but this would require American’s executive leadership, which has brought the carrier to its knees by ignoring economic reality, to surrender leadership to the America West team that acquired the larger US Airways. US Airways' management has demonstrated the ability to turn around an airline, add new equity, and develop a profitable operation.
American’s management team, by contrast, has kept their heads in the sand and avoided the inevitable need to restructure under bankruptcy since 2001, when the post 9-11 industry entered a disastrous downturn. While attempting to protect their shareholders and stakeholders in the short-term (an admirable if naïve goal), they have watched their competitors become leaner and more competitive after bankruptcy filings that slashed costs to lower levels and become stronger after consolidations, and pushing off the pain for as long as possible. The sad fact is that American’s position during that period eroded from the largest and financially most successful carrier to one sustaining massive losses and no longer having the critical mass necessary to compete with Delta, which acquired Northwest, or Continental, which acquired and took the name of United after merging. Had American prepackaged a bankruptcy six or seven years ago, it would likely have remained on top of the industry.
During that period, American’s labor relations have eroded and become contentious, with unions taking multiple concessions while senior management salaries remain at high levels. Today, those relationships have eroded to the point the organized labor has endorsed a merger with US Airways as preferable to working under the stand- alone plan being prepared by American management.
At the same time, a carrier once known for innovation, with the first computer reservation system, the first advanced purchase “super saver” fares, the first yield management system, and the first frequent flyer program hasn’t generated a new idea in more than a decade. The company allowed its fleet to age to the point that it needed a record order for aircraft to remain competitive, and has allowed service levels, once its hallmark, to erode to below the level of key competitors.
We’ve seen carriers with strategic advantages make poor decisions and not recover. Pan Am failed to develop domestic feed for its international route structure (and vastly overpaid for National Airlines in an attempt to do so), and couldn’t compete with networked carriers. From Braniff’s over-expansion post deregulation to Eastern’s contentious labor relations to TWA’s inability to develop strong domestic hubs, airlines have failed for a variety of reasons.
Today, without service that can maintain business travelers, American needs a dance partner to survive - and the only viable partner remaining is US Airways, which has come a long way from its Allegheny roots.
US Airways management will revitalize the American brand, provide critical mass, improve labor relations and rationalize costs after a takeover, and save a carrier than, right now, doesn’t deserve to survive.
Airlines take a long time to die. Eastern, Pan Am and TWA suffered for about 15 years before their demise. American has now been in trouble for nearly a decade, and the court has an option before it that makes sense, keeps the franchise alive, provides stability for its employees, and creates the competitive critical mass necessary for future success. That option is to accept US Airways proposal rather than the shortsighted stand-alone exit plan being prepared by American’s management, who are apparently asleep at the helm and letting the airline self-destruct in plain sight while purposely ignoring the only viable solution.
The hardest thing for a management team to do is to give up control and step aside. But that’s precisely what is needed, and AA’s management team needs to fall on its sword. If management won't do so voluntarily, and it appears that it won't, then the time has come for the court to appoint a trustee.
Our first choice is Robert L. Crandall, the former, hard-charging CEO who retired in 1998. Crandall sometimes fought bitterly with the unions, but they always knew where the straight-shooting Crandall stood. Crandall's ability is beyond question. Bringing him back harks to another time when American was on the brink of disaster and founder C. R. Smith came to the rescue after he had been retired for many years.
Crandall is hardly the beloved figure that Smith was. But Crandall would bring confidence to the creditors and, we believe, even to the employees who may not like him but nonetheless respect him. Unfortunately, we believe Bob Crandall is too smart to take on this quagmire, which may be beyond repair as a stand-alone entity.
It is time for the creditors to pressure the debtors in bankruptcy court and realize that under a stand-alone plan the best they can do is kick the can down the road a few feet, versus gaining equity in a viable entity with a strong chance of success under new management. Will creditors come to their senses and give Doug Parker a chance to turn things around, or watch Tom Horton take his bonus and run the airline into the ground again. There’s a clear choice, and a decision that will decide the future of thousands of AA employees. Let’s hope they make the right choice.
AirInsight || Analysis of Current Events No. 41, October 16, 2012
Pressure is on Boeing for 787 The pressure is on Boeing for its 787—and we mean this in a good way.
After years of a program in disarray, Boeing is now delivering new-production aircraft and some of those that have littered the Everett Paine Field taxiways and ramps for the last four years.
Boeing has delivered more than two dozen 787s and we don’t think it’s inconceivable that as many as 40 could be delivered by the end of the year, a figure comfortably in excess of prior predictions.
Boeing probably will have an update on its third quarter earnings call October 26.
Although Boeing continues to lose money on every 787 it delivers, and will for many, many years, the pressure is on Boeing to launch the 787-10, a stretched version that nominally will seat about 323 passengers in three classes and have a range of about 6,800nm. This will be a straight-forward stretch, intended to have about the same gross weight as the 787-9 but with far less than the 8,500nm range of the -9.
We would not be surprised if Authority to Offer is announced on the 3Q earnings call, but certainly by November 21, the US Thanksgiving holiday.
Customers have been anxious for Boeing to launch the 787-10. Before the end of the year, we would not be surprised to see upwards of 200 orders (or commitments) announced for the aircraft.
We expect some customers will convert 787-9 orders to 787-10, but scores will be brand new.
The 787-10 represents a shift in Boeing philosophy. When the 787 was launched in December 2003, Boeing pursued a strategy of 8,000nm-8,500nm range, a sexy number that fed into Boeing’s hub-bypass philosophy. The strategy wasn’t universally accepted, however. Many pointed out that few routes required this much range— perhaps 5%-10%--and that building a plane with this capability meant building “too much” airplane.
Lufthansa Airlines in particular adheres to the philosophy that it doesn’t want to buy more range than it needs. The 787-10’s proposed range illustrates this point; this aircraft can serve any route on Lufthansa’s system with anticipated seat mile costs that will be the best in the industry.
At Boeing’s pre-Farnborough Air Show media briefing, company officials acknowledged a shift in the previous long-range strategy. Now, they said, they recognized that 8,500nm isn’t always needed and the -10’s 6,800nm will be plenty to serve most of the world’s inter-Continental and regional routes.
Boeing paid a heavy price for pioneering a composite airplane. It paid a heavy price for out-sourcing major industrial work and failing to keep tabs on its industrial partners and supply chain. It will be years before the program is profitably. Although the 787-8’s early airplanes (through line #90, according to most sources) will be heavy and less desirable aircraft, subsequent -8s will be very good airplanes and the -8 monopolizes new technology in its class. With the 787-9 and the forthcoming -10, Boeing has a winning family of aircraft.
AirInsight || Analysis of Current Events No. 42, October 23, 2012
Airbus opens its A350 FAL With lots of fanfare Airbus officially opened its A350 Final Assembly Line today in Toulouse. The factory will, at full production, employ 1,500 people and build up to 10 aircraft a month as from 2018.
There are currently two aircraft in the FAL. The more complete airplane is a test vehicle that will not fly. It has its wings and gear attached. Next to it is MSN1, the first of the model set to fly. Its wing, vertical tail and tailplane are set to be attached in November. The event was primarily political with many dignitaries in attendance. The French Prime Minister officially inaugurated the site. Along with a 1,000 Airbus employees, the audience was told of the tremendous technology advances the A350 represents. The political audience was most focused on the remarks about high skill jobs being brought into Toulouse and France.
Speaking with some customers after the speeches proved challenging. The event was not one where anyone wanted to discuss concerns and fears. The exception was Steven Udvar-Hazy, CEO of Air Lease Corp and founder of International Lease Finance Corp, who shared that the airplane “looks good.” He noted the program appears more settled than the A380 at the same stage. He also noted that looking forward one had to consider the ramp up and supply chain. Some suppliers may struggle to keep pace.
Hazy didn’t say so, but our sources unconnected with this event tell us Air Lease will announce an order for the A350 before the end of the year. Two airlines we found in the crowd were reluctant to speak freely. One noted that airlines are concerned with the “whole package”, i.e. comfort, economics and safety. The A350 was not mentioned specifically but one airline noted they started with the A300 many years ago and the airplane proved heavy and challenging. This airline now operates the A380 and appears satisfied with Airbus’ progress.
The other airline was even more reluctant. As an airline with a relatively small A350 order, it did not feel its opinion was important. But the official feels the program should be on track. They have a number of Airbus planes in their fleet and clearly are satisfied with its products. But they would not be drawn on detail.
A350 program boss Didier Evrard showed a higher level of confidence than he had in previous briefings. The program risks are diminishing as Airbus gets closer to building the first flying version of the plane. The composites for MSN8 are already in production. Engine maker Rolls-Royce has completed 10 development engines and is now assembling the production engines. Airbus clearly has faced significant risks in moving from 25% composites on the A380 to over 50% on the A350. But by building two generations of fuselage demonstrators, they have worked their way through that.
In terms of risks left on the program, Evrard shared that the flight phase and ramping up the supply chain are issues he is focused on. The wing drilling at Broughton that earlier been an issue has been resolved and only impacted the first two wing sets. In terms of supply chain stability, program visibility is such that vendors know where they need to be and none has requested any financial assistance from Airbus at this stage. The plan is that in 2013 the FAL will be operating at one airplane per month by the latter part of the year. In 2014 the rate will rise to two per month and by 2014 the plan is to be at four per month. Ensuring this ramp up is sustainable. Airbus currently has some 15,000 people in the supply chain focused on the A350 program. When the ramp up is in full swing, this is expected to grow to 35,000 people worldwide. The complexity of such a large team is not lost on Airbus’ management. But it is accurate to say that Airbus has clearly learned the lessons from the A380 program. It has been more deliberate on this program, reducing risks by slowing down the program in the early phases.
AirInsight || Analysis of Current Events No. 43, October 30, 2012
Longest range is sexy, but R&D and ROI doubtful The news that Singapore Airlines is scuppering the world’s longest airline flights— between Singapore and New York and Los Angeles, operated by Airbus A350-500s in all business class—raises interesting issues that have only been hinted at from time- to-time when it comes to ranges of the Boeing 777LR, the A350 and the 787.
The Wall Street Journal wrote19, “The all-business-class flights began in 2004 and will halt by the end of next year. The Newark-Singapore flight covered 9,506 miles and lasted about 18.5 hours, while the Los Angeles-Singapore flight covered 8,746 miles and lasted about 16 hours. A round-trip flight on the Newark route was expected to cost about 12,570 Singapore dollars (US$10,260) in mid-November; while a similar trip to Los Angeles was expected to cost about S$9,000 (US$7,300).”
Both flights are more than the 8,500nm advertised range of the Airbus A380, A350 and Boeing 787s. The 777LR has an advertised range of 9,350nm, but Boeing on its website says the airplane could do Singapore-New York.
As Boeing considers the upgraded 777X, range is an issue that as yet is unsettled. A few key customers, notably Tim Clark of Emirates Airlines, wants as much range as Boeing can provide so he cry operate Dubai-Los Angeles non-stop with a full cargo and passenger payload.
19 http://online.wsj.com/article/SB10001424052970203937004578076560046135292.html But Boeing is lukewarm because this capability falls within the last 5% of normal airline operations. The cost of developing an airplane with this last 5% capability pushes the physics, the R&D and the return on investment.
And, it means other customers have a lot more airplane to fly than they need.
Both Airbus and Boeing have been very open in questioning the wisdom of building an airplane for this last 5%.
When the 787 was developed, with its advertised 8,500nm range, Boeing’s philosophy was then said to be to build a family of twin-aisle aircraft with as long a range as made sense. Some observers questioned this, saying that even at 8,500nm this was more airplane than most airline operations required.
Airbus, playing catch-up, developed the A350 with a similar range. But it continued to promote the A330-300 and its 5,500nm range and the A330-200 with its roughly 6,000nm range as more than enough for most routes. Airbus has since improved the - 300 to a high gross weight version with a range of just under 6,000nm and the -200 to a range of nearly 7,200nm.
Since then, Boeing has had a change of heart. The 787-10 will have a range of only about 6,700nm. Now Boeing openly says its philosophy has changed, concluding that for most operations even this range is plenty.
One can suspect that Boeing’s change of heart evolved from the practical consideration that to develop a 787-10 with an 8,000nm range or more meant developing a new wing at a cost of a couple of billion dollars in a program that was already astronomically over budget. But practicalities aside, the new conclusion isn’t wrong. A 6,700nm range gets you from the US West Coast comfortably to Continental Europe or well within East Asia; or from Australia to Asia or Europe to Africa or Asia.
How many routes truly require 8,500nm range, let alone 9,000nm? Not that many.
Being able to boast 8,500nm or 9,000nm ranges may be sexy bragging rights. But the R&D and ROI is another matter.
As Boeing settles in on 777X range, Tim Clark may find he’s just plain out of luck. We’d love to be a fly on the wall of Boeing’s October 31 777X customer meeting. Alas, our invitation seems to have been lost in cyberspace.
AirInsight || Analysis of Current Events No. 44, November 6, 2012
Upside Down-Under? Recent months have brought major changes in strategies, alliances, and joint ventures to the Australian airline industry that will alter the competitive landscape. Industry consolidation in Australia has begun.
Perhaps the most significant event this year is Qantas Airways' strategic alliance with Emirates Airlines, refocusing its connecting operations for Europe through Dubai rather than Singapore. Qantas has been shrinking, offering service to only two European cities, and through its code-shares will be able to offer seamless service to 32 European destinations via Emirates, plus the other continents. Of course, coming in the other direction, Emirates will be able to sell to any of the 80 cities served by Qantas, its low cost subsidiary JetStar and its regional subsidiary Qantas Link in Australia. Will it be a win-win situation? For Qantas, it is vital to their future success.
In 2012, Qantas reported its first annual loss since privatization in 1995 for FY 2012 at June 30 of $AU 244m. But of that result, Qantas cleared a $AU 600m profit domestically and losses of 844m internationally. Clearly, Qantas' international strategy wasn’t working. The industry experience with transatlantic code-sharing alliances has been quite strong, with both parties gaining traffic from the partner’s hub-and-spoke operations. We believe Qantas similar arrangements will be successful with Emirates, but the proof is in the details, which are still yet to materialize. But Qantas is now focusing its flying and strategy to its more profitable domestic rather than international operations, culling unprofitable long-haul routes.
Interestingly, the Emirates alliance will eliminate code-sharing with two oneworld partners British Airways and Cathay Pacific, and also a code-sharing pact with Air France. This is a major defection from the oneworld partnership, and while Qantas will maintain code-sharing with American Airlines in the US, the bonds within oneworld don’t appear to be very strong.
But Qantas' new focus on domestic routes will run straight into a strengthened competitor, run by John Borghetti, a competitor to Alan Joyce for the top job at Qantas just four years ago, and who knows the competition quite well. Just when Qantas thought it was safe to go back into the domestic waters, a shark is appearing.
Virgin Australia (formerly Virgin Blue), serves 35 domestic destinations and has completed several transactions this week to strengthen its position domestically. Virgin Australia is already partly owned by Air New Zealand (19%) and Abu-Dhabi’s Etihad (10%). Both now have code-sharing and interline agreements. Enter Singapore Airlines, which has just bought 10% of Virgin Australia, enabling Virgin Australia to in-turn acquire SkyWest Airlines based in Perth, which operates 28 regional aircraft in Western Australia. Virgin Australia will also acquire a 60% stake in Tiger Airways Australia, a subsidiary of Singapore-based Tiger Airways in which Singapore Airlines has a 32.84% stake. So just as Qantas focuses domestically, one competitor, Tiger, is swallowed by Virgin Australia, which is also aiming to gain strength. The results are already showing positive results for the traveler, with business fares 40% lower than the comparable period last year. However, that also means that Qantas cash cow may be in jeopardy.
The Australian market is undergoing a major consolidation, and it appears that Qantas-Jetstar-Qantas Link and Virgin-SkyWest-Tiger are emerging as the two major competitors, with the latter being profitable and the former hemorrhaging losses. The agreement between Virgin Australia and Tiger Airways indicates that an additional AU$62.5m will be invested, thus enabling the carrier to add as many as 24 additional aircraft to the 80 it already operates.
Qantas offers JetStar as its LCC, and now Virgin Australia can counter with Tiger Airways as its own LCC. Virgin Australia now serves the US, New Zealand, South Pacific and Abu Dhabi, where it’s connecting code share enables it to serve Europe. It is rapidly, via consolidation and alliances, becoming a viable competitor to Qantas.
Singapore Airlines will likely also code share to gain domestic feed from Virgin Australia, and funnel that traffic through its Singapore hub to international destinations rather than via Dubai. Internationally, this will be an interesting battle, as Singapore and Emirates are among the industry leaders in service, fleet, and airport amenities for passengers. Both hubs offer easy connections. It may come down to a matter of passenger preference in the end.
The Bottom Line: Qantas decided to play safe and focus on the home market, but outsiders are intervening with strong competitive investment that is growing a viable competitor. Australia hasn’t seen this type of duopoly battle since the Qantas vs. Ansett days. The question now is whether two competitive CEOs will compete destructively, or learn from the US industry how capacity controls can forge a more profitable environment. While the jury is out, it appears the fight is just beginning, and the Australian market may become the travel bargain of 2013.
AirInsight || Analysis of Current Events No. 45, November 13, 2012
Big Twin Competition Gaining Momentum The large twin-engine, twin-aisle competition for the future is gaining momentum following the opening of the Airbus A350 Final Assembly Line in Toulouse last month and the customer meet October 31-November 1 hosted by Boeing to discuss the 777X concepts.
What is clear from talking with customers who attended the Boeing meeting is that the 777X is far from clear. General concepts have emerged as the favorites: a composite wing and wing box, new engines, a conventional metal fuselage and system upgrades.
The wing span remains undecided, with one concept including folding wingtips to keep the airplane within the 777’s current airport “box.” Whether Boeing elects to go with a sole source (GE) engine or a dual source (GE plus either Rolls-Royce or Pratt & Whitney) is also undecided.
Boeing is showing concepts for the 777-8X (a 350 passenger model that would replace the 777-300ER and compete directly with the A350-1000), the 777-8LX (replacing the 777LR) and 777-9X, a new-sized airplane with 407 seats that technically drops it into the Very Large Aircraft (400+ seats). The 777-200ER would be replaced by the forthcoming 787-10.
Customer reaction to the 8X and 8LX has been tepid at best. The 9X is drawing a lot of favorable attention, say people who attended the meeting.
Boeing CEO Jim McNerney on the 3Q12 earnings call said 777X EIS could be the end of this decade or early next decade. Soft ATO for the 787-10 apparently has been given, with Boeing talking to airlines about the plane. Formal ATO slipped from October to this month, according to customers we’ve talked to. Firm orders are likely to follow shortly after ATO. We believe Boeing could have around 100 orders by year-end, down from our original prediction of about 200 given the slip in ATO.
The A350-900 and A350-1000 compete with the current 777-200ER and -300ER lines. Airbus doesn’t have a version competing with the niche -200LR. The 200ER is already a “dead” airplane and the -300ER for now has the market segment to itself. The A350 is sold out to 2020 and Boeing has 335 unfilled 777 orders through September, a 40 month backlog at the current production rate of 8.3 per month, to mid-2016. Boeing has plenty of delivery slots during a period when Airbus does not.
The absence of delivery slots is why A350 sales have stalled. Boeing has used this to cast doubts on the -800 and the -1000, calling the -900 an “orphan.” This is typical Boeing hyperbole, but Airbus hasn’t done an effective job of countering the Boeing public relations campaign. This campaign also runs counter to some of Boeing’s own internal analysis, which shows the A350-1000 to be much more efficient than the - 300ER. (Otherwise, why tinker with a winning product by developing the 777X?)
The A350-800 currently has more firm orders than the -1000 but it’s widely agreed that the -800 is likely to be the model in least demand in the long-term. But this doesn’t mean there isn’t a market for the aircraft. The question is whether Airbus’ R&D for it will be sufficiently inexpensive to provide a sufficient ROI.
Boeing is waiting to see what the final design for the -1000 is before proceeding with the 777X, say customers and others we’ve talked to familiar with Boeing’s thinking. Although Boeing has done a good job casting doubt over the -1000, customers and potential customers tell us this is over-stating the situation. True, questions remain over the airplane: Airbus’ focus is on getting the -900 assembled and first flight by mid-year next year. Customers expect another delay in EIS beyond that announced this year by Airbus, slipping into 2015. As a result of the redirected engineering resources, development and finalized design of the -1000 has slowed. Issues, according to our discussions with customers, primarily revolve around weight, engine thrust and field performance. Rolls-Royce has room for more thrust (but at what cost to fuel economy?), and weight at this stage of development of any airplane is always an issue. Weight-and-thrust affect field performance.
Tim Clark, president of Emirates Airlines, has waged a public campaign urging Airbus to put more range into the airplane. But his needs are unique and his requirement falls within the last 5% of airline operations, and Airbus (and Boeing) are loath to design an airplane for only 5% of the missions. Qatar Airways’ CEO Akbar Al-Baker jumped on the Emirates bandwagon, but the truth is the -1000 fulfills every mission required by this airline.
Although Boeing has engaged in a very effective public relations campaign against the A350-1000 and -800, customers (and potential customers) we talk to paint a very different picture from the critics. Concerns exist, yes, and these are typical of concerns at this stage of airplane programs. The airplane is running late and customers expect more delays.
Our conversations with suppliers and customers don’t reveal anything to match the Boeing hyperbole.
AirInsight || Analysis of Current Events No. 46, November 20, 2012
The C919 - Quietly Gaining Traction and Building Backlog While many in the industry view the COMAC 919 as China’s aerospace learning vehicle that will enable it to enter the modern airliner industry, many others are less pessimistic regarding its future. With a veritable plethora of western suppliers on the C919 program, from the CFM LEAP engines to Honeywell, Parker, Liebherr, Eaton, Monogram, Labinal and other well-known names that also serve Boeing, Airbus, Bombardier and Embraer, the C919 has a top tier supply chain.
Add Bombardier’s partnership in a number of areas, including joint worldwide customer support, and the odds of success for the C919 in the near term begins to look better than it did just a couple of years ago.
Of course, the proof will be a certified airplane with strong economics, and how the Chinese minimize “weight creep” that seems to accompany every new aircraft program. If the C919 can come in near to spec, it should have better economics than the 737NG and A320ceo, and be just shy of performance numbers for 737 Max and A320neo, but with much lower capital costs.
Back in the 1970s, there was similar skepticism whether a French-German-English consortium named Airbus would become a threat to Boeing and Douglas. Some entrenched folks in the industry guessed wrong. We see some of the same hubris being applied to China today, doubting whether they will succeed in the short-term, while conceding that 20 years from now China will be a competitor. Our advice is to be careful, as China’s ambition is to be world class and one of the ABC competitors (Airbus-Boeing-COMAC). China's aerospace industry success is firmly entrenched as a national goal. They have the funding, they have willing and able Western partners, and now need to execute on their business plan. While they may stumble, as Boeing and Airbus have in delivering programs on time, they have the resources to succeed.
At the recent Zhuhai Air Show, COMAC announced additional orders for C919, including its first potential order from the US by the reincarnation of Eastern Airlines, which is seeking 50 aircraft. In addition to the new Eastern, GECAS ordered 10 more, while Hebei Airlines and Joy Air each ordered 20.
The order book to date includes 380 aircraft from 15 customers, with GECAS as the major international (non-Chinese) customer. Discussions are also underway with European LCC Ryanair and British Airways regarding the C919 in addition to the tentative deal with Eastern. Turning Western interest into orders would be a significant coup for COMAC, and an element of national prestige for China. If you thought Boeing and Airbus offered aggressive launch customer discounts and financing, think again.
Is there room for the C919? China wants the C919 to capture half the home market. Boeing and Airbus are essentially sold out for narrow body aircraft deliveries through 2020. Orders for neo and MAX continue at a record pace, and delivery slots are unavailable without production increases, which are difficult to accomplish because of the requirements placed on an already stretched supply chain. The lead time for increasing production rates, with so many components outsourced, has stretched in recent years from a few months to between 18-24 months today at many suppliers.
Excess capacity and excess inventories have long been removed from the supply chain, and the constraints on growth for Airbus and Boeing may leave COMAC with the only available delivery slots for new aircraft above 150 seats 5-6 years from now. Could Airbus and Boeing being too successful create a strategic opportunity for China?
Airbus and Boeing can attack Bombardier’s CSeries aggressively without much threat of retaliation from Canada, and temporarily hold down sales. But could they utilize the same aggressive pricing against the Chinese? The answer is no, for several reasons. First, the Chinese airlines will be mandated to purchase the local product. Second, the C919 will simply cost less, and COMAC will be willing to undercut Boeing and Airbus, as necessary, to succeed. Third, with a strategic goal to penetrate Western airlines, COMAC will make attractive offers in order to buy market share.
Can COMAC pull it off? Yes, we believe they will produce a good (perhaps not great) airplane in the C919. Will they be on time? Likely not, but then again neither are Airbus, Boeing, or Bombardier these days. Will they be able to gain market share? You bet, especially in China, but they will secure several key non-Chinese orders. Will COMAC become the ABC competitor? With 380 orders, they are well on their way.
Bottom Line: Those skeptical on C919 fail to recognize the subsystem integration roles being provided by Western suppliers with experience, and their experience on other programs. Yes, China will be learning with this airplane. But they will pull it off, and before the end of this decade will become a force to be reckoned with.
AirInsight || Analysis of Current Events No. 47, December 4, 2012
The Iron Dome On a visit last week to Israel we were given a relatively close up visit with an Iron Dome battery. While we focus on commercial aerospace, the Israel visit provides us with something unusual to share with readers.
The lights on the launcher tell the story - flashing red means the device is live and online, ready to fire instantly. All around southern Israel we saw large trucks driving with Rafael canisters such as on this launcher - carrying empties away and bringing fresh ones into service.
The recent events in Israel have been a cause of much discussion. Hamas declared a victory because they are still in business. A part of the reason the IDF did not undertake a ground attack against Hamas, which would have escalated the situation, is the Iron Dome missile defense system. While the fact that the IDF did not engage in a ground attack is being viewed as a "win" for Hamas, perhaps the greater win was the Iron Dome, decimating the impact of rocket attacks and keeping the situation from escalating into what could have escalated to World War III. But the Iron Dome is still in pre-beta mode. The Iron Dome, while deployed, is still being tested. During the exchange of fire two weeks ago, the Iron Dome batteries fired two interceptors at each target. After this trial by fire, we were told this will not be necessary in future - system accuracy is sufficient that only one interceptor will be needed. The only missiles that escaped the Iron Dome were those fired in salvos of 16. In future, with only one interceptor needed per target, a launcher such as seen here could handle 20 targets on its own. This is essentially a doubling of a battery's capabilities.
Another interesting item we learned about is that the IDF has developed a method which reduced identification of a missile launch site to attacking the site to "seconds". They won't explain how, but almost certainly this has to do with persistent battle space coverage by UAVs.
There are some thoughts that Hezbollah in Lebanon could be much more difficult for the IDF to handle. They have far more missiles for example. But Hezbollah might not be as tough an opponent. The IDF's Iron Dome software is going to be continually updated and the IDF is now likely to be able to seriously blunt any Hezbollah missile threat. It has real world experience now in missile defense and threat retaliation - something Hezbollah may not expect and cannot match. Missile attacks and defense require practice and Israel has more experience than any of its regional threats.
The Iron Dome had a hit rate of between 82% and 90%. That is a tremendous success for a system in test mode. We understand that the system designers benefited from female Russian immigrants trained in classical mathematics who wrote the geometry algorithms so the system could decide on a fire/no fire based on the expected landing site of an incoming missile. (In another site visited, we saw female IDF soldiers monitoring remote camera observation posts because they have better concentration levels and eye for detail than men.)
One Israeli analyst shared this view: "The spine and backbone of Iran's military method and concept (and obviously its proxies) is the use of rockets and missiles first and for most part as a weapon designed and designated to terrorize. Lacking the ability to win conventional confrontation with Israeli army, the rockets are their answer, the use of rockets is supposed to compensate for their military inferiority and to play role as weapon of deterrence as well as weapon that - in their mind - will generate political achievements."
The missile threat from Iran (and its surrogates) is growing weaker: Last week Israel made an additional major breakthrough with the successful test of its new Magic Wand system which is designed to handle mid-range rockets. Israel is at the forefront of missile and rocket protection. With its threats' best weapons largely neutralized, the Israeli Air Force could rapidly go into full ground attack mode when needed. No regional air force is a threat. Long range attacks on Israel by missiles are likely to be far less damaging than they would have been even two years ago.
In fact, the EU now is probably under greater threat from Iran's missiles than Israel. Unless the US places a large number of its Patriot systems all over the south eastern EU and Turkey.
There reports that South Korea has expressed interest in Iron Dome because its capital is under threat from missile and rocket attack from North Korea.
AirInsight || Analysis of Current Events No. 48, December 11, 2012
Comparing Very Large Aircraft: The A380 and 747-8 In the wake of Airbus “Pinocchio” advertisement critical of economic claims by Boeing, AirInsight has decided to take an independent look at the economics of these to aircraft and compare the aircraft.
While both aircraft are the largest in their respective fleets, we don’t see them as direct competitors, as they are in much different seat classes. This is like comparing an A319 with a 737-900ER, or an 737-700 with the A321. While both are in the same class - narrow-body trunk liners - they would not normally compete against each other in an airline competition.
In estimating operating economics, each manufacturer will utilize a different set of economic assumptions, normally those that optimize the performance of their aircraft against the competitor. And because cost per available seat mile (CASM) is such an important metric for airline fleet planners, the manufacturers often play with seating configurations as well to provide an advantage for their aircraft. Comparing A380 and 747-8 have substantial differences between the two manufacturers in their methodologies, which lead to markedly different results.
One of the key elements of our analysis was an independent look at seating configuration. Each manufacturer provides a seat comparison using three-class service. But unless you read beneath the headlines and examine the seat-pitch assumptions behind the claims, you may miss a key lesson in how the manufacturers “stretch” the truth in their economic analyses. In this case, Boeing claims the 747-8 to accommodate 467 in its economic analyses versus 565 for the A380, and Airbus claims the comparison should be 405 to 525 using different seat pitch assumptions. The only current operator of both, Lufthansa, configures its aircraft with large premium cabins, and offers 362 seats in the 747-8 and 526 in the A380, and perhaps best illustrates the significant difference in seating capacity between each type for an operator offering a consistent service level.
The underlying assumptions about seat pitch are markedly different between the manufacturers:
The difference is quite remarkable, particularly for Business Class seating in an era in which lay flat seats are becoming the international standard.
Boeing’s calculation of 467 seats in three classes for the 747-8i, shown in the diagram below, assumes 26 First Class seats with 61 inch pitch, 89 Business Class seats at 39 inch pitch, and 352 Economy seats at 32 inch pitch. Using the same seat pitch standards, except for 48 inches in Business Class, Boeing calculates 565 seats for A380 using the same assumptions, but a more generous 48 inches for Business Class.
Airbus, by contrast, calculates 525 seats for the A380, using 10 First Class seats at 81 inch pitch, 84 Business Class at 61 inch pitch, and 431 Economy at 32 inch pitch. Applying those to the 747-8, the result would be 405 seats for the 747-8 with seven First Class at 82 inches, 74 Business at 61 inches, and 324 Economy at 32 inches.
Clearly, the Airbus assumptions are more consistent with modern seat configurations at major airlines, and a comparison of 405 to 525 is more realistic.
A differential of 62 seats does have a significant impact on seat-mile economics, and illustrates one way in which the OEM’s tend to exaggerate their economic claims. To gain a true picture, you need to look closely at the assumptions to avoid an “apples to oranges” comparison.
AirInsight || Analysis of Current Events No. 49, December 18, 2012
Sequestration's Impact on Commercial Aviation Sequestration is a process through which the US Treasury ensures budget cuts, by not funding government agencies to their full budgeted amounts. This process was enacted as a last resort, if no agreement on a budget can be reached, as a mechanism to help balance the budget. Because some agencies and programs, like Social Security and some elements of the Department of Defense, are exempt, budget cuts for other departments become more substantial, on the order of 8.6%.
With the “Fiscal Cliff” nearing and little progress on a budget and an impasse that looks more and more like a game of political chicken, there is now a real possibility that many government agencies, including DoD, will not escape automatic budget cuts. When those $109 billion in cuts arrive, will they have an impact on commercial aviation? And if so, how large and how painful might they be?
The Theory The concerns are that cuts to the budget, both DOD and non-DOD, could impact the commercial side of aviation. One scenario laid out by Representative Norm Dicks (D- WA) was that air traffic control services could be slashed by $800 million and that the FAA would lose as many as 2,200 air traffic controllers. Those cuts would be inadequate to maintain services, and with fewer flights, the impact could cascade to Boeing, through lower demand for aircraft, or demand for fewer, but larger aircraft due to infrastructure constraints.
Another possibility is that the Next Generation Air Traffic Control System, a $1bn project, might be slashed, directly impacting those contractors putting together the new system. We believe that the project has been mismanaged and is already technologically obsolete before implementation, and that a commercialized entity like NavCanada would be much more cost-effective. But it's the best the government has to offer right now and Sequestration will impact this.
Nonetheless, cutting the project back significantly would impact those companies working on the project directly, as well as to slow the process. This would impact airlines, as the more productive innovations in ATC would not alleviate congestion as quickly as was expected.
The Reality Will or should this happen? The answer is no. While the Dec. 31 may pass and technically we fall off the cliff at midnight, we believe at worst there will be a soft landing. We expect Congress and the President will reach a deal in early January, retroactive to Jan. 1.
Politicians love to use fear as a major weapon to sway public opinion, and Sequestration is not going to result in the FAA firing air traffic controllers en masse nor stopping new development programs. What it will require, however, is that the government sector starting to watch expenditures in the same way private sector companies do, and pay closer attention to budgets.
Nonetheless, the lobbying groups have already begun their drumbeating to ensure that their areas will not be the ones subject to cuts, and the games of whose ox is gored will soon begin. A part of the problem is that Federal budgets are put together with inflation increases built-in, as well as assumptions for growth, based on the budget for the prior year. This mechanism, compounding growth year after year results in artificially inflated numbers, which the aerospace and defense industry has feasted on for many years. Let’s say inflation is 3%, and population growth 2%. A budget of $100 last year would be adjusted for inflation, and population growth, and $105 becomes the new baseline.
If someone suggests that we spend $103, rather than $105, they scream that their budget is being cut, even though the dollars are higher than the prior year. With virtually no incentive for increasing productivity, government spending has gone out of control, and an 8.6% cut would simply put us back a couple of years, forcing entities to live within their means. It is doable, but may mean that some government bureaucrats may face the hard choice of not being able to grant salary increases, or forcing more productivity from their employees. The doom and gloom scenarios being discussed are just that - doom and gloom.
It is time that everybody sacrificed, including the government. There is plenty of room for improvement and taxpayers will rightly expect the job to continue to be done. There remains a productivity difference between government employees and the private sector. It is now time to force that gap closed, and Sequestration is a process that will do just that.
AirInsight || Analysis of Current Events No. 50, January 8, 2013
Dim outlook for Boeing-SPEEA talks-but how far apart are they, really? Contract negotiations resume tomorrow (Jan. 9) between Boeing and its engineers’ union, SPEEA. The outlook is dim and the prospects of a strike are high. The gap between the SPEEA “wants” and the Boeing offer is too wide and talks are expected to break down almost immediately. Furthermore, if a strike occurs, a long run appears in the making. At least that’s the view of SPEEA.
Boeing, on the other hand, seems a bit bewildered at this characterization. SPEEA at one point offered to extend the current contract with 5% annual wage hikes; Boeing is offering 4.5%, a difference of one-half of one percent. (SPEEA’s counter offer, however, contains 6% wage hikes.) Boeing argues that for a SPEEA member earning an average of $100,000 a year, its wage offer provides $17,000 over four years in guaranteed wage hikes plus the prospect of profit sharing equal to 4%-7% depending on the annual results in any given year.
SPEEA counters that the demands by Boeing for increased employee contributions on medical co-pay and changes to the retirement program for new hires means compensation is going backward, not forward. Boeing disputes this. Citing its analysis for a family of four, Boeing figures additional medical costs will equal $5,000 against the guaranteed wage increases of $17,000 but not allowing for the profit sharing. Boeing also wants to switch future employees from a defined benefit pension plan to a defined contribution plan using a 401(k). The company match would be 75% of the 6%-8% employee contribution. SPEEA is currently on a defined pension plan. Non- union Boeing employees are generally on the 401(k).
Boeing’s strategy in making its offer last year is to narrow the gap between its costs and those of its peers and the aerospace supply chain. Wage costs in the Seattle area, where the bulk of SPEEA engineers and tech people are located, are higher than the national average. Boeing’s thinking is that it is willing to live with this 7% Puget Sound premium but not go higher, and that medical and pension costs need to be reduced. Boeing believes SPEEA members would not gain enough to make a strike worthwhile because the gap between the current contract and Boeing’s wage offer is only a half- percent apart. A month-long strike would cost the average SPEEA member $10,000, according to Boeing’s analysis.
We’re not optimistic at this stage that a strike won’t happen. We sense the mood at SPEEA is similar to the mood at IAM 751 in 2008, when 751 struck for 58 days and cost Boeing $1.5bn in profits. Members rejected the first contract offer by a 96% vote, and we certainly don’t sense that there’s been a meaningful shift in sentiment.
SPEEA’s last significant strike, in 2000 for 42 days, led to delivery delays of 50 aircraft at a time when production rates were sharply lower than today.
Boeing has notified suppliers to continue shipping product in the event of a strike, vowing to maintain deliveries. SPEEA believes that new deliveries will immediately grind to a halt because engineers must sign off on any work other than, for example, painting the airplane.
Talks resume tomorrow at 1pm, picking up where they left off when the federal mediators ended the talks last month. Boeing doesn’t plan to drop a new contract offer tomorrow.
AirInsight || Analysis of Current Events No. 51, January 15, 2013
Embraer Launches E-Jet RE: Assessing the Impact Embraer last week finally firmed up its plans, announced in 2011, to re-engine the E- Jet family. The announcement of the selection of the Pratt & Whitey Geared Turbofan engine removes much of the ambiguity about the program. That ambiguity has likely suppressed sales of the current E-Jet, which has not generated orders recently, and will now intensify the competition with arch rival Bombardier, as well as with Sukhoi and Mitsubishi, who also compete in the 70-100 seat segment.
It appears the re-engining will be only for the E-175/190/195 models and the future of the smallest member of the family, the E-170, is unclear. A potential stretch of the airplane, to accommodate additional passengers and compete more directly with Bombardier’s CSeries, remains uncertain, but preliminary information regarding a stretched E-198 model has emerged.
Entry into service for the second generation E-Jets is planned for 2018. The engine selection decision is an important milestone for this new program that will be formally launched later this year.
What does this mean for Embraer? The E-Jet program from Embraer, after only seven years in service, had become economically obsolete when compared with the new technology CSeries from Bombardier and other new technology competitors. To maintain competitiveness, it became clear that Embraer needed to re-engine the aircraft with a new technology engine and enhance other elements of the airframe to improve economic performance. This program, with a new wing design as well as new engines, appears to be more complex than the A320neo program, and will revitalize the competitiveness of the E-Jet against its all-new competitors, much as Boeing has revitalized the competitiveness of the 737 with new derivatives on multiple occasions.
Embraer will utilize the PW1700G and PW1900G variants from Pratt & Whitney, with thrust ranges from 15,000 to 22,000 pounds. The PW1700G has the same 56in- diameter fan of the MRJ engine and the PW1900G has the 73in-diameter of the CSeries engine. The first engine is likely to be derived from the engine powering the MRJ and the second engine is likely to be derived from the one powering the CSeries. In combination with new aerodynamically advanced wings, state-of-the-art full fly-by- wire flight controls and other systems evolutions, they will result in double digit improvements in fuel burn, maintenance costs, emissions and external noise.
The new E-Jets will likely use lighter-weight carbon fiber composite and aluminum alloys in construction. Final decisions on the configuration of the aircraft have not yet been made. This early rendition of the new E-Jet is noteworthy in that the new wing does not have winglets as the current E-Jets have. Rather it has a swept-back wing tip, similar to those on the Boeing 777 and 787.
The E-Jets have been popular, with more than 900 currently in service with 63 customers from 43 countries. The impact of new competition from the MRJ, SSJ and CS100, resulted in airlines holding back on orders for the E-Jets, waiting for new technology from competitors and Embraer itself. After announcing late in 2011 the company would re-engine the airplane, the program was bound to suffer some uncertainty in the marketplace in the near-term. Embraer rightly recognized the competitive threats, and is moving to negate them – leveraging a proven product and large installed base.
With 63 customers, there is a lot Embraer can do in the interim to keep them happy, including offering interim lift with existing models and trading these for re-engined models later, reselling the earlier models to secondary customers.
There are big potential orders to come from American Airlines/US Airways and United Airlines as they have, and continue to, refine scope clauses and as the industry continues to consolidate. Embraer will now provide these airlines with a competitive option – although before 2018 competitors will benefit from being able to deliver new technology aircraft sooner. The revised E-Jet will change the competitive dynamics and introduces a new alternative for the aircraft selection process. E-Jet vs. MRJ, SSJ and CSeries The revised E-Jets are going to be more competitive with the Mitsubishi MRJ, Sukhoi Superjet and Bombardier CSeries than its current models. The direct competition will be between CS100, SSJ100, MRJ90 and E-198, which the re-engined model is currently being referred to in the industry. The following table contains specifications for the existing models, as well as our estimated specifications for the re-engined model from Embraer. As the table illustrates, the E198 will become more capable and more competitive with the CSeries, SSJ100 and MRJ90 than the existing E-195. We expect an improvement in fuel burn of approximately 12-14% over existing models, depending on Embraer’s use of advanced materials to reduce aircraft weight in the final design, and the aerodynamic effectiveness of the new wing. While it is premature to estimate the economic impacts of the program, the P&W GTF engine should provide a 12% fuel burn benefit over the existing GE CF34-10 engines.
In the game of leapfrog, Embraer, with the E-Jet, was able to leapfrog Bombardier’s CRJ-700/900 series in the marketplace, and gained market success. The CSeries will leapfrog the E-Jet, forcing Embraer to re-engine the aircraft to maintain competitiveness. But this will not be a leapfrog situation, and the re-engined E-Jet is unlikely to gain economic advantage over the all-new high-technology CSeries.
What this means for P&W This news means P&W has been selected for five new airplane programs; Airbus, Bombardier, Embraer, Mitsubishi and Irkut. This is a remarkable endorsement for the new GTF engine. Bear in mind the OEMs can select whatever engine they believe will provide airlines with the most reliable low cost performance. The programs that will use the GTF all require a highly reliable engine – one that will do perhaps eight flights per day. The fact that so many new airplane programs have selected the GTF speaks to the confidence the OEMs have in the new technology engine.
If there was any doubt at how disruptive the GTF has been, there can’t be any longer. This new engine allowed Bombardier to disrupt matters for Airbus and Boeing at the bottom end of their single aisle airplanes. CFM was forced to react also by developing its LEAP. IRKUT developed its MS-21 using the GTF. Similarly, new entrant Mitsubishi selected the GTF for its MRJ. Airbus responded with a GTF engine option (also offering the LEAP) for the A320 family. Then Boeing had to respond with a LEAP powered 737. Now we have Embraer selecting the GTF. This entire wave of new or updated offerings was either enabled or influenced by P&W, which is definitely back in the narrow-body business and gaining market share.
The Bottom Line: Embraer has made a strong choice in the GTF for its new airplane, and the new technology engines will enable the successful E-Jet program to remain competitive in the 100-seat marketplace.
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