VIENNA UNIVERSITY OF ECONOMICS AND BUSINESS MASTER THESIS
Title of the Master Thesis: Market Perspective Assessment for MC-21 Single Aisle Aircraft
Author: Alexander Korshunov Matriculation number: H1353431 Program: Professional MBA Marketing and Sales 2013-2015 Supervisor: Prof. Dr. Sven Reinecke
I, Alexander Korshunov, hereby declare, 1. that I composed the on hand Master Thesis “Market Perspective Assessment for MC-21 Single Aisle Aircraft ”, page numbers, hardback, self dependent, without utilizing other than the stated sources and additives and that I did not make use of other illicit help, 2. that I have not submitted the Master Thesis nationally or internationally in any other form as examination paper, 3. that this Master Thesis corresponds to the assessed by the supervisor.
24.06.2015 Date Signature
Abstract
Professional MBA Marketing and Sales 2013-2015
Author of the Master Thesis: Alexander Korshunov Title of the Master Thesis: Market Perspective Assessment for MC-21 Single Aisle Aircraft
Supervisor: Prof. Dr. Sven Reinecke Number of Pages: 57 University: Vienna University of Economics and Business (WU Wien) Year: 2015 Abstract:
This study aims at examining the market perspective of MC-21, an aircraft produced by Irkut Corporation. In the course of the research the author made use of the indicative approach and applied the mixed methods research that encompassed qualitative and quantitative approaches. The qualitative research was used for the identification of key decision criteria on acquiring commercial jets, whereas quantitative research was applied to identify future regional demand for single aisle aircraft and to forecast production rates of the main players, namely Airbus and Boeing, using historical data and applying least squares regression technique. Moreover, other direct competitors of MC-21 were identified during the research phase and used in order to conduct SWOT analysis of the product in accordance with the derived criteria. The results have shown that currently Irkut Corporation exercises difficulties in communicating the product and the brand name to international customers and has a strong orientation on domestic Russian market, rather than international markets. The author of the research concluded that in order to ensure a market share MC-21, Irkut Corporation together with the United Aircraft Corporation, which is a parent company, must create a competitive customized product with reliable after- sales support, taking into account the political climate and diversify the network of suppliers, as well as establish joint ventures with international companies, in a capacity of risk share partners.
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Table of Contents
Abstract ...... i Table of Contents ...... ii List of Abbreviations ...... v List of Tables and Figures...... vii List of Appendices ...... viii 1. Introduction ...... 1 1.1 Background Information ...... 1 1.2 Aims and Objectives ...... 2 1.3 Approach and Methodology ...... 3 1.3.1 Grounded Theory Method...... 4 1.3.2 Interview with industry experts ...... 5 1.3.3 SWOT analysis ...... 6 1.3.4 Least squares regression ...... 6 2. Analysis of the Incumbent Market Players in the Single-Aisle Aircraft Segment ...... 7 2.1 Irkut MC-21 ...... 7 2.1.1 Irkut MC-21 product overview ...... 7 2.1.2 History and development ...... 8 2.2 Boeing B737 MAX ...... 9 2.2.1 Boeing B737 MAX product overview ...... 9 2.2.2 Facts and history ...... 9 2.2.3 The essence of lean manufacturing ...... 10 2.3 Airbus A320 neo ...... 12 2.3.1 Airbus A320 neo product overview ...... 12 2.3.2 History and technological development...... 12 2.4 Bombardier CS 300...... 13 2.5 COMAC C-919 ...... 14 2.5.1 COMAC C-919 product overview ...... 14 2.5.2 Technological co-operation ...... 14 3. Market Forecast ...... 16 3.1 Drivers of Air Travel Demand ...... 16
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3.2 Regional Overview ...... 18 3.2.1 Asia Pacific ...... 18 3.2.2 Europe ...... 19 3.2.3 North America ...... 20 3.2.4 Latin America ...... 20 3.2.5 Middle East ...... 21 3.2.6 Common Wealth of Independent States ...... 21 3.2.7 Africa ...... 22 3.3 Data Analysis ...... 22 3.3.1 Potential regional aircraft deliveries ...... 22 3.3.2 Front runners of single aisle market segment ...... 23 3.3.3 Assessment of market potential for newcomers ...... 25 4. Key Decision Criteria on Acquiring Commercial Aircraft ...... 28 4.1 Brand Image ...... 28 4.2 Sales Representatives ...... 29 4.3 Web-site ...... 30 4.4 Pricing ...... 30 4.5 Customer Support Analysis ...... 31 4.5.1 Initial provisioning ...... 31 4.5.2 Maintenance support analysis ...... 32 4.5.3 Training and technical Support ...... 33 4.5.4 Warranties and guarantees ...... 33 4.6 Commonality Feature in Aircraft Manufacturing ...... 34 4.6.1 Fleet commonality ...... 34 4.6.2 Crew commonality ...... 35 4.7 Performance Analysis ...... 36 4.7.1 Payload-range capabilities ...... 36 4.7.2 En-route performance ...... 37 4.7.3 Airfield performance ...... 38 4.8 Power Plant Evaluation ...... 39 4.8.1 Fuel burn ...... 39 4.8.2 Maintenance variables ...... 40 4.9 Cabin layout ...... 40 4.10 Political Risks ...... 41
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5. Market Perspective Assessment for MC-21 Single Aisle Aircraft ...... 42 5.1 Assessment of MC-21 Based on Derived Key Decision Criteria ...... 42 5.1.1 Brand image ...... 42 5.1.2 Sales representatives ...... 44 5.1.3 Web-site ...... 45 5.1.4 Customer support analysis ...... 49 5.1.5 Commonality feature ...... 51 5.1.6 Performance analysis ...... 51 5.1.7 Power plant evaluation ...... 52 5.1.8 Cabin layout ...... 53 5.1.9 Political sanctions ...... 53 5.2 Market Perspective...... 55 5.3 Recommendations ...... 56 5.4 Areas of Further Research ...... 57 References ...... 58 Appendices ...... 63
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List of Abbreviations
AOG Aircraft on Ground APU Auxiliary Power Unit ATC Air Traffic Control AVIC Aviation Corporation of China BAC British Aircraft Corporation CAEP Committee on Aviation Environmental Protection CAGR Compound Annual Growth Rate CCQ Cross Crew Qualification COMAC Commercial Aircraft Corporation of China DOC Direct Operating Cost EASA European Aviation Safety Agency FAA Federal Aviation Authority FBW Fly-by-Wire FSNC Full Service Network Carrier GDP Gross Domestic Product GDP Gross Domestic Product GEI Grouping of Economic Interest GTF Geared Turbo Fan ICAO International Civil Aviation Organization IL Ilyushin IOC Indirect Operating Cost IP Initial Provisioning ISA International Standard Atmosphere LCC Low Cost Carrier LSR Least Squares Regression MDTOW Maximum Design Take-Off Weight MIG Mikoyan MLW Maximum Landing Weight MRO Maintenance, Repair and Overhaul MTOW Maximum Takeoff Weight
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MWE Manufacturer’s Weight Empty MZFW Maximum Zero Fuel Weight O&D Origin and Destination OEM Original Equipment Manufacturer PAL Panel Assembly Lines PPDS Primary Power Distribution System RTO Rejected Take-Off SL Sea Level SSJ Sukhoi Superjet SU Sukhoi UAC United Aircraft Corporation UEC United Engine Corporation YAK Yakovlev
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List of Tables and Figures
Table 1: Consolidated Regional Results of Aircraft Delivery Forecast ...... 22
Figure 1: Traffic and market outlook ...... 17
Figure 2: Potential markets and delivery shares ...... 23
Figure 3: Consolidated delivery figures from Airbus and Boeing ...... 24
Figure 4: Consolidated results of top 10 mainline aircraft ...... 25
Figure 5: Regression analysis of data from Boeing ...... 26
Figure 6: Regression analysis of data from Airbus ...... 27
Figure 7: Classification of operating costs...... 30
Figure 8: Comparison of payload-range diagrams...... 52
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List of Appendices
Appendix A: Regression analysis of data from Boeing ...... 63
Appendix B: Regression analysis of data from Airbus ...... 64
Appendix C: Interview with Mr. Budaev, Sales and Marketing Vice President of Irkut Corporation carried out on 18th of March, 2015...... 65
Appendix D: Potential service providers for MC-21 ...... 68
Appendix E: Cabin dimensions comparison ...... 70
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1. Introduction
The introductory chapter of this master thesis serves two main purposes. First of all, it will familiarize the reader with background information, followed by the research objective, which the author wants to achieve in the course of the research. In addition, the approach to tackle the research question would be described and the justification for the chosen methodology would be provided.
1.1 Background Information
Nowadays, Russian Federation is trying to reenter international aviation markets and disturb a long-lasting duopoly of well established manufacturers. The regional aviation duopoly, dominated by Bombardier and Embraer was already challenged by Sukhoi Superjet 100 in the aircraft segment up to 100 seats; and the single aisle aircraft market, dominated by Boeing and Airbus in the segment of 150 plus seats aircraft, is yet to be challenged by MC-21, also known as MS-21, in the near future (Baldwin, 2014). Though, according to Flottau and Warwick (2012), Russian ambitions in the civil aviation market are met with a certain degree of skepticism, United Aircraft Corporation (UAC) successfully managed to launch Sukhoi Superjet 100 project and now is looking forward to bridging the gap in 150 plus seat segment with MC-21 (p.28). Open joint stock company “United Aircraft Corporation” was established in the year 2006 in accordance with Russian President Decree, in order to preserve and develop scientific and production potential of aircraft engineering. Moreover, the creation of UAC ensured the security and defense capabilities of the Russian Federation as well as foresaw the consolidation of intellectual, financial and industrial resources for the development and implementation of current and future aeronautical programs (United Aircraft Corporation, 2015). Currently, UAC consolidates 30 enterprises all over Russia and holds rights to the world known brands: “MIG”, “SUKHOI”, “IL”, “YAK”, “SSJ” and “MC-21”. In accordance with the long-term strategy, the development, production and after-sales support of military and civil aircraft, as well as the development of full scale international cooperation and sustainable
1 contract implementation have been set as top-priority goals for the corporation (United Aircraft Corporation, 2015). The first test flight of MC-21 is scheduled in 2015 and in 2017 United Aircraft Corporations plans to start commercial deliveries. According to Alexei Fedorov, the (former) President of Irkut, a subsidiary of UAC, MC-21 project is offered with two types of turbofan engines: Pratt& Whitney PW1400G and PD-14. The next generation PW1400G turbofan engine is expected to deliver a 20% reduction in operating costs and decrease the fuel burn by 15% in comparison to previous Pratt& Whitney products in the same thrust range. The PD-14 turbofan engine is currently under tests and United Engine Corporation (UEC) is reporting “12-16% reduction on cruise specific fuel consumption compared with currently certified engines” (Flottau& Warwick, 2012, p. 30). According to Denis Manturov, the Minister of Industry and Trade, MC-21 project is "is one of the highest priorities in the field of aviation." He goes on to say that technologically MC- 21 is more advanced than any other counterpart previously produced in Russia, which would enable the aircraft to become a competitive product on the international arena (Baldwin, 2014).
1.2 Aims and Objectives
The study aims at examining market perspectives of MC-21 in potential niche markets, based on critical decision factors of buying commercial jets, which would be derived in the course of the research. Based on the industry forecast, the author of this master thesis would identify the regions with the demand for 150-200 seat aircraft and respective regional demand. Furthermore, the SWOT analysis of MC-21, based on the drivers that stipulate aircraft choice such as brand name, payload-range capabilities, maintenance support, fuel efficiency, aircraft commonality, crew commonality and political risks would be conducted and benchmarked against direct competitors in the same market segment. Moreover, the assessment of customer requirements in terms of maintenance support and spare parts logistics, as well as customer support analysis that encompasses initial provisioning, training and technical support of the product will be carried out. Based on the derived critical success factors of acquiring commercial jets, as well as customer requirements and support analysis, the current market and sales strategy would be
2 examined, that would enable the author to derive strength and weaknesses, and, consequently, opportunities and threats of the whole project. Finally, based on the SWOT analysis, the author will develop general guidelines to effectively target and penetrate existing and emerging markets and propose the most suitable marketing strategy, followed by recommendations on further improvements of the product in order to make it more attractive on the market.
1.3 Approach and Methodology
Due to the fact that the research question was already developed, the approach that suits this research process best is the indicative approach. According to Saunders, Lewis and Thornhill (2012), the indicative approach does not start with a “clearly defined theoretical framework”, but is rather seen as an attempt to identify the dependency and interrelation between the data and to develop questions or hypotheses. As a consequence, “theory emerges from the process of data collection and analysis” (p.549). This idea was supported by Bryman and Bell (2011), who see emerged theory as “the outcome of research”, when the indicative approach is undertaken (p.11). This master thesis was developed around the research question: What are market perspectives for MC-21 single aisle aircraft? This research serves exploratory purposes, which is, according to Saunders, Lewis and Thornhill (2012), “a valuable means to ask open questions to discover what is happening and gain insights about a topic of interest”. Exploratory research encompasses the review of subject- related literature, interviewing industry experts, in order to acquire independent opinion, and is characterized by an initial broad focus on the topic, which would narrow down in the course of the research (p.171). In order to identify market perspectives of MC-21, the author in the first place would identify the opportunities and threats of the project. For the derivation of opportunities and threats the “mixed methods research” would be applied, that encompasses both quantitative and qualitative research methods. According to Bryman and Bell (2011), there is controversy over the use of both methods simultaneously, as in epistemological version “mixed methods research is not possible”, whereas technical versions sees both qualitative and quantitative research approaches as compatible. Nevertheless, “mixed methods research has acquired credibility in the field of business research” and is widely used as an effective research strategy (pp.630-631).
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Moreover, according to Saunders, Lewis and Thornhill (2012), during the research phase both qualitative and quantitative methods should be used “only in a complementary manner, so that each set of data collected, analyzed and presented separately in order to support the interpretation and conclusion reached” (p.166). In order to assess the current market situation and derive critical success factors of buying commercial jets, the Grounded Theory Method was used throughout the qualitative research. According to Saunders, Lewis and Thornhill (2012), the main objective of the method is, by applying the indicative approach, to develop a grounded theory that arises from the analysis of available data (p.567). In other words, the method refers to “a theory that is grounded in or developed inductively from a set of data” (Saunders, Lewis& Thornhill, 2012, p.185). In addition, interviewing industry experts is a part of qualitative research, which represents primary data and is referred to as unstructured interview (Bryman& Bell, 2011, p.467). According to Saunder, Lewis and Thornhill (2012), this type of interaction is referred to as non- directive and helps to obtain information from the industry experts. Within a framework of this master thesis, it helps to acquire information about the current market situation, long-term strategy, opportunities and threats of MC-21 (p. 375). Moreover, a SWOT analysis helps to summarize opportunities and threats based on the observations made with regard to the current and future outlook. In the course of the research, the author conducted quantitative analysis, in order to identify regions with demand for such aircraft types and the respective regional demand. Moreover, in order to assess the perspectives of MC-21 in the market, the author made use of the Least Squares Regression (LSR), in order to calculate the underserved niche from main market players i.e. the difference of projected overall demand for single aisle aircraft and maximum possible production capacity rate of Airbus and Boeing. Throughout this master thesis, the author made use of both primary and secondary data. The following sub-chapters give a brief description of techniques used during the research phase and in the course of writing this master thesis.
1.3.1 Grounded Theory Method
The author of this research made use of the Grounded Theory Method that was used for the analysis of secondary data, during the derivation of key decision criteria that stipulate aircraft
4 choice from the customer side i.e. airlines. According to Bryman and Bell (2011), this method serves as a “framework for analyzing qualitative data” (p.577). Cohen and Crabtree (2006), stress the idea that the application of this method foresees constant comparative analysis, thus engaging the researcher in “iterations”, i.e. “the researcher moving in and out of the data collection and analysis process.” Once the data was collected, it was subjected to analysis by the author of this master thesis, which paved way to the development of preliminary theory in line with the research question. After the derivation of preliminary theory, the author continued with theoretical sampling. It is important to mention that continuous data collection, its analysis and theoretical sampling are integral parts of comparative analysis, which continues until “the researcher reaches saturation- the point at which there are no new ideas and insights emerging from data.” It is also referred to as point, at which the researcher is confronted by strong repetition of data content. The data analysis process consists of open, axial and selective coding. The segmentation of data into groups and derivation of “preliminary categories of information about the phenomenon being examined” refers to open coding. Axial coding deals with consolidation of categories into groups and selective coding foresees the organization and integration of categories “in a way that articulate a coherent understanding or theory of the phenomenon of study” (Cohen& Crabtree, 2006). For the purpose of this research, the author made use of industry forecasts from front running commercial jets manufacturers, namely Boeing, Airbus and Bombardier, as well as presentations from Irkut Corporation and United Engine Corporation. Moreover, press releases, official websites of all involved parties, as well as news items and articles in printed and electronic versions were used. In addition, aerospace and aviation related literature was employed in order to derive necessary critical factors that were in focus of the research.
1.3.2 Interview with industry experts
In the course of the research, the author made use of one of the primary research methods, namely unstructured interview with an industry expert. It has been carried out on the 18th of March 2015 with Mr. Budaev, Sales and Marketing Vice President. For primary research, Mr. Budaev was asked to comment on how Irkut Corporation plans to penetrate existing and emerging markets and to elaborate on the long-term marketing strategy. Moreover, competition
5 with well established manufacturers was discussed and competitive advantages of MC-21 were covered. In addition, in the course of the interview, opportunities and threats, as well as potential difficulties dealing with incumbent sanction regime and further political risks were discussed.
1.3.3 SWOT analysis
According to Makos (2014), SWOT analysis is an effective tool that contributes to “evaluation and discovery phase of strategic planning” within a company. He goes on to say that SWOT analysis is a tool designed to summarize strengths, weaknesses, opportunities and threats, which provides a company with “advantages they have over competitors and their possible vulnerabilities.” This enables companies to create effective business strategies, and implement necessary measures in advance, to make the product or service more attractive and competitive. Moreover, Goodrich (2015) stated that SWOT analysis “enables organizations to identify both internal and external influences.” Strengths and weaknesses refer to the internal analysis, from which strategic options, namely opportunities and threats arise, which are referred to as external factors that have an impact on the business. In the course of the research, SWOT analysis helps to identify opportunities and threats of MC-21 with regard to the incumbent and emerging competitors in the same single aisle segment. Moreover, SWOT analysis serves as a foundation for recommendations on further improvements in order to make the product more competitive on the market.
1.3.4 Least squares regression
According to Oracle (2015), the Least Squares Regression (LSR) method “derives an equation describing a straight line relationship between the historical sales data and the passage of time.” The technique of LSR “fits the line to the selected range of data so that the sum of the squares of the difference between the actual sales data points and the regression line are minimized.” The forecast for the upcoming periods represents the extrapolation of the line into the future. In order to apply the method, past sales data for specific periods and corresponding periods are required. The minimum requirement for application is at least two “historical data points” that are required in order to forecast future sales (Oracle, 2015).
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2. Analysis of the Incumbent Market Players in the Single-Aisle Aircraft Segment
The second chapter of the master thesis analyzes the current market players in the single- aisle aircraft segment. The first part of the chapter introduces MC-21 and provides necessary background information on the product. The second part of this research introduces and assesses competitors in the same market segment and gives background information on history and technological development of the product. For the purpose of competition analysis, single-aisle aircraft of similar seat capacity were chosen: Airbus A320 neo, Boeing B737 MAX, Bombardier CSeries CS 300, COMAC C919 and Irkut MC-21.
2.1 Irkut MC-21
2.1.1 Irkut MC-21 product overview
In June 2008 Russian Aviation Corporation Irkut launched the development of MC-21, a family of a narrow body single aisle aircraft, which intends to compete with B737 MAX, A320Neo, CS 300 and COMAC C919 in short and medium haul market segments. The aircraft family foresees the creation of MC-21-200/300/400 with the seat capacity of 150/181/212 passengers respectively (DVB Bank, 2013, p.44). In 2015 United Aircraft Corporation plans to “complete assembly of MS-21 fuselage and showcase it to the visitors of MAKS-2015 air show online”, followed by a “maiden flight” in 2016. The aircraft is planned to enter commercial service in the year 2017 and is expected to replace the outdated Tupolevs Tu-154 and Tu-134 on the domestic and Common Wealth of Independent States’ markets (Russian Aviation, 2015). According to MC-21, Andrei Matveyev, chief designer and project director of the aircraft, the jet liner will consist 40 per cent of the composite material, including the wing, will have a lower structural weight, allegedly 15 per cent less than current competitors from Boeing and Airbus A320 and is expected to have a 25 per cent lower fuel consumption in comparison to already mentioned above products. Interestingly, MC-21 is expected to provide two engine options to customers, namely Pratt& Whitney PW1440G or by Aviadvigatel PD-14 (Harrison, 2011, p.29).
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Moreover, the expertise of internationally recognized suppliers is used in the production and design process: Zodiac Aerospace develops and supplies Primary Power Distribution System (PPDS); Intertechnique develops oxygen supply system, as well as “fuel system, fuel control and measuring fuel consumption system” and neutral gas system; Zodiac Data Systems develops measuring instruments that “allow to collect, record, transmit and process all the data required for the MC-21 flight testing” (Irkut Corporation, 2013). In addition, gear system is planned to be supplied by BMT Aerospace International, fire detection and suppression system is provided by Kiddle Aerospace Defense, Rockwell Collins Inc. supplies avionics management systems as well as anti-collision system, etc (Airframer, 2015).
2.1.2 History and development
Reputational risk always played an important role for manufacturers and for the customers and end consumers, be it leasing companies or airlines themselves. Due to the fact that Soviet manufacturers were highly geared by governmental subsidies, after the collapse of the USSR none of the producers could survive on the international arena and compete with Boeing and Airbus. The reason for this was mainly “poor after-sales support and poor maintenance” to the airlines that operated the planes. In 2006 Russian aviation industry was subjected to reorganization, where the umbrella company owned by the government, namely United Aircraft Corporation, was created (Harrison, 2011, p.10). In order to overcome the reputational image, UAC strived to establish co-operation with well recognized international suppliers and create joint ventures in order to get expertise in “design, manufacture, and maintenance of commercial aircraft manufactured by those state- owned companies.” The main idea behind international co-operation was the increase of credibility, namely “safety, performance, quality and comfort” and the reduction of risks for airlines that planned to purchase the product (Harrison, 2011, p.11). MC-21, currently is being described as “Russia’s great hope for the revival of its civil aircraft industry”, which will be available on the market in three version i.e. 150, 180 and 210 seats. The Russian Government is funding 40 per cent of the program that is allegedly 6.3 billion US dollars in total and the other 60 per cent are covered by loans and UAC (Harrison, 2011, p.29).
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2.2 Boeing B737 MAX
2.2.1 Boeing B737 MAX product overview
Boeing 737 MAX is a response to Airbus A320 neo program. B737 MAX is a modernized B737 NG, equipped with new LEAP- 1b engines. It is planned that new engines will deliver a more efficient fuel burn, namely 10-12 per cent less than previous CFM56-7B installed on B737NG. In addition, due to installed “nacellee chevrons, similar to those on the 787 and 747- 8”, Boeing managed to achieve the noise reduction (DVB Bank, 2013, p.19). Moreover, B737 MAX underwent aerodynamic changes, and got “new tail cone” and refurbished winglets, so called “Advanced Technology Winglet”, which contributed to the improvement of range capabilities of 400-540 nautical miles (740- 1000 km). Though B 737 MAX exercised minor changes in the aircraft systems and cabin design, it, as well as his predecessor B737NG, preserved the design concept, fuselage and length and enjoy commonality within the 737 family (DVB Bank, 2013, p.19).
2.2.2 Facts and history
Boeing, in the period from 2013 to 2015, managed to raise the production output from 38 to 42 aircraft per month. In addition, the CEO of Boeing Jim McNerney anticipates the production rates to over pace 42 jets per month, as 737 MAX “begins to supplant current- generation airplanes on its assembly lines in Renton, Washington” and the market share of new aircraft with new generation engines will reach the “equilibrium with that for Airbus’s A320neo” (Bradly, 2015). Currently, there are two “assembly lines in Renton” for Boeing 737 NG aircraft. In order to keep up with competitors, Boeing will introduce a third assembly line for the new Boeing 737 MAX aircraft. Boeing anticipates that with the introduction of the third line “running in full capacity”, it theoretically could produce up to 63 Boeing 737 aircraft by 2018, meaning 21 aircraft from each production line (Bradly, 2015). Boeing B737 MAX that provides up to 14% improved fuel efficiency in comparison to previous versions, estimates the final assembly in 2015 and the first deliveries for commercial operations in 2017. In order to compete with a high technological competitor, namely Airbus A320, Boeing underwent changes and implemented “a new robotic system, known as Panel Assembly Line (PAL)” to construct “wing panels” for Boeing 737 aircraft. The PAL system is
9 supposed to replace outdated “drill machines” in order to reduce the number of injuries on the production plant, “reduce defects by 66 per cent” as well as expedite the assembly time by 33% (Bradly, 2015). By the year 2017, apart from the first delivery of Boeing 737MAX, Boeing plans to produce and deliver up to 560 aircraft from a Boeing 737 family, showing a “50 percent increase in manufacturing since 2010.” Due to the fact that Boeing and Airbus managed to reach the economies of scale and “relatively low production costs”, both B737 and A320 are treated as cash cows, as they “they provide significant contribution to funding development of larger long haul aircraft” (Bradly, 2015). Since the early 90s, Boeing was introducing the so called “Lean Manufacturing principles” and, as a result, in 2004 Boeing reported the reduction of costs by 210 million US Dollars. The philosophy of the manufacturing system at Boeing encompasses important principles, i.e. “Lean Manufacturing, Six Sigma,” outsourcing and supply chain management that “ensure the output of the high quality cost-effective products in the least amount of time” and contribute to the competitiveness of the company (Marx, 2015). Beginning from 1999, Boeing’s commercial aircraft division took part in numerous projects applying Six Sigma principles “with the main focus on the customer.” As a result, Boeing underwent significant changes in “manufacturing and managing business processes based on business metrics and cultural change.” Moreover, the experts from Boeing participated in trainings and were certified as “green belts” and “black belts”, depending on the level of qualification after the completion of trainings. Currently, Boeing manufacturing facilities are supervised by “300 green belts and 60 trained black belts” (Marx, 2015).
2.2.3 The essence of lean manufacturing
According to Hill and Jones (2012), aircraft manufactures vertically integrated the suppliers in the value chain and manufactured numerous aircraft components on their own. In early 90s, Boeing pioneered in outsourcing the manufacturing of components and “entire sub- assemblies” to suppliers all over the world. As a result, outsourcing has reached up to 65 % of the whole value in some of the Boeing aircraft types, as the main idea behind outsourcing was the reduction of production cost. But later on, “global manufacturing” imposed the necessity to establish a control and monitoring of the whole production process of the suppliers, due to a
10 breakthrough in designing concept, namely digital design. Thus, manufacturers were started to work closely with the suppliers, in order to undergo “virtual aircraft assembly before components production” (pp.C389-C403). In the 90s, Boeing was the frontrunner to introduce the digital design concept with its Boeing 737 aircraft. A peculiar fact, aircraft manufacturers, which did not follow the high technological trend started to lose market share. As an example, in 1996 McDonnell Douglas, which neglected the trend, had “only 10% of market share in the large commercial aircraft with 3% order backlog.” Later on, McDonnell Douglas was forced to leave the business due to inability to compete and in 1997 was acquired by Boeing (Hill & Jones, 2012, pp.C389-C403). In 1996, when Airbus started to put pressure on Boeing products, Boeing reacted by decreasing the prices on its aircraft, in order sustain previous market share and doubled the production, which resulted in “production bottle necks.” The company was forced to hire and train additional 40,000 employees in order to catch up with the backlog. As a result, in 1997 Boeing failed to comply with the production program and postponed the deliveries. In order to catch up, some of the production lines were shut down, in order to shift the personnel on pending unfulfilled backlog. In the period 1996 to 1997, barely made any profit, due to high contractual delivery delay penalties that summed up to 1,6 billion US Dollars. After these heavy financial losses and production collapse, Boeing decided to revise its outdated production system and methods. The manufacturer sent its teams to Toyota, in order to adopt the lean manufacturing technique that was later implemented in Boeing (Hill& Jones, 2012, pp. C389-C403). In addition, Boeing trained the so called “moonshine” team in lean production that modified equipment and optimized processes, production space and waste. The reason behind it was high production rate of parts and components, which were inventoried and stored in the warehouses, thus causing irrational spending on space and inventories itself. As a result, the implementation of innovations decreased the production costs of an aircraft (Hill& Jones, 2008, pp. C22-C36). Boeing realized that in-house production of some of the components was cheaper than buying the same ones from wholesalers. Moreover, just in time procurement and production of inventory, as well as new and small in size high technological machinery allowed to free 1,3 million square feet (120,774 square meters). In addition, switching from “stick assembly bays to moving line” heralded the technological breakthrough: the lines could be stopped if a problem
11 was detected. As a result, in 2005 the assembly time for Boeing 737 was reduced from 22 to 11 days and “store inventory had been cut by 59%” (Hill& Jones, 2008, pp. C22-C36).
2.3 Airbus A320 neo
2.3.1 Airbus A320 neo product overview
Airbus Corporation launched the neo program that stands for “New Engine Option.” A320neo is offered with two engine options: “Pratt & Whitney PW1100g (Geared Turbo Fan) or CFM’s new LEAP-1A engines.” It is anticipated that due to a higher by pass ratio the engines will “offer 15 % fuel burn advantage over today’s engine” (DVB Bank, 2013, p.7). Moreover, A320neo underwent structural changes, got new reinforced gear and new winglets- “sharklets”, which are expected to deliver 10-15 per cent efficiency in operations. In addition, Airbus managed to decrease structural weight of an aircraft by applying composite materials, which enabled to increase the MTOW (maximum take-off weight) by 2000 kilograms or increase the range of the mission to 500 nautical miles (1000 km) (this trade-off between payload and range will be examined in Chapter 4) (DVB Bank, 2013, p.7).
2.3.2 History and technological development
In 1960s, France realized that it is impossible to develop a commercial aircraft alone and compete against American Boeing. As a result, in 1970, the French and German governments founded “Airbus Industrie”, a company registered as a “Grouping of Economic Interest.” Later on, in 1971 Spanish aircraft producer CASA as well as British Aircraft Corporation (BAC) in 1979 joined Airbus Industrie. The co-founder, Roger Bateille, stated later: “You cannot compete with the dominant player if you do not offer something different” (Hill& Jones, 2008, p. C40). The main challenge for Airbus was to “convince the airlines to switch to unknown manufacturer from Boeing.” In order to conquer a market share, Airbus implemented the cutting edge technology and innovations, namely “composite materials, fly-by-wire control system and new approach in aerodynamics.” The incorporation of new technologies together with “aerodynamically efficient wing” enabled to reduce the structural weight of A300, A310 and A320 aircraft, making them “world’s first aircraft with computerized system of flight control” (Hill& Jones, 2008, pp. C37-C53).
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Though Airbus competitor Boeing was the first one to introduce the family concept that would be later discussed in Chapter 4 of this research, Airbus continued the development of the latter concept and “applied to manufacturing and marketing.” The concept enabled all aircraft operators to apply standardized “maintenance, training and operational procedures” and utilization of the same supply chain within a family, as aircraft shared “the basic frame, wings and cockpit layout.” Moreover, Airbus marketed whole of its family that encompassed A318, A319, A320 and A321 with different seat capacity and different flight range, but having a 100% commonality between them all. This concept enabled airlines to cut costs from utilization of Airbus aircraft and helped Airbus to establish solid ground and conquer a significant market share, eliminating Boeing’s monopoly (Hill& Jones, 2008, pp. C37-C53). Roger Beteille, also known as “the father of Airbus”, was responsible for “engineering, manufacturing and development” of Airbus A320, which in 1984 became a major problem for B737 and MD-80 in the short haul aircraft segment. Due to the incorporation of new technologies, the aircraft’s weight was less that led to decrease of operating costs, than of the latter competitors, due to lack of “mechanical controls” and implementation of FBW system. As a historical fact, Airbus A320 received 400 orders, before actual commercial operations and managed to win “a share of the American market”, and as an example only Northwest Airlines placed a 3 billion US Dollar order, making A320 the fastest selling aircraft in the world (G.I.E Airbus Industry, 1996).
2.4 Bombardier CS 300
Bombardier designed the CSeries in order to step into up to 150 seat aircraft market that would bridge the gap between their main scope- regional aviation and single aisle aircraft market. CS300, the larger version CSeries is expected to step into direct competition with A320 and B737 aircraft families (DVB Bank, 2013, p. 34). The main focus during the creation of the aircraft was on engine efficiency, which follows the trend of Boeing and Airbus.CS300 is planned to be powered by Pratt& Whitney Geared Turbo Fan (GTF) engines, which is expected to deliver a 15% reduction of fuel consumption in comparison to the mainline engines produced. Moreover, it is expected to be “50% less noisy and up to 40% cheaper to maintain than today’s technology engine.” Apart from that, CSeries are
13 developed with the use of composite materials that reduce the structural weight and integrated fly-by-wire control (DVB Bank, 2013, p. 34).
2.5 COMAC C-919
2.5.1 COMAC C-919 product overview
Commercial Aircraft Corporation of China (COMAC) with C919 product is trying to penetrate single aisle aircraft market and gain a foothold in the sector. Though C919 is developed in China, it managed to gain expertise and support from leading aircraft suppliers, namely “CFMI, Hamilton Sundstrand, Honeywell and GE”. Currently, C919 is planned to be equipped with LEAP-X engines “that are claimed to be 15% better than today’s standard” and later an option to equip C919 with home developed Chinese engines is possible. Moreover, in 2011 Bombardier and COMAC “signed an agreement to cooperate in the fields of marketing and support, but also collaboration on the complementary C919 and CSeries programs and future aircraft development was not excluded.” Currently, Chinese airlines and leasing companies are the main customers for the product and the international sales of the jet remain vague (DVB Bank, 2013, p. 45). It is expected that C919 will be a baseline version, from which a family encompassing shorter and longer versions would be created. The fuselage of a jet is 25 cm wider than those of B737 and A320, which would allow accommodating LD3 containers in the belly capacity (DVB Bank, 2013, p. 45).
2.5.2 Technological co-operation
According to Harrison (2011), Bombardier and COMAC had signed a strategic partnership deal on narrow-body development. The idea was to share the market in manufacturing non- overlapping jets with 100-149 seat (Bombardier) and 156-190 (COMAC). The agreement covers cooperation on C-919 aircraft development, marketing and MRO. The collaboration involves sharing of interchangeable and compatible parts between CSeries and C-919. Moreover Bombardier has already started outsourcing production of the CSeries frames to a subsidiary of Aviation Corporation of China (AVIC) (p.28).
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Both partners’ aircraft may share a lot of commonalities that reduce the production cost, facilitate customer relationship and customer support. All these factors will lead to the highest interoperability between CSeries and C-919. The 100-200 seat capacity of Bombardier-COMAC aircraft cooperation could challenge to the Boeing-Airbus duopoly worldwide (Harrison, 2011, p.28). This partnership may create real competition for Boeing and Airbus in the rapidly growing Chinese market and could allow for the alliance to gain a major share in Chinese market. (Harrison, 2011, p.6) .
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3. Market Forecast
This chapter of the master thesis is a quantitative analysis of traffic forecast from front running aircraft manufactures, namely Airbus, Boeing and Bombardier. The main objective of the analysis is the identification of the regions with demand for 150 seat plus single aisle aircraft and corresponding markets, classified by regions.
3.1 Drivers of Air Travel Demand
Traditionally, GDP level, GDP per capita and trade have been credible macroeconomic indicators for air travel. According to long term forecast from Boeing, the GDP is expected to “rise 3.2% over the next 20 years”, which would consequently lead to an increase of the traffic volume by 5% annually (Boeing, 2014, p.3). In addition, according to Doganis (2006) such critical factors as liberalization and deregulation increased the benefit to consumers through “extension of competition”, which lead to the reduction of “regulatory control” and flexible pricing that in turn stipulated the natural growth of air traffic (p.32). According to Airbus (2014), the increase in population is an important variable contributing to the traffic growth, as “between 1950 and today, the World’s population almost tripled, now totaling more than seven billion people” (p.37). Moreover, due to increase in productivity in agricultural sector, a strong tendency of moving from rural areas is observed that is referred to as urbanization. Thus “two thirds of the World’s population is expected to be living in urban agglomerations by 2050”. Consequently, urbanization will contribute the natural growth of air traffic, especially due to establishment of “urban agglomerations” with a diverse aviation infrastructure and the emergence of the middle class with a higher disposable income (Airbus, 2014, p.38). The same idea is supported by Bombardier (2014), as according to the company’s forecast, “the size of the global middle class could increase from 1.8 billion people in 2010 to 4.9 billion by 2030.” Moreover, the growth of passenger traffic is “directly linked to changes in a population’s propensity to travel”, that drives up the demand for new aircraft in existing and emerging markets (p.10).
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According to Boeing (2014), the long-term demand for new commercial jets until 2033 is approximately equal to 36,770, from which 15,500 or to 42% of the overall value, will replace the outdated inefficient aircraft, and 21,270 airliners or 58% consequently, will support natural growth of traffic. The single aisle aircraft market will continue to dominate in the aviation
Figure 1: Traffic and market outlook industry due to rapid growth of low cost carriers (LCC) in various regions of the world and replacement of aging fleet by full service network carriers (FSNC) (p.3). It is forecasted that by 2033 the share of single aisle aircraft would constitute 70% (25,680 aircraft) of the upcoming projected deliveries, of which “38 percent will replace older airplanes, while 62 percent will expand the fleet” (Figure 1). It is anticipated that the (Source: Boeing, 2014, p. 16) emerging markets would drive up the demand for single aisle aircraft market. Particularly, the Asia-Pacific region is expected “to take the largest share of new deliveries and will need 9,540 new airplanes” that is 37% of the forecasted deliveries (Boeing, 2014, p.17). At the same time, Airbus (2014) projects the delivery of 22,100 new single aisle aircraft in the upcoming 20 years. In contrast to Boeing forecast, the largest share of new single aisle aircraft deliveries (44% of the overall deliveries) is expected to be split between European and North American markets that are “highly driven by replacement demands.” The Asia-Pacific market is characterized by steady growth and represents 37% of the demand in the next 20 years, “of which 58% is for growth in these markets” (Airbus, 2014, p.89). The following sub-chapters will give a brief outlook of the world’s regions and identify the potential for single aisle aircraft market.
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3.2 Regional Overview
3.2.1 Asia Pacific
According to Airbus (2014), the Asia-Pacific region “will be responsible for more growth and aircraft deliveries than any other region”, as 60 % of the world’s population is concentrated in the region (p.98). This rapid growth in the region is stipulated by liberalization, which in turn provides new opportunities to the whole aviation industry in the region. This enabled the low cost carriers to spread and increase the “seats and flights offered by LCCs.” Due to growing population, the seats offered in the market have to outpace the projected growth, in order to accommodate upcoming demand and minimize congestions (Airbus, 2014, p.101). In 2013, the regional GDP “rose 4.8 percent, driven both by the region’s fast growing, emerging economies and by mature economies, which were lifted by the recovery from global recession.” As a consequence in 2013, the traffic grew 3.9%, which was faster than planned, as capacity increased only at 3.7% per annum (Boeing, 2014, p.21). This phenomenon can be explained by the fact that the “growth of air traffic”, which is usually accompanied by the “time lag” to respond to the changes, stays in close correlation with the development of GDP (Doganis, 2006, p.17). A stable economic growth is expected over the next 20 years at a rate of “4.4.percent growth annually” and the region is expected to become the “largest air travel market in the world” by 2033, which would constitute up to 48% of the global traffic from or within the region. Economic development together with the rapid growth of low cost carriers would demand for 9,540 single aisle aircraft in the market (Boeing, 2014, p. 21). According to Airbus (2014), Asia-Pacific region will be the front runner of the economic growth, “both in real GDP with an average of 4.6% per year and in trade with an average of 5.7% per year” (p.101). The market can expect 8,066 new single aisle aircraft deliveries up to year 2033 (p.103). The area of Asia-Pacific region can be divided in various markets, such as “Oceania and Northeast Asia and emerging markets…, such as Southeast Asia” (Bombardier, 2014, p.37). The Northeast Asian region includes Japan, North and South Korea and Taiwan. “The region’s GDP is forecasted to grow 1.5 percent over the next 20 years” (Boeing, 2014, p.23). Due to Japan’s recovery from stagnation, only moderate economic growth is expected and moreover, aging population will deteriorate and slow down the recovery. Korea and Taiwan will continue stable 18 growth in line with the projections. “Despite modest economic growth”, the air travel is forecasted to grow at 2.5% per annum, requiring 560 new single aisle aircraft (Boeing, 2014, p.23). Oceania is a quickly developing region, with the traffic forecasted to grow at 4.8% annually over the next 20 years. Moreover, rising popularity of the region would attract tourists that would stipulate the “opening of new flights.” This will consequently lead to a need of aircraft in the region. In the next 20 years it is “expected to need 1000 new airplane deliveries…of which 760 will be single-aisle airplanes”, and a very non significant number of regional jets that is equal to 10 (Boeing, 2014, p.26). No doubt, “China will be the key market in Asia-Pacific” and will become the largest economy and the domestic aviation market in the world. It is projected that by 2033 the Chinese domestic market will be “more than 60% larger than in terms of passengers than today’s largest market in the US.” Though LCC have been rapidly developing in the region, China “appears to have a large remaining potential”, and the official authorities have occupied a liberal position, allowing the creation of new airlines and “even potentially cutting airport charges in third and fourth tier cities.” This is done in order to reduce congestion in major hubs, as “nearly 80% of Chinese population and economy is within the range circle of about 2,000 km.” Thus not only the creation additional infrastructure, but the establishment of low cost carriers is a necessity for China (Airbus, 2014, p.102). As the low cost model foresees point-to-point service, “which avoids connections at hubs and shortens travel time”, it will reduce the congestions “at major hubs, such as Beijing, Shanghai, and Guangzhou.” Thus for China alone, there is forecasted demand of 4,340 single aisle aircraft, which is 45% of all planned deliveries to the Asia-Pacific region in the upcoming 20 years (Boeing, 2014, p.22).
3.2.2 Europe
After a long lasting crisis, the European economy “is gradually recovering, driven by rising consumer and business confidence, low interest rates and improving export markets” (Airbus, 2014, p. 105). According to Bombardier (2014), the economy in Europe is expected to grow at a 1.8% compound annual growth rate (CAGR) (p.33). Though the aviation growth “is not as rapid as aviation growth in the world’s emerging economies”, the European region will demand for 5,870 new single-aisle aircraft, 54% of which
19 will replace the aging fleet and 46% consequently would support the traffic growth (Boeing, 2014, p.27) According to Airbus (2014), the European short-haul market can expect an annual of 3.8% in the next 20 years and expect the demand for 6,167 new aircraft (pp.109-111).
3.2.3 North America
According to Bombardier (2014), North American region will remain the “largest commercial aircraft market” in the upcoming 20 years (Bombardier, 2014, p.31). In accordance with global market forecast from Airbus (2014), North American region can expect the growth of origin and destination traffic (O&D) at a rate of 3.4% per annum. Moreover, mergers in US aviation industry “contributed to airline profitability” and lean capacity management contributed to constant growth of seat load factors that “remained above 80%” (p.116). As a result, “capacity growth slowed down” in an attempt to maximize the profitability of the networks (Boeing, 2014, p.28). Since 2009 the average traffic growth of 2% outpaced the capacity growth, which ranged from 1-2% (Boeing, 2014, p.28).Consequently, airlines have to consider the expansion of offered capacity on the market by either increasing the frequencies of flights or increasing the size of the aircraft in order to “accommodate future growth.” Thus the region can expect the demand for 4,730 single aisle aircraft up to year 2033 (Airbus, 2014, p.116). At the same time, Boeing (2014) projects the need for 4820 single aisle aircraft in the upcoming years (Boeing, 2014, p.28).
3.2.4 Latin America
Latin American aviation industry shows steady development “as a result of economic growth, market liberalization, new investments in airlines and infrastructure, fierce competition and cross-border airline consolidation” (Bombardier, 2014, p.32). The region’s economy showed growth rate of 2.9% in 2014 and anticipating 3.2% growth in 2015. The “macroeconomic stability, solid growth, poverty reduction” stipulated the growth in the region and development of aviation sector is “crucial to sustain this growth.” Moreover, the two largest low cost carrier markets in Brazil and Mexico have shown rapid growth and there are still numerous neighboring markets available for potential expansion. It is forecasted that by 2033 the region will need 2360 single aisle (Boeing, 2014, p.29). According to Airbus (2014),
20 the dynamics of traffic growth and availability of numerous underserved markets within the region creates the potential demand for 1,784 single aisle aircraft (p.133).
3.2.5 Middle East
The “centrality” of the region makes it possible to compete for the traffic in “connecting this region.” Moreover, the growth of local demand, potential of liberalization and “hub aggregation” is the key success of the region’s growth at a projected rate 3.8% increase in GDP annually (Boeing, 2014, p.30). Interestingly, Middle East is the “only region of the world where the wide body fleet is larger than single aisle”, due to the focus on long-haul flights (Airbus, 2014, p.122). The expansion of low cost carriers in the region will contribute to the overall intra- regional traffic, opening new frontiers to the underserved markets such as Common Wealth of Independent States and Africa. With this dynamics, the region will need 1,360 single aisle in the upcoming 20 years (Boeing, 2014, p.30). At the same time, Airbus (2014) is less optimistic about the number of single aisle aircraft, forecasting only a need for 826 jets up to year 2033 (Airbus, 2014, p.125).
3.2.6 Common Wealth of Independent States
The region’s geographical “size and diverse terrain make airline travel an attractive transportation option.” According to forecast, in the next 20 years air travel popularity will be growing due to growing economy, the increase in disposable income and liberalization, which will make “aviation service more available and affordable.” The economy is expected to grow at an annual rate of 3.3% and in order to sustain the growth a need for 990 new single aisle aircraft is forecasted in the upcoming 20 years (Boeing, 2014, p.31). Airbus (2014), points out that in 2013 the aviation industry exercised liberalization, namely “by relaxing some legislation- notably regarding the obligation to refund ticket fares, checked luggage and in-flight service.” This would definitely stimulate the traffic growth due to establishment of low cost carriers with attractive pricing in comparison to full service network carriers serving domestic market, thus increasing the propensity to travel (p.137). The stable growth of domestic and intra-regional traffic is projected with a rate of 5.2% per annum. The development of inter-regional traffic is expected to be 6.2% annually, giving an average of 5.8%
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per annum of total traffic development, creating a need for 1,036 new aircraft in the upcoming 20 years (Airbus, 2014, p. 141).
3.2.7 Africa
Africa’s economy shows positive dynamics in development, even in the light of “global recession and political unrest in North Africa” (Boeing, 2014, p.32). The GDP has shown a steady growth rate and has increased to 4% per annum. Moreover, traffic is expected to develop steadily 6% per annum due to diversification of economy. Following the positive trend, the region will require 740 single aircraft up to year 2033 (Boeing, 2014, p.32). Moreover according to Airbus (2014), emerging middle class in the region will increase spending, due to stable increase of disposable income that would have a positive effect on the economy. Under condition of political stability in the medium term horizon, the region will create a need for 734 single aisle aircraft in the upcoming years (pp.147-149).
3.3 Data Analysis
3.3.1 Potential regional aircraft deliveries
In the course of the research, global market forecasts from Airbus, Boeing and Bombardier were used for the identification of market potential for aisle aircraft. Due to the fact that the market forecast from Bombardier Table 1: Consolidated Regional Results of Aircraft Delivery Forecast has a strong focus on regional Airbus Boeing Average aviation sector which ranges from Asia-Pacific 8066 9540 8803 Europe 4895 5870 5383 20 to 149 seat aircraft, it will be North America 4730 4820 4775 excluded from the analysis. The Latin America 1784 2360 2072 consolidated results can be seen in Middle East 826 1360 1093 CIS 1036 990 1013 a tabular form below (Table 1). Africa 734 740 737 In order to exclude bias TOTAL 22071 25680 23876 from the analysis, the author (Source: Created by author using Airbus and Boeing forecasts) decided to use the average from both of the forecasts in order to conduct quantitative analysis. According to the data from Airbus and Boeing, Asia-Pacific region is expected to be the largest single aisle aircraft market, demanding an average of 8,803 aircraft or 37% of the overall deliveries followed by Europe,
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with 22% of the total delivery number or 5,383 aircraft until 2033 (Figure 2). North American market will require 4,775 (20% of the overall deliveries) new single aisle aircraft to sustain growth and replace outdated fleet, followed by Latin American region demanding 2,072 (9% of the deliveries) aircraft in future. Due to further liberalization in aviation industry and growing
Figure 2: Potential markets and delivery shares popularity of low cost carriers, Middle East can expect the need Forecasted Deliveries for 1,093 aircraft or 5% of the
4% 3% overall deliveries, followed by 5% CIS with expected aircraft Asia-Pacific Europe demand of 1,013 units or 4% 9% 37% North America respectively. The African region Latin America will require 737 new aircraft (3% 20% Middle East of the deliveries) in the next 20 CIS Africa years. 22%
(Source: Created by the author using data from Airbus and Boeing forecasts)
3.3.2 Front runners of single aisle market segment
According to Flightglobal special report (2014), currently there is a “commercial war” running for the single aisle aircraft market between “the two big airframers”, namely Airbus and Boeing. Today, Airbus with the A320 fleet family is about to overtake its direct competitor from Boeing B737 (p.3). According to Newhouse (2008), the “low end of the market is covered by two single-aisle airplanes, Boeing’s 737 and Airbus’s 320.” Though both of the aircraft are of the same size, able to accommodate 190 people, B737 “is older and has been steadily improved over the years. But the A320, a newer, slightly larger, and more comfortable aircraft is outselling the 737” (p.7). Airbus, therefore, is a good example on how to penetrate the market with a new product conceptually different from direct competitor, as “Airbus did things that saved the money and appealed to airlines” (Newhouse, 2008, p.12). Newhouse (2008) pointed out that standardization in the fleet families was one of the keys to success of Airbus that implemented a feature called
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“commonality”, which “Boeing was reluctant to emulate, mainly because of the costs involved.” “Commonality” was one of the drivers that enabled Airbus to “reduce the labor cost” (p.13). In 1995 and 1996 a study was organized by the outsiders, in order to identify the factors that allowed Airbus to sell aircraft at a lower price than Boeing. Apart from high degree of automation i.e. Airbus “uses more robots than people to build fuselage shells at its plant”, the producer implemented “laser welding of the fuselage assembly” instead of using rivets that consequently made the product more appealing to the customer due to a lower Manufacturer’s Weight Empty (MWE) (Newhouse, 2008, p.123). According to Clark (2007), MWE is “the weight of the aircraft as it has been built by the manufacturer, without the elements necessary for revenue earning payload to be carried” (p.127). Later in the course of the study by the outsiders in 1996, it was concluded that “Airbus was winning numerous competitions” due to “lower production costs” that allowed Airbus to sell aircraft cheaper than Boeing. The research identified that the production capacity of both was enough to supply “one half of the world’s aircraft needed” at that time. The significant difference, however, was at the bottom of the production space: Airbus used “22-23 million square feet” (approximately 2,043,868-2,136,771 square meters), whereas Boeing “was using 55 million square feet” (approximately 5,109,672 square meters), that gave Airbus “12-15 percent
Figure 3: Consolidated delivery figures from Airbus and Boeing cost advantage over Boeing in production and tooling” Delivery Rate Comparison (Newhouse, 2008, pp.125- 600 126). 500 In order to show the
400 development of competition
300 B737 in the single aisle aviation A320 200 segment between Airbus and Boeing, the author made use 100 of the historical deliveries 0 1960 1970 1980 1990 2000 2010 2020 from both of the producers
(Source: Created by author using historical delivery data from Airbus and Boeing) (Figure 3) in order to visualize the development of competition and transformation of monopoly into duopoly. The figures on Airbus A320
24 encompass the whole fleet family, as well as figures Boeing B737 include the whole 737 series. The numeric data for the analysis was extracted from Airbus (2010) “Historical Orders and Deliveries 1974–2009”, Airbus (2015) “Airbus Orders and Deliveries” and Boeing (2012) “Historical Deliveries”. According to Flightglobal (2014) census, the number of Airbus A320 has increased steadily over the years, showing an 8.7% grow in 2013 summing up to 5,632 units all over the world in 2014 (Figure 4). At Figure 4: Consolidated results of top 10 mainline aircraft the same time the B737 deliveries grew 10% in 2013, but the number of units all over the world stayed below A320 results, due to the retirement of aged models such as B737- 200/300/400/500. It is worth pointing out that the numbers
(Source: Flightglobal, 2014, p.4) in the table do not include the orders for the new generation for B737 Max as well as A320Neo,”which are yet to enter service”. Nevertheless, Airbus is close to surpassing Boeing in the single aisle in-service aircraft (p.3).
3.3.3 Assessment of market potential for newcomers
As it was identified earlier in Chapter 2, Irkut MC-21, Bombardier CS300 and COMAC C919 are the newcomers in the single aisle aircraft segment with a capacity over 150 seats. Based on the analysis of Boeing and Airbus deliveries and potential need in for single aisle aircraft in the upcoming 20 years, the author conducted a quantitative research, in order to identify the remaining underserved market demand that represents the difference between the sum of Airbus and Boeing production capacity rates in the next 20 years and forecasted aircraft demand for the 2013-2033 period. In order to identify the production rate, the author made use of the official press-releases from Boeing and Airbus. According to Airbus (2015) press center, the company “decided to
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further increase the production rate for its very successful A320 Family to 50 aircraft per month from Q1 2017, matching market demand.” Boeing (2014) reports “it will increase production on the 737 program to 52 airplanes per month in 2018 in response to strong market demand from customers worldwide.” Least Squares Regression method that was already describe in Chapter 1 under “Approach and Methodology” serves a tool in order to calculate the maximum amount of aircraft that can be produced together by Boeing and Airbus in the upcoming 20 years. The author of the research used historical data from both of the producers starting from 1988 to 2014 in order to construct a trend line extrapolated into the future until 2033. In order to raise credibility of the future forecast, the author imposed constraints on production rates of both producers i.e. in the case where future delivery projections per year outpaced the yearly production rate, then planned production rates from producers were used as a maximum by default: for Airbus 50 aircraft per month (600 aircraft per year) and for Boeing 52 aircraft per month (624 aircraft per year) were applied. The trend projection of Boeing historical data starting from 1988 (Figure 5), extrapolated in to the future have shown the Figure 5: Regression analysis of data from Boeing following results: starting from 2013 until 2033 Boeing is B737 Forecast with Trend Projection expected to deliver 10,709 900 800 aircraft to the market. The full 700 calculation model including the 600 500 estimated regression equation B737 Units 400 can be found in Appendix A. In 300 Линейная 200 (B737) the course of analysis the author 100 did not have to adjust the 0 1980 2000 2020 2040 2060 production rate numbers, as all Year them were below 52 per month (Source: Created by author using data from Boeing) (624 per year). The analysis of historical Airbus data from 1988 to 2014 and its extrapolation to the future have presented the following results: in the upcoming 20 year Airbus is expected to deliver 12,080 aircraft to the market. Rapid growth of deliveries over the years affected the forecast, as
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the extrapolated delivery rates outpaced the manufacture’s production rate starting from year 2021. In order to exclude this inconsistency, the author imposed a constraint on the deliveries, where the delivery rate outpaced the maximum production rate i.e. deliveries larger than 50 units per month were set equal to Figure 6: Regression analysis of data from Airbus the maximum monthly output that is equal to 50. A320 Forecast with Trend Projection The blue curve (Figure 6) 800 represents the delivery 700 600 forecast of A320 on the 500 market and the flattened 400 Units 300 A320 out part in the region of 200 600 units on the Y-axis is 100 the imposed constraint that 0 1980 1990 2000 2010 2020 2030 2040 serves as an alignment of Year future deliveries with
(Source: Created by author using data from Airbus) maximum production rate. The whole calculation model can be found in Appendix B. After the identification of the maximum number of aircraft that can be supplied by the industry front runners, the author identified the underserved market demand as follows: the average demand for single aisle aircraft, derived in Table 1 that was equal to 23,876 aircraft minus the sum of forecasted deliveries from Boeing and Airbus that was 10,709 and 12,080 respectively. According to calculation, the underserved market demand is equal to 1,087 units in the upcoming 20 years. As a matter of fact, the deliveries on the underserved markets would be split between the newcomers, namely Bombardier CS300, COMAC C919 and Irkut MC-21. The success of sales is closely tied to critical decision factors on buying commercial jets that would be derived in the course of research in Chapter 4.
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4. Key Decision Criteria on Acquiring Commercial Aircraft
In this chapter of the master thesis a qualitative analysis was conducted in order to derive critical decision factors that stipulate aircraft choice. Moreover, market and customer requirements as well as production and sales risks were evaluated. This chapter serves as a general guideline for product evaluation on the market side i.e. what features are important for the customer and for the end consumer of the product.
4.1 Brand Image
For aircraft manufactures it is important to position the brand on the market and in the customers’ minds in order to increase the awareness and to differentiate the product from the competitors. One of the main functions of a brand is to skew the customer’s choice towards the product, increase customer loyalty and the dependency on the product range. Obviously, the unique characteristics of the product play a major role in the aircraft acquisition process (Malaval& Benaroya, 2002, p.404). It is important to point out that brand image is not created by the manufacturer, but is rather formed in the course of pre-sales, sales, post-sales activities and utilization of the aircraft. The brand image encompasses “products' appeal, ease of use, functionality, fame, and overall value.” Thus for airlines it is crucial to make the right choice as, by buying an aircraft, companies automatically acquire its brand image, which should increase “the goodwill and brand value of an organization” (Management Study Guide, 2013). According to Clark (2007), once a decision on a particular aircraft type has been taken, the company would “stick with that particular technology standard as the fleet develops.” It is in the interest of an airline to “benefit of economies of scale” and high degree of customization within the product range, as airlines can reduce the cost of spare parts inventory, training cost, maintenance costs and at the same time increase planning and rostering capabilities within a given network (p.36). In addition, sales representatives play an important role in forming the brand image of a company. The presence of sales representatives in potential or established markets increases the awareness of the product and is treated as “an essential prerequisite to the purchasing act.” Moreover, they have a crucial role in establishing contacts with potential customers, maintaining
28 the existing customer base, thus contributing to penetration of new markets with new or existing products (Malaval& Benaroya, 2002, p.405).
4.2 Sales Representatives
It is crucial for aircraft manufacturers to identify both the customer and the purchasing pattern of the latter, i.e. what is favored the most within the product: “price, quality, delivery, service.” Moreover, in order to comply with customers’ demand and monitor regional market i.e. market growth, market trends, competitors etc. it is absolutely essential to have active regional sales force and representatives (AlysConsulting, 2014). Sales representatives play a major role in establishing contacts with new customers, providing details on the product range, assisting existing and potential clients in technical support of the product, acting as a mediator between the manufacturer and the customer, organizing effective dialogue and flow of information and providing feedback from the customer side (Malaval& Benaroya, 2002, p.291). Sales representatives are engaged in every step of the sales process, namely pre-sales, sales and after-sales support. The pre-sales stage of the process encompasses customer segmentation and derivation of customer requirements. The sales process itself is characterized by provision of technical details, economic and financial feasibility and purchase agreement. After-sales phase includes the spare parts provisioning and maintenance support of the product, as well as feedback on the product from the operator. Moreover, effective communication with the customer increases customer loyalty and the ability of sales representative to find ad hoc solutions in accordance with the customers’ needs acts as a guarantee for reliable operations (Malaval&Benaroya, 2002, pp.292-295). According to Clark (2007), effective communication between the customer, namely airline, and aircraft manufacturer is a need. It is the task of representatives to provide “cabin layouts, weight statements and detailed analysis of spares investment.” Moreover, sales representative are engaged in the process of guarantee provisions, “customer option selecting, financing, spares provisioning, training, and other technical support areas appropriate to the case.” In addition, sales and marketing department stays in close contact with fleet planning department of an airline and maintains the “continuity of relationship”, as it is in the interest of a manufacturer to ensure on time deliveries, and further opportunities for increasing the backlog (p.23).
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4.3 Web-site
Today the website is treated as an important marketing tool that enables to attract new customers and “keep the existing ones informed of what your business is doing.” What is extremely important to point out is the quality of the website, as it represents the “image” of the business (Johnson, n.d.). The website is known to be “the most basic form of a company’s web presence and is a must in today’s business environment.” It should be used as an effective tool acquaint the potential customers with the brand and inform customers about the value a company creates for them (Narwhal, 2015). Globalization has caused business to refurbish their marketing strategies that heralded creation and maintenance of strong presence in the web. In order to remain competitive and maintain the awareness of the product companies create sophisticated multilingual website, providing extensive coverage of the product and its capabilities (Narwhal, 2015).
4.4 Pricing
Aviation industry is characterized by a high degree of secrecy, especially when it comes to pricing. Though a significant number of business institutions are involved in aircraft acquisition
Figure 7: Classification of operating costs process, still no specific sums are available in the open sources. One thing that is clear, aircraft manufactures, such as Boeing and Airbus “value the deals based on the planes' catalog prices which no one pays” (Michaels, 2012). Though the initial purchase price does play a role, it should not be the only factor stipulating the aircraft choice. An important constitute of investment appraisal are the operating costs (Figure 7) that can be divided into direct operating costs (DOCs) and indirect operating costs (IOCs) of an aircraft.
Source: (Holloway, 2014, p.274) 30
DOCs change with the type of the aircraft utilized, whereas IOCs are not affected by the aircraft type. At the same time the costs can be further divided into fixed and variable costs (Clark, 2007, p.173). This way aircraft economics is put on the top “of the list of the key decision criteria.” Consequently, it is critical to identify cost components and a calculation model in order to identify how the costs change with the type of operation (Clark, 2007, p.171). Thus during the aircraft selection process, not only the price, but also the operation costs must be accounted, as in the long run a high price of initial purchase can be compensated by low cost of operation and the other way around. The analysis of direct and indirect cost will not be carried out in the course of this master thesis, as it is out of the scope of research.
4.5 Customer Support Analysis
4.5.1 Initial provisioning
In order to ensure reliable operations of aircraft in the fleet, initial provisioning (IP) with spare parts, which also includes the power plants and necessary “ground support equipment,” must be planned in a way to follow the pace of aircraft delivery rate and their consequent entry into service. Obviously, purchase of spare parts and rotables in advance incurs a penalty of increased inventory costs. This is a typical trade-off that airline face: “what has to be acquired to optimize inventory costs against target dispatch reliability and what expenditure will this require?”(Holloway, 2010, p.471) On the one hand, in order to make such a decision, operators have to conduct a detailed analysis by evaluating the probability of a failure using historic data, assess the reputation of the supplier and its “responsiveness to urgent requirement”, etc. On the other hand, airline’s operating profile, as well as the “assumed hours/cycles,” distance to distribution centers and network coverage affect the choice. The overall tendency of keeping inventory in the supply chain, rather than keeping it in house prevailed in the past years, due to “high reliability of express delivery services.” Moreover, due to “material management programs” provided by original equipment manufacturer (OEM), as well as maintenance repair overhaul (MRO) companies, have become popular, providing a service “encompassing all aspects of maintenance and supply chain management” (Holloway, 2010, p.472).
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4.5.2 Maintenance support analysis
Maintenance support is the key element of after-sales service. It plays a major role in ensuring safe and reliable operation of an aircraft and, moreover, has a direct impact on revenue earning opportunity and image of an airline (Lufthansa Technik, n.d). The establishment of maintenance service, integration of spare parts supply chain and training of technical staff are the key elements that have to be incorporated prior to the delivery of aircraft in order to ensure commercial operations. Moreover, maintenance and training are seen as effective tools to increase customer loyalty, and constant improvement of a product in line with the consumers’ feedback is an effective tool for strengthening the brand image of a manufacturer (Malaval& Benaroya, 2002, pp.455-457 ). Maintenance process can be divided into light and heavy maintenance (overhaul). The main difference between the two processes is as follows: during light maintenance the aircraft is utilized in accordance with scheduled plan and remains in service, whereas overhaul foresees the removal of aircraft from commercial service. Light maintenance encompasses daily routine pre- flight checks, followed by ramp check on a daily basis. A-checks are performed every “350 to 750 flying hours,” depending on the region of operation and requirements. Such maintenance requires “between 45 and about 260 man-hours.” C-checks are more labor intensive, requiring “between 1,500 and 2,000 man-hours” and a withdrawal from service up to a week. Overhaul, also known as the D-check, is carried out every six to ten years, requiring “30,000 to 50,000 man-hours of labor over a period of four to six weeks.” Typically, light maintenance is done in house, whereas heavy maintenance is outsourced to MRO providers (Lufthansa Technik, n.d.). For aircraft operators maintenance support acts as a “guarantee reassuring the customer about the reliability of his relationship, who commits to following up his product.” That is why it is essential to aircraft producers already during the development stage to integrate maintenance programs in order to classify spare parts and integrate them in the supply chain of MRO providers and distribution centers of logistics companies (Malaval& Benaroya, 2002, pp.466- 467).
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4.5.3 Training and technical Support
Training, apart from having a “pedagogical role” is one of the tools to increasing customer loyalty: during the training process, the consumer explores features of a product, its functions and technological components, thus increasing the confidence level. Consequently, the familiarization with the product increases the probability of success of future sales (Malaval & Benaroya, 2002, p.473). According to Holloway (2010), typical training packages cover “aircrew (initial conversion training) and engineers” (p.472). Engineers’ training starts six months before the first aircraft enters service, flight crew training starts three months prior to operations and cabin crew begins one month before the delivery (Malaval & Benaroya, 2002, p.478). According to Holloway (2010), technical support includes the following: provision of technical documentation from the manufacturer, field service which “involves secondment of technical representatives to an airline operating a substantial fleet of a particular type” and operations support. Typically, large carriers will have manufacturer’s representatives “attached to engineering departments”, whereas small carriers cannot afford such support. Due to a high cost, small carriers have to make sure that in the Product Support Agreement “OEMs undertake to dispatch qualified support personnel several times each year to discuss problems that have arisen.” In addition, it is important for an operator to assess the reliability of the whole value chain in order to ensure stable utilization of aircraft (p.472).
4.5.4 Warranties and guarantees
According to Holloway (2010) Warranties and guarantees are given by the “airframe manufacturer, engine manufacturer, and over equipment vendors.” For brand new aircraft entering service, the manufacturer provides the launch customer guarantees on the weight and performance operational undertaking that include the following: 1. “Weight related guarantees”: these include the Manufacturer’s Weight Empty (MWE), “operating weight” and payload; 2. Airfield performance guarantees: these specify take-off and landing capabilities of an aircraft in accordance with specified operating conditions (p.473). The manufactures typically would use International Standard Atmosphere (ISA), which is equal to 15
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degrees Celsius, at sea level (SL) with maximum takeoff weight (MTOW) as specified operating conditions (Clark, 2007, p.144). 3. “En route performance guarantees”: these as a rule of thumb cover payload-range capabilities of an aircraft, “all-engine and engine-out rates of climb” and operational limitations in case of engine failure (Holloway, 2010, p.473).
Some guarantees include certain deviation margins, as operational performance is highly dependent upon ambient conditions, temperature, and other factors that stay outside the airline’s control (Holloway, 2010, p.473). According to Clark (2007), guaranteed performance “does not strictly represent a real level of performance”, but rather a benchmark value proposed by the manufacturer. Though guarantees are intended to protect consumer rights, and “performance analysis undertaken for a customer will often include fuel mark-ups and margins”, these are not “contractual binding”, due to a number of factors influencing the operations. The latter would be discussed in the “Performance analysis” sub-chapter. But of course, there is a guarantee for compliance with the margins in accordance with Flight Manual and Flight Crew Operating Manual and penalties provisioned for non-compliance (p.150).
4.6 Commonality Feature in Aircraft Manufacturing
4.6.1 Fleet commonality
The fleet family concept in the aviation industry emerged in the nineties that foresaw a high degree of similarity in aircraft systems, design and control system. On the one hand, this concept allowed aircraft manufactures to reduce production and development cost, as the “basic design” was preserved and the concept required “producing variations with different fuselage length and take-off weights.” On the other hand, fleet families were highly welcomed by the airlines, as “commonality between aircraft of different sizes” offered “significant synergies to the operators” (Clark, 2007, p.97). According to Holloway (2010), airlines favor the commonality concept, as it leads to reduction of costs and increase productivity. Moreover, due to standardization, commonality allows for cutting training costs of crews, technical staff and cabin crews. In addition, common use of ground equipment as well as common spare parts provisioning and “inventory
34 management cost” contribute to the overall cost saving process. Apart from that, commonality feature provides airlines this flexibility, as capacity can be adjusted to demand at the day of operations, buy scheduling a larger or smaller derivative of and aircraft (p.474). For fairness’ sake, it is important to mention that this is not true for every business model in the aviation industry, i.e. full service network carriers (FSNC), operating via hub and spokes system require a diverse fleet, due to a complex network, comprising short, medium and long haul flights with heterogeneous payload and range requirements. The low cost carriers, however, operating only short or medium haul point to point flights favor this concept and utilize it to the utmost (pp. 473-474). A good example from the industry is the low cost carrier Ryanair operating only a fleet of Boeing 737-800 and its modified derivatives: Our policy of exclusively operating the 737-800 is part of our strategy to bring you the cheapest flights on all of our routes, and in fact, our sole use of the 737-800 is not just good for fares, but also for safety (Ryanair, 2015). In addition, in 2014 Ryanair “signed an agreement with Boeing to purchase up to 200 new Boeing 737 MAX 200 “gamechanger” aircraft (100 firm & 100 options)” (Ryanair, 2014). Moreover, the author of the research is convinced that commonality does not only act as a cost cutting measure for both manufacturer and the operator, but also acts as a factor that increases loyalty of customers towards the product or a product range.
4.6.2 Crew commonality
Crew commonality enables airlines to reduce costs of crew training and contributes to “rostering flexibility”, i.e. aircraft within a fleet family that share a common type rating “can be flown on a single license endorsement.” As already said, apart from possibility of adjusting capacity with demand, crew commonality enables to increase productivity of both crews and aircraft (Holloway, 2010, p.475). In addition to crew commonality, a concept of cross-crew qualification (CCQ) that was developed by Airbus, “leverages common design concepts, handling characteristics, and cockpit configurations”, and enables for a quick transition from one aircraft to another (Holloway, 2010, p.475). According to Airbus (2015), “transition training from A320 Family aircraft to the A380 takes 13 working days, from A330/A340 Family aircraft it takes 12 working days, while a pilot
35 with no Airbus fly by wire (FBW) experience requires 24 working days to complete the A380 standard type rating course.” Due to reduced time of training for transition, airlines save training costs and increase productivity of crews. In addition, “annual savings in training and payroll costs through improved productivity from the reduced transition time can be up to $300,000 for each new Airbus aircraft added to the fleet.”
4.7 Performance Analysis
4.7.1 Payload-range capabilities
Performance of an aircraft is referred to as “capabilities and limitations of an airplane in different phases of flight.” The most common way to assess performance is to examine the relationship between payload and range that can be expressed in a graphical way in a payload- range diagram. This diagram helps aircraft operators to identify aircraft performance and economics in existing or planned network, by looking at MTOW and examining different combinations of payload and consequent range capabilities, as well as trying out different range combinations and consequents payload capabilities (Holloway, 2010, p.464). Clark (2007) stresses the idea that range and payload stay in direct correlation with aircraft’s ability to generate revenue. Moreover, range capabilities are dependent upon the amount of fuel carried in the tanks that are at the same time limited by the MTOW of an aircraft (p.137) In order to fully understand the interdependency of all input variables, the author of the research decided to explore the elements that build up the weight of any aircraft in service: 1. Manufacturer’s Weight Empty (MWE) - weight of an aircraft produced by a manufacturer, excluding “elements necessary for revenue earning payload to be carried” (Clark, 2007, p.127). 2. Operator’s items- referred to as necessary elements for aircraft operations, these typically include technical fluids (hydraulic liquids, oils, galley water), unusable fuel, seats, lifejackets, etc. (Clark, 2007, p.127). 3. Operating Empty Weight (OEW) - weight of an aircraft ready for commercial service and calculated as the sum of MWE and operator’s items (Clark, 2007, p.128).
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4. Maximum Zero-Fuel Weight (MZFW) - represents the sum of OEW plus the payload loaded on the aircraft (Clark, 2007, p.128). 5. Maximum Design Take-Off Weight (MDTOW/MTOW) - “maximum certified weight at which aircraft can take-off.” Sometimes the MDTOW can exceed the maximum certified weight due to added taxi fuel that is burned by the time aircraft requests take-off clearance. This weight is called Maximum Ramp Weight (Clark, 2007, p.127). 6. Maximum Landing Weight (MLW) - “maximum certified weight at which an aircraft can land”, which consists of OWE plus the payload and unused fuel (reserve fuel and fuel not consumed) (Clark, 2007, p.129). Thus it is not possible to load and lift the maximum payload and at the same time to accommodate the weight of the maximum fuel capacity. Consequently, for airlines this is always a tradeoff between the range of the mission and the payload that has to be transported (DVB Bank, 2013, p.57).
4.7.2 En-route performance
En-route performance of an aircraft is referred to as “function of aircraft definition and operational conditions.” Since, it is dependent upon factors that stay out of the airlines control, it is important to differentiate between nominal and guaranteed performance (Clark, 2007, p.149). Nominal performance is known as “marketing level of performance and the one used in the performance analysis.” This type of performance can be found in Performance Manual from a manufacturer and represent an operational average” (Clark, 2007, p.150). Guaranteed performance, on the other hand, does not “represent a real level of performance”, but is rather a benchmark value or the upper limits that must not be exceeded. This notion was already discussed by the author in subchapter 4.5.4 “Warranties and guarantees” (Clark, 2007, p.150). The use of mathematical modulation, on the other hand, makes it possible to identify performance of an aircraft, which plays a major role for fleet planning purposes, when “ambient and operating conditions are defined.” Since aircraft performance is a “function of the assumptions and statistical probabilities”, the application of historic data and effect of ambient and operating conditions can help in simulation of performance under different conditions.
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Moreover, fluctuating ambient conditions deteriorate the payload- range calculations and identification of “true limits of an aircraft’s performance on a real route”, as they are isolated from ambient conditions. But for the analysis to have a real value, it is crucial for both manufacturers and operators to jointly work out a system that satisfies both sides on how to calculate the performance, using a predefined set of criteria and variables (Clark, 2007, p.151). Further analysis of variables and statistical methods of identification of en-route performance will not be conducted, as it is out of scope of the research.
4.7.3 Airfield performance
According to Clark (2007), apart from ambient conditions, loading restrictions and environmental regulations, MTOW is affected by the runway length. As all of the mentioned above factors are out of airlines’ control, they impose artificial constraints on payload and range capabilities (p.137). Manufacturers provide customers with airfield performance for evaluation purposes only, as every take-off is a unique event isolated form ambient conditions, runway configuration, elevation, wind, etc., which requires calculations (Clark, 2007, p.137). “The essence of take-off calculation is that an engine failure is presumed to occur at a critical point in the take-off run.” If an engine failure occurs before the V1, the speed at which a pilot has to take a decision in case of a failure, then the jets must have sufficient remaining runway distance to stop safely. In case of a failure after the critical decision point, the pilot must be able to make an aircraft airborne using only one engine (Clark, 2007, p.138). This way, the aircraft choice is driven by the network of the operator and by the served markets, as they define configuration of an aircraft, MTOW and impose limitations on take-offs and landings (Clark, 2007, p.149). In order to elaborate on the topic, the author of the research decided to bring forward an example of an airport that imposes harsh constraints on operations. Quito, the capital of Ecuador, with its international airport, is located 2,850 meters (8,700 feet) above the sea level, surrounded by mountainous area, makes it one of the most challenging airports for pilots in South America, which had ten fatal accidents from 1984. Due high elevation, an aircraft requires a longer run and a lower MTOW that diminishes payload capabilities. In addition, inbound aircraft approach at a
38 higher speed, due to decreased air density, in order to remain airborne and consequently require a longer runway distance for landing (Solano, 2013). As seen from the analysis, airfield location, as well as configuration imposes certain constraints on the operational and performance side. Therefore, fleet planning is a complicated procedure, where aircraft have to not only satisfy existing and potential demand of the network, but rather fit the network in order to operate at an optimal payload- range level, and provide flexibility in scheduling and costs benefits to an operator.
4.8 Power Plant Evaluation
According to Holloway (2010), due to intense competition in the sphere of power plant suppliers, customers, now days have a possibility to choose and equip an airframe with a suitable engine. Moreover, the cost of power plant represents a significant portion of the overall cost and can go to up 25 per cent of the initial purchase price and furthermore, engine maintenance and fuel are “significant elements of DOCs” and can exceed 50 per cent of the “typical life-cycle costs.” Thus it is crucial for airlines to assess technical issues and evaluate performance on a specific airframe during the fleet planning phase (p.468). There is a number of “technical metrics” that are used to assess power plants: thrust of the engine, sector fuel consumption on a predefined route and under specified ambient conditions, fuel burn with the changing payload and range requirements, “thrust- to –weight ratio”, etc. During the fleet planning process, airlines conduct a thorough analysis in order to make sure that an engine on an airframe is able to comply with network specific take-off conditions i.e. take-off form short runways, assure safe and reliable operations, as well as reduced maintenance requirements, and moreover comply with noise and emissions levels (Holloway, 2010, 468). For the purpose of this research the author conducted a general analysis of the critical decision factors, namely fuel burn and maintenance variable.
4.8.1 Fuel burn
Now days, “fuel efficiency has become paramount with the recent increase in oil priced and growing concern about CO2 emissions.” Aircraft operators will always try to investigate the productivity of an engine/airframe combination within the network, working under usual
39 assumption of a typical seat load factor, cargo load and cabin configuration of an airline (Holloway, 2010, p.468). Interestingly, but selecting the most fuel efficient engine does not necessarily lead to efficient fuel burn, due to influencing factors that were derived in the sub-chapter 4.7 “Performance Analysis.” As a result, operation under “off-optimum” conditions are penalized by increased fuel consumption. Moreover, short sector fuel flights cannot assure economical fuel burn, as a significant part of the flight is spent in an inefficient phase i.e. take-off, climb to the cruising altitude, low altitude maneuvering in a high drag configuration. Medium and long range missions, on the one hand provide a more efficient performance, as a major part of the mission is spent on a cruising altitude (Clark, 2007, p.174). But on the other hand, according to Nobre, Walker and Harris (2012), it is crucial to identify the optimum range of the mission, as the price of carrying the weight of the fuel is reflected in the increased fuel burn (p.68).
4.8.2 Maintenance variables
Every time during the critical phase of the flight i.e. take-off, climb, rejected take-off (RTO), go around, etc. when the engine is operated at the maximum thrust, it leads to a physical wear out of the mechanical elements. In addition, the region of operation i.e. cold temperature exposure, sand or dust exposure, etc., ambient conditions, elevation, etc. also affect the power plant (Clark, 2007, p.177). According to Holloway (2010), power plants suppliers tend to create “engine families” that represent derivatives of a former power plant, rather than a brand new model, which leads to already discussed commonality. “Engine families” on the one hand, have become a cost cutting measure due to “reduced spares and maintenance training cost”, when an operator utilizes numerous derivatives within a given fleet. On the other hand, due to the fact that engine maintenance is outsourced and spare parts provisioning is done by OEMs supply chain or MRO’s logistics department, airlines “have become less concerned about commonality” (p.469).
4.9 Cabin layout
Cabin configuration and the layout play a significant role during the fleet planning phase. Primarily, cabin layout is connected to compliance with airworthiness regulations i.e. maximum
40 allowed number of passengers, tied to the number of emergency exits, and commercial operations, which are tied to revenue opportunity (Clark, 2007, p.111). Though the size of fuselage cross section and the number of seats abreast are of the greatest importance to airlines, at the end of the day it is up to them to decide the efficiency of cabin volume use, which differs from one aircraft to another, depending on the business model of the operator (consumers) or the customer (leasing companies/ consumers) i.e. for low cost carriers spacious overhead bins are an advantage, due to the nature of business; leasing companies prefer a high degree of standardization, as reconfiguration may be needed due to different consumer needs over the aircraft life period; for full service network carriers cabin flexibility is an important aspect, as it can be reconfigured in accordance with market demand for example from two to three-class operation and the other way around (Clark, 2007, p.115).
4.10 Political Risks
Now days, manufacturers as well as any other business make a serious mistake when they do not take political risks into account. Political risks do not only deal with economic factors i.e. inequalities in disposable income, propensity to save/spend or the increase of the “sovereign debt”, but also deal with governmental interventions to “promote state-owned companies” or set trade barriers, as well as impose sanctions that reduce the export of technologically advanced equipment in certain regions in the world. As a matter of fact, the assessment of political risks enables companies to occupy and advantageous position and increase market share in existing markets (Culp, 2012).
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5. Market Perspective Assessment for MC-21 Single Aisle Aircraft
This chapter of the master thesis will assess the perspectives of MC-21 on the international arena by benchmarking it against competing aircraft, based on key decision criteria on acquiring commercial jets, derived throughout chapter 4. The SWOT analysis will be applied in order to identify strengths and weaknesses, as well as opportunities and threats of the MC-21 product. Though key decision criteria were derived from available aviation related and general business related literature, it was not always possible to fully apply derived theoretical framework on real life examples, due to lack of credible quantitative or qualitative data i.e. cost, price as well as performance related data are not available, due to confidential nature of information. As a consequence, the author conducted an analysis making use of credible available data in open sources, where it was possible.
5.1 Assessment of MC-21 Based on Derived Key Decision Criteria
5.1.1 Brand image
Well established market players, namely Airbus, Boeing have a long lasting history, expertise and a strong brand image that helped to them to form strong loyalty from the customer/consumer side. Moreover, “intense marketing and aggressive advancements in aircraft technology has led both companies to the very top” (Stephens, 2014). The author of the research, being Chief Sales and Marketing Officer of United Engine Corporation, is responsible for joint implementation of Irkut Integrated Marketing Communication (IMC) strategy for MC-21 namely with PD-14 engines sees the establishment of MC-21 on an international arena as a great challenge. First of all, MC-21 as a product must possess something unique as a product in order to differentiate itself from competitors. Moreover, MC-21 as a brand does not currently have neither any history nor aircraft flying in air, which is obviously a weakness of the product. According to Trimble (2015), referring to Russian officials, it is expected that after entering the service, aircraft will be rebranded and named Yak-242. The author of the research wants to stress the idea that such rebranding can lead to deterioration of sales efforts abroad, due to an underlying linguistic phenomenon, namely homonym.
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A homonym is “a word pronounced the same as another but differing in meaning, whether spelled the same way or not” (Dictionary, 2015). “Yak” which is an acronym from “Yakovlev”, an aircraft producer, and “yuck” according to Dictionary (2015) meaning “disgusting substance, person, or thing; someone or something nasty” have the same pronunciation, but imply completely different meanings. Thus, the author of this master thesis recommends evaluating all implied risks before making the final decision on the brand of the aircraft. As it was pointed out by the author in Chapter 2, which analyzed current market competitors and history, no country could sustain the burden of aircraft development and production, unless the forces and efforts were joined, as it was done by Airbus by joining the efforts of four countries for creating a competing product, as already described by the author in Chapter 2. Currently, Russian Federation is running two priority aviation programs, namely Sukhoi Superjet 100 (SSJ100) and Irkut MC-21, which are fully independent. Though, as was already pointed mentioned, UAC (United Aircraft Corporation, 2015) foresaw consolidation of intellectual, financial and industrial resources for the development and implementation of current and future aeronautical programs, it runs the development of completely different products with different manufacturing philosophies, not sharing any commonality, marketing and after-sales. From the standpoint of brand and increase of the awareness, lack of joint marketing with SSJ100, which is already on the market, is seen as a weakness by the author. Joint marketing, from author’s standpoint, is an opportunity for MC-21, which can reduce the financial burden of establishment of regional strategic sales force and distribution channels, and moreover reduce the overall marketing and sales costs, by sharing them. At the end of the day, finding a rational solution in marketing and sales efforts does not guarantee a market share, due to a threat arising from Bombardier’s CSeries CS300 and COMAC C-919, who are penetrating the single aisle market with new product, and having a strong brand name in the case of Bombardier. Thus in order to survive, branding, marketing and sales should be correlated with modern standards of marketing, PR and advertising. Irkut together with UEC should turn round to social media and learn to say verity, and not to fable. As a remedy, Irkut and UEC should together find and hire a professional IMC company to develop IMC strategy to overcome the major barriers like incompetence, lack of IMC experience, fear of social media communication and closed nature in order to gain a market share.
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According to Sales and Marketing Vice President of Irkut Corporation, Mr. Budaev, the corporation currently uses all possible mass communication tools, such as internet, advertising and presentation material, advertorials, participation in international aviations shows and conferences in order to promote the brand of MC-21 in different regions of the world (Personal Interview, 18 March, 2015).
5.1.2 Sales representatives
As already derived in Chapter 4, sales representatives are an important intermediary between a customer and a manufacturer that are engaged in promoting the product abroad, thus contributing to the penetration of new markets and establishment of solid positions on the existing markets, increasing the market share. Moreover, sales representatives provide extensive pre-sale and after-sale support and treated is one of the most effective distribution channels for a manufacturer. According to Boeing (2015), the manufacturer is engaged in pre-sales, sales and after- sales support in 150 countries around the globe, employing “165,000 people across the United States and in more than 65 countries.” Airbus (2015) employs 55,000 skilled professional around the globe, and managed to establish numerous subsidiaries in the United States of America, China, Japan, India and Middle East and opened “more than 150 field service offices around the world.” At the same time, Bombardier (2015) has a similar approach and is present in Canada, USA, Northern Ireland, China, United Kingdom and United Arab Emirates, providing pre- and after- sales support to the customers around the globe. According to Sales and Marketing Vice President of Irkut Corporation, Mr. Budaev, the corporation will establish “several regional sales offices later on,” after the first deliveries of the aircraft (Personal Interview, 18 March, 2015). After the consideration of Airbus, Boeing and Bombardier approaches of the establishment of regional offices for promoting and supporting the product, the author is convinced that the approach of Irkut Corporation towards the establishment of regional offices must be revised. Due to the fact that Irkut Corporation plans to penetrate international markets, the lack of regional offices and sales representatives abroad is obviously seen as a weakness by the author of the research.
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Moreover, the author is convinced that the establishment of regional sales offices is an opportunity for the manufacturer that would contribute to the penetration of the market. As an option, cooperation with SSJ sales department can be considered, due to the already established network with agents, spread around the world. This measure will benefit to the profitability of MC-21 project at the production stage, as high investments are not required. Moreover, cooperation in other fields can be horizontally integrated within UAC and provide support to other existing and future projects, by allocating the direct costs and tracing indirect cost on a specified basis, to the cost object, namely aircraft. This will enable the manufacturers consolidated in UAC to cut costs of individual products.
5.1.3 Web-site
According to the analysis in Chapter 4, a website should have a strong orientation on the customers, and keep the potential and existing company informed about the products, technologies and development. In addition, a web site is a tool to promote the brand to the customer and inform the latter about the value the product creates. The author of this research would analyze only the web-site of Irkut Corporation with MC- 21 in the course of this sub-chapter and try to identify the weak spots that can be changed in order to raise credibility of the product and brand itself. The web-site under analysis is located on the domain http://www.irkut.com/, where the version in Russian language is the default version. A peculiar fact that was identified by the author- the English version of the web-site in not available, as an attempt to access the latter is accompanied by the message “English version is coming soon.” The question that arises is: who are the main customers? Though international customers would directly contact the head office or arrange a meeting during international aviation shows in order to get information on the product in English language that is certainly available, nevertheless the mere fact that English version is not available, deteriorates the image of the company, as the web-site is the first channel to the information on the product. This is seen as a weakness by the author, as international customers do not have a proper access to available information. An opportunity that arises from the weakness is the implementation of a multilingual concept within the web-site that targets main customers and
45 keeps them informed about the projects and provides high quality download materials covering the product. In the course of the analysis, the Russian version of the web-site was examined and the author identified a number of inaccuracies and moreover found a number of sentences that sound in a sophisticated financial or operational manner to an amateur, unfamiliar with aviation, and completely lack sense and trustworthiness to an aviation related expert, or ordinary employee in operational and revenue management sectors. Some of the examples were chosen by the author, translated into English language and analyzed below: 1. “МС-21 способен обслужить растущие пассажиропотоки без увеличения потребности авиакомпании в новых слотах в аэропортах” (Irkut, 2015). MC-21 is capable of accommodating growing demand without requesting for additional slots in airports. The underlying problem of this argument on the official web-site is that it is completely isolated from the airlines’ business standpoint, and moreover contradicts with it. According to Holloway (2008), the airlines operating a hub and spokes system as well as point to point would increase the frequencies of flights, consequently would request for additional slots as the demand grows, as “a carrier dominating frequencies on a route will benefit from a disproportionately high market share.” Moreover, frequencies are dependent upon on the “local competitive situation in O&D [Origin and destination] market served” in order to ensure that “schedule contributes to hub strength in terms of destination served, share of departures, and share of slots and/or gates” in order to create artificial barriers to competitors to entering the hub and at the same time “achieving a high level of connectivity” (p. 452). Thus from the standpoint of an aircraft operator, increase of frequencies and consequently of slots is a measure to maximize the contribution of a particular flights to the overall network, but not the means of saving costs by not adding an additional flight and not paying all related fees for its operation. Moreover, a slot at the airport is not the only prerequisite for departure and arrival. Apart from airport slot, an airline must request for an air traffic control (ATC) slot on the day of operations in order to avoid congestions of the airways, which is valid for a “specific flight and for a specific departure time window of 15 min” (Slot Coordination Switzerland, 2015).
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2. “МС-21 остается прибыльным даже в турбулентной экономике и на рейсах с низкими доходными ставками” (Irkut, 2015). MC-21 remains profitable even in volatile economy and on the routes with low yield fares. Due to complex nature of airline business, airlines apply advanced revenue management systems that foresee the following: yield maximization, load factor maximization and revenue maximization. Typically, airlines would fly a non-profitable route if it contributes to the overall network of an airline; in other case airlines would cancel the flight if it is unable to cover DOCs (Holloway, 2008, p.496-498). As an example from the industry, due to political tension between Russian Federation and the West, which affected the national currency, the propensity to travel and consequently the demand decreased. As a consequence, Lufthansa, a German carrier, cancelled service to some of the cities in Russia, namely Samara, Nizhny Novgorod and partially flights to Moscow, due to a “downward trend” in demand that started in 2014 (Montag-Girmes, 2015). Thus such statements as “to remain profitable even in volatile economy” are not back up real airline expertise and are very far from reality, as not having a sufficient seat load factor, in combination with lean yield management, cannot guarantee profitability of a route even if an aircraft is extremely efficient in terms of operations. 3. “МС-21 позволяет бюджетным авиакомпаниям успешно бороться за высокодоходных пассажиров без роста себестоимости кресло-километра” (Irkut, 2015). MC-21 allows low cost carriers to fight for high-yield passengers without the increase of a seat-kilometer cost. The author wants to stress the idea that the cost of a seat- kilometer is not affected by the ability of a passenger to pay a higher or a lower price. Moreover, the notion of high-yield passengers is usually related to passengers flying business class that is obviously not available in the low cost carrier business model. In addition, the operating costs of transporting a passenger in business class are equal to the costs of transporting a passenger in economy class. The only price difference comes in the service level provided i.e. beverages, meals, magazines, etc, but these are covered by the fare price on a booking stage (Holloway, 2008, pp. 31-34). Thus, as seen again, the argument does not have a solid ground. 4. “Возможность обеспечить высокий налёт благодаря снижению времени оборота в аэропорту и увеличению интервалов между работами по техническому
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обслуживанию, а также более высокой крейсерской скорости” (Irkut, 2015). MC- 21 enables airlines to increase aircraft utilization due to short turnaround time at the airport, increased maintenance intervals, and a higher cruise speed. According to Holloway (2008), high utilization is indeed tied to turnaround time. But turnaround time is stipulated by an external factor that cannot be controlled or managed by an airline, namely airport of operation. In slot regulated airports, where sometimes demand exceeds the capacity, a quick turnaround is not possible, due to congestion of the airport itself. Moreover, the turnaround time is directly tied to business model i.e. FSNC or LCC. FSNCs require by far more time for a turnaround, in comparison to LCC due to flights operated into hubs and high service levels of the carriers i.e. catering, baggage handling, pre-flight cabin cleaning, etc in order to sustain a high quality standard (pp.32-33). LCCs, on the other hand would operate point to point flights, excluding hubs and choosing uncongested airports, where a short turnaround is possible due to lack of internal airport constraints (Holloway, 2008, p.33). Moreover, as already described in Chapter 4 under “Performance Analysis,” cruise speed is affected by the endurance of flight i.e. short or medium haul flights in case of single aisle aviation. Short sector flights lack the possibility to exploit the cruise altitude and speed due to its nature, and spend most of the time in an efficient phase of flight, namely climb and low speed maneuvering on the approach, whereas medium haul flights spend most of the time on the cruise altitude with cruise speed. Moreover, the argument of “higher cruise speed” of MC-21 is isolated from ambient conditions that can have a positive or a negative effect on the speed. Thus, high utilization is not connected with technological excellence of an aircraft, as it is put on the web-site, but rather is stipulated by internal company factors and external operational constraints of the airport and ambient operating conditions. The author of the research presented some of the examples from the web-site that are supposed to raise customers’ interest and credibility of the project and the brand, but in fact, have an opposite effect, when explored by people working in the aviation industry. This is definitely seen as a weakness by the author, as sophisticated phrases can impress a potential passenger or an amateur, but definitely neither fleet planner from airlines, nor leasing companies, who are asset managers, conducting investments appraisals and performance analysis.
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The author suggests hiring a professional team of experts to create a multilingual website and to post credible information on the product that is connected to market realities, and provide download materials on the product, as well as video material, which are an effective means of communicating product and company values. Moreover, it is crucial to inform the public and potential customers about the program status, first roll out and maiden flight in order to assure effective communication.
5.1.4 Customer support analysis
An aircraft is just an airframe, which becomes a product that can be successfully marketed and sold, when it encompasses after sales support, training, logistics, spare parts and inventory. All these together must make sure that “products and services meet or surpass the expectations of the customers” (Management Study Guide, 2013). In addition, as already mentioned in Chapter 4, the quality of after sales support is directly tied to regional sales representatives. Airbus, for example employs 4000 people to “cover all areas of support – from technical and spare parts, to crew and personnel training and aircraft upgrades.” Moreover, technical specialists provide 24/7 technical support for the customers. In addition, Airbus has more than 290 customer support representative “in more than 150 cities close to the airlines they serve” and has its own global network of spare parts and support centers in Toulouse, Washington and Beijing, as well as training centers in Toulouse, Beijing, Miami, Bangalore and Hamburg (Airbus, 2015). Boeing, as well as Airbus, sustains a very high level of customer support, having 300 “field service representatives” in more than 60 countries and Aircraft on Ground (AOG) teams “ready to dispatch expert help anywhere in the world”, as well as global spare parts logistics. Moreover, the company offers “19 flight and maintenance training campuses on six continents with 80 full- flight simulators.” In addition, airlines can consult Boeing’s experts via a secured “MyBoeingFleet” portal for technical assistance and for “essential information such as engineering drawings, details about a part or product, or maintenance documents”, which is available 24/7 for the customers (Boeing, 2015). Bombardier, in turn, also ensures the global presence in order to comply with the customers’ needs. Apart from Canada, it has certified maintenance centers in USA, Australia, Ethiopia, China, United Kingdom, Russian Federation, Slovenia and Netherlands. Moreover it
49 has 26 training centers for crews and technical personnel, covering all current and potential markets all over the globe. In addition, to ensure reliable operations, Bombardier has numerous distribution centers in China, United Arab Emirates, Hong Kong, Brazil, USA, Japan and Australia, which are an essential part of Bombardier’s value chain (Bombardier Commercial Aircraft, 2015). Irkut Corporation with MC-21 is currently preparing the ground for providing a high quality after-sales support to customers, once the aircraft in commercial use. So far, according to Irkut Corporation’s presentation, there are agreements with MRO Providers, namely Lufthansa Technik, Aeroflot, FL Technics, Vostok Technical Service and S7 Engineering that would offer maintenance support on a global scale. Along with MRO, Irkut Corporation will use the expertise of EMS Services, Aviahelp, Lufthansa Technik, etc. to offer global spare parts logistics for aircraft operators. In addition, it will use training facilities for crews and technical staff of Aeroflot, Lufthansa and FL Technics. Full Irkut’s Corporation network of service providers can be found in Appendix D. The author of the master thesis is convinced that preliminary and contractual agreements on service provisions are important steps in creating an attractive product. Moreover, according to Mr. Budaev, Sales and Marketing Vice President of Irkut Corporation, the manufacturer plans to offer free crew training as well as financial support to airlines, willing to acquire MC-21 commercial jet (Personal Interview, 18 March, 2015). As crew trainings require significant investments from airlines, this can be an attractive offer for airlines, planning the fleet roll over in the near future. Definitely, the scope of potential services to be provided is hardly comparable to well established veterans, which is seen as a weakness by the author. Moreover, the supply chain of MC-21 is vulnerable to political climate that can have a negative effect not only on production capabilities, but on the sales geography as well. The latter will be discussed later in the course of the research. The establishment of regional support and sales representatives is seen as an opportunity by the author, as it will contribute to penetration of potential markets, as well as to increase of brand awareness, which is critical to aircraft manufacturer. In addition, the rise of new competitors, namely Bombardier CS300 and COMAC C-919 represent a threat to MC-21 in single aisle aircraft market, as for example regional carriers, which operate Bombardier aircraft
50 and plan to increase the scope of operations on high demand routes, would definitely acquire CS300, due to loyalty to the product, commonality and CCQ features, various standardized procedures and already establish support and logistics systems. Moreover, competing manufactures can have an advantageous position in terms of capturing underserved markets due to the political climate, which is also a potential threat for MC-21.
5.1.5 Commonality feature
As already described in Chapter 4, commonality, as well as CCQ is an important pre- requisite for cost saving activities on trainings, spare parts, which also provides scheduling flexibility to airlines. Looking back at Figure 4, it is seen that the single aircraft segment is dominated by Airbus and Boeing, which have implemented commonality features back in the 80s, which was already covered in Chapter 3. This was one of the success factors for both A320 and B737, which increased the customers’ loyalty, which later paved the way to the top selling aircraft in the world, namely A320 and B737. According to Irkut (2015), currently МС-21-300 (160-211 seats) and МС-21-200 (130-176 seats) are under development, and would form a family, possessing a high degree of commonality. This is definitely a strength for MC-21, as it makes the product more appealing to the customer, but taking into account the competing products and customers expectations, “commonality” is something that is referred to as “a must have” and not something unique, giving a competitive advantage. What could increase the attractiveness of the product, according to author’s opinion, is common cockpit concept and a possibility of CCQ with already existing regional jet SSJ100, which was developed independently, using different philosophies, as already discussed by the author at the beginning of Chapter 5. Thus, the author is of the opinion that lack of commonality concept within UAC commercial products is a weakness, as it would have increased the loyalty of the customer, due to a diverse product range, encompassing regional and single aisle aircraft with a high degree of standardization.
5.1.6 Performance analysis
According to Chapter 4 of the research, performance analysis, namely payload range capabilities, airfield and en-route performance, are directly tied to revenue opportunity of an
51 airline. Due to the fact that all of the competing products are under development, no credible data is available. Moreover, the comparison of specification data from manufacturers would not provide a credible result, as it is isolated from operating and ambient conditions, as well as from the region of operation, and specific character of the network i.e. destination portfolio and endurance of flights. Nevertheless, the author of the research used the comparison of payload- range diagrams (Figure 8), provided by DVB Bank SE, which specializes in financing commercial aviation and provides consultancy services in the sphere of transport (DVB Bank, 2015).
Figure 8: Comparison of payload-range diagrams
(Source: DVB Bank SE Aviation research, 2013, p.60) According to available data, MC-21 supersedes COMAC C919 and Bombardier CS300 in terms of payload-range capabilities, but stays behind the counterparts from Airbus and Boeing. These results are subject to changes, once the operational statistics from manufacturers is available.
5.1.7 Power plant evaluation
As defined earlier in Chapter 4, thrust, as well as fuel burn, maintenance variable and compliance with environmental and noise standard play an important role during the evaluation
52 process. Unfortunately, the author of the research was not able to conduct fuel consumption and maintenance cost comparison due to lack of quantitative data. Due to the fact that power plants as well as airframes are still in the development or testing stage, no credible data is available. What is important to mention, all of the engines that are developed comply with Committee on Aviation Environmental Protection (CAEP 6) and have significant margins to the limit, as well as comply with ICAO Stage IV noise levels. Thus from the legal standpoint of air navigation and landing charges, no engine has an advantage over the other, as long as output parameters stay in line with legal limits (Air Insight, 2011).
5.1.8 Cabin layout
According to Irkut’s presentation slide that can be found in Appendix E, MC-21 cabin exceeds the dimensions of direct competitors. That is definitely a strength for the project, as this parameter cannot be altered by neither Airbus, nor Boeing, as frame of all refurbished models stays unchanged. According to Irkut (2015), the most spacious cabin within single aisle segment is able to provide a comfort level comparable to long haul aircraft. Moreover, the width of the aisle enables the passengers to walk freely even during passenger service, without the aisle being blocked by trolleys. In addition, spacious overhead bins allow for additional hand luggage. Thus spacious cabin is a definite strength of the product, as it can utilized to the utmost by in accordance with the business model of an operator.
5.1.9 Political sanctions
The author suggests considering sectoral sanctions that have been imposed on Russia in 2014 from the point of view of their potential risks for MC-21 further project development, marketing and sales. For the purpose of the research, Mr. Budaev, Sales and Marketing Vice President of Irkut Corporation, was asked to comment political sanctions and their influence on the MC-21 project. According to Mr. Budaev, currently Irkut Corporation does not have any concern about the sanction regime, as so far MC-21 project was not influenced. Nevertheless, such problems may occur, depending on the changes in political environment. Moreover, Mr. Budaev expressed the
53 opinion that sanctions have a minor influence on the airlines’ to decision on acquiring MC- 21(Personal Interview, 18 March, 2015). In context of sanctions, the author does not fully share the idea of the invulnerability of the project and proposes to consider the aspect of trade restrictions in the sale of aircraft to the so called rogue states and risks associated with the failure of suppliers to deliver to Russia high- technological equipment and engines. As mentioned in Chapter 2, avionics, navigation systems, landing gears, engines and APU, which generally exceeds 85% of all aircraft systems, are supplied by Western companies. Bringing forward an example from the industry, the author of the research wants to elaborate on the case of Tupolev 204 SM, equipped with PS90A2 engines, which were developed by Russian Aviadvigatel together with US Pratt & Whitney. Russian Federation wanted to deliver five Tu-204SM aircraft to Iran in 2010, but the U.S. State Department blocked the deal, since Iran was in a list of rogue states and moreover, the deal was subject to the US Export Administration Regulations (Aerotime, 2015). The Russian made SSJ100 regional jet is already in commercial operation, as well as MC- 21 is already under production now. However, they cannot be delivered to the outcast club countries due to great amount of US OEM engines, avionics, and control systems. Consequently, these regulations close the niche market for the Russian aircraft, thus restricting the sales geography (Aerotime, 2015). Thus there is a real political risk of the ban on the delivery of the aircraft in countries such as Iran, Syria, Cuba, North Korea, Sudan, Zimbabwe and others, which decreases the sales scope. As a reaction, in February 2015 for, example, it was decided to decrease the percentage of foreign avionics on SSJ100 “from 48% to 80% thus lowering its dependence on foreign suppliers.” This decision was triggered by the current political stance of the West and it foresaw the implementation of mechanisms that would secure “national aircraft programs from the potential escalation of sanctions against Russia”, and started import substitution programs. However, the latter will need years for development and will incur significant cost for European Aviation Safety Agency (EASA) and Federal Aviation Authorities (FAA) certifications (Aerotime, 2015). The author of the research is convinced that the situation with political sanctions is ambiguous. On the one hand, the use of Western equipment certainly increases the credibility of
54 the project, and reassures the potential customer, which is obviously a strength of the project. On the other hand, due to unstable political situation there is a degree of uncertainty about the direct influence of sanctions on the project that is seen as a threat. Strategic options that arise from the weakness, is the opportunity to undergo import substitution programs that would need additional investments, and at the same time start the in-house development of similar equipment, which would decrease the dependency on Western suppliers. The overall political situation between Russian Federation and the West is seen as a threat, as it can skew customers’ choice towards a competing product.
5.2 Market Perspective
As identified earlier, the success of an aircraft and its sales is dependent upon the derived critical decision factors. According to calculations, conducted by the author in Chapter 3, who identified the underserved demand by Boeing and Airbus in the upcoming 20 years, the market will require additional 1,087 single aisle aircraft together with projected production rates of Boeing and Airbus that are 10,709 and 12,080 units respectively. This underserved niche will have to be split between the newcomers, namely Bombardier CS300, COMAC C-919 and Irkut MC-21 in the upcoming years. The author of the research is convinced that transition of airlines, which historically operated Airbus and Boeing aircraft is hardly possible, due to the loyalty of the customers, which was developed throughout the time by the means of homogeneous procedures, high degree of standardization, extensive global support and of course, by operational history, which formed a credible image, as well as a strong brand that is welcomed not only by the operators, but by the passengers as well. Moreover, the author is convinced that due to a positive trend in traffic growth, regional airlines, which operate regional jets from Bombardier, will be loyal to Bombardier and its products, as it is already familiar, and encompasses beneficial cost reduction features, summarized in Chapter 4. This way, COMAC C-919 and Irkut MC-21 products, will have to fight for customers, who might run the risk of introducing a product, without operational history and with a limited coverage of after-sales support, due to the production scope. The author, using both quantitatively derived underserved niche and qualitatively derived key decision criteria on acquiring commercial jets, can roughly assume that COMAC C-919 can conquer 40 % of an
55 underserved capacity, or 435 units, being a political decision and operated on Chinese domestic market that is expected to show drastic growth in the upcoming years. Bombardier with CS300, as well Irkut MC-21 can expect 30% of the overall niche, leaving them both with 326 aircraft. For Bombardier, this number is not critical, as CS300 is an extended version of CS100, a regional jet, which has a well establish duopoly together with Embraer on a regional aviation market. For Russian Irkut MC-21, taking into account the production rates of Boeing and Airbus that are expected to be 52 and 50 units per month after year 2017 or 624 and 600 per year respectively, the overall twenty year niche for MC-21 is roughly a half, produced by Airbus or Boeing on an annual basis. Thus the author of this master thesis is skeptical about a financial success of the project, meaning the ability to have an adequate return on invested capital in the project. Moreover, the author is convinced that lack of strategy for communicating company values and the product via the multilingual website and lack of established regional sales offices, which are one of the most effective distribution channels, would hinder international sales. As a result, sales of MC-21 could be limited by Russian market only, supported by a political decision, rather than by efficiency and reliability of an aircraft, which in still under development, having neither operational history nor data.
5.3 Recommendations
In Chapter 5, the author has identified market perspective of MC-21, based on critical decision factors on acquiring commercial jets in Chapter 4, taking into account internal factors, namely strengths and weaknesses of the product, as well as opportunities and threats that refer to external factors. That means that the market perspective has been developed throughout the process of data collection and analysis and represents hypotheses, derived by the author using indicative approach. First of all Irkut Corporation has to ensure that MC-21 becomes a competitive product, enjoying an advanced after-sales support with integrated supply chain solutions in order to comply with customers’ requirement on a regional or global scale, depending on the sales success. Moreover, it is crucial to increase the awareness of the product on the international scale using all available multilingual means, as well as direct distribution channels via the establishment of sales representatives.
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Secondly, due to rising political tension, it is important for Irkut Corporation to diversify the supplier’s network, in order to reduce the dependency on one supplier and to undergo import substitution program, for creating in-house equipment, not subject to political instabilities. In addition, outsourcing can reduce the self cost, having a positive effect on the competitiveness. Thirdly, further or already existing projects within UAC must have common philosophy and a certain degree of standardization between the products, to increase the loyalty of the customers, due to availability of a common product in different in range and capacity possibilities. Fourthly, the establishment of joint ventures with international companies that would act not only as suppliers, but rather risk share partners, would increase the credibility of the product and help to gain solid ground in international markets.
5.4 Areas of Further Research
Due to unavailability of operational quantitative data, the author of this master thesis sees the quantitative comparative analysis of direct operating costs of competing aircraft, stipulated by the geographical location, as an interesting topic for further research for identifying a numeric advantage over current market players.
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Appendices
Appendix A: Regression analysis of data from Boeing
Historic Data Forecast Total Deliveries Until Year B737 Year per year per month 2033 per year per month 2015 413 34 Year Units 2016 424 35 2013 440 1988 165 14 2017 436 36 2014 485 1989 146 12 2018 447 37 2015 413 1990 174 15 2019 458 38 2016 424 1991 215 18 2020 470 39 2017 436 1992 218 18 2021 481 40 2018 447 1993 152 13 2022 492 41 2019 458 1994 121 10 2023 504 42 2020 470 1995 89 7 2024 515 43 2021 481 1996 76 6 2025 526 44 2022 492 1997 135 11 2026 538 45 2023 504 1998 281 23 2027 549 46 2024 515 1999 320 27 2028 560 47 2025 526 2000 281 23 2029 572 48 2026 538 2001 299 25 2030 583 49 2027 549 2002 223 19 2031 594 50 2028 560 2003 173 14 2032 606 50 2029 572 2004 202 17 2033 617 51 2030 583 2005 212 18 2031 594 2006 302 25 2032 606
2007 330 28 2033 617
2008 290 24 Total 10709 2009 372 31 2010 376 31 2011 372 31 B737 Forecast with Trend 1000 2012 415 35 Projection y = 11,336x - 22430 2013 440 37 800 2014 485 40 600 B737 Units 400 200
0 1980 2000 2020 2040 2060 Year 63
Appendix B: Regression analysis of data from Airbus
Forecast Historic Data per per Total Year A320 year month adjusted adjusted per year Deliveries Until per year per month 2015 503 42 42 503 2033 1988 16 1 2016 522 43 43 522 Year Units 1989 58 5 2017 540 45 45 540 2013 493 2014 490 1990 58 5 2018 559 47 47 559 2015 503 1991 119 10 2019 577 48 48 577 2016 522 2020 596 50 50 596 1992 111 9 2017 540 2021 615 51 50 600 1993 71 6 2018 559 2022 633 53 50 600 1994 64 5 2019 577 2023 652 54 50 600 1995 56 5 2020 596 2024 670 56 50 600 2021 600 1996 72 6 2025 689 57 50 600 1997 127 11 2022 600 2026 708 59 50 600 2023 600 1998 268 22 2027 726 61 50 600 2024 600 1999 222 19 2028 745 62 50 600 2025 600 2000 241 20 2029 763 64 50 600 2026 600 2001 257 21 2030 782 65 50 600 2027 600 2002 236 20 2031 801 67 50 600 2028 600 2003 233 19 2032 819 68 50 600 2029 600 2004 233 19 2033 838 70 50 600 2030 600 2005 289 24 2031 600
2006 339 28 2032 600 2033 600 2007 436 36 Total 12080 2008 386 32 2009 402 34 2010 401 33 2011 421 35 A320 Delivery Trend Projection 2012 455 38 900 y = 18,593x - 36963 2013 493 41 800 2014 490 41 Deliveries cannot 700 surpass production 600 rate capabilities 500 400
300 A320 200 100 0 1980 1990 2000 2010 2020 2030 2040
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Appendix C: Interview with Mr. Budaev, Sales and Marketing Vice President of Irkut Corporation carried out on 18th of March, 2015.
After a long-lasting standstill Russia is trying to reenter international markets with a brand new single aisle MC-21 aircraft. Obviously there is a demand for such aircraft type. But this aircraft niche is already dominated by duopoly formed by Boeing with B737 and Airbus with A320. Chinese COMAC will enter the market with C919 in 2018 as well.
1) Could you share with your plan to penetrate international markets? All international markets are divided into groups priority wise. Our top-priority is Russia and CIS with expected 30% of all sales. 70% of all aircraft is expected to be sold in Latin America, Middle East, Europe and Southeast Asia.
2) Do you consider setting up local sales force abroad? Yes, we definitely consider setting up several regional sales offices later on (after first delivery).
3) There are some drivers that stimulate the airlines to choose the aircraft. What are they in your case? Training centers for crews, maintenance, spare parts supply chain? Training centers, maintenance, spare parts supply and lots more - it is all included in our after-sales support, but we believe that, as far as MC-21 aircraft is concerned, the drivers are different. Aerodynamic efficiency, new generation engines, fuel consumption and economic advantages that is what makes MC-21 competitive.
4) What do you do to create the brand name? In order to promote brand awareness we use all possible mass communication tools, such as the Internet, advertising and presentational materials, advertorials, participation in international aviation shows and conferences and etc.
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5) From point of view the market requirements and competitor’s domination which factors would you consider as strengths and weaknesses of MC-21? Strengths – flight performances and marketing concept of aircraft. MC-21 weak spot is early program status and overheating of the market due to time lag between the announcement of the project and its realization.
6) What factors could stimulate airlines to order MC-21? Apart from MC-21 aircraft advantages, some other benefits are possible, such as free crew training or financial package.
7) Is there something special that would give MC-21 a competitive advantage in future? Adjustability of MC-21 can give it a competitive advantage in future, as it can satisfy any operating model - from a low cost carrier to a business jet.
8) What are the market opportunities and threats of MC-21? Market opportunities – high competition in airline industry, high jet fuel prices, shift LCC model to more comfortable one. The main threat for our product is early appearance of rememorized Boeing and Airbus or its new product.
9) In connection with sanctions how would you assess the vulnerability of the whole project? Could sanctions and trade restrictions affect the reliability of supply chain? At the moment we do not have any concerns that sanctions could have any influence on our project. However such problems may occur in future depending on the changes in political environment.
10) Due to dependency on foreign suppliers and assessing all political risks involved do you think that this can restrain airlines from buying MC-21?
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We believe that all of these factors have minor influence on airlines’ decision to buy MC- 21.
11) What is your sales forecast for the year 2015? Do you have firm book orders from international customers? There is a possibility to get the first international firm order in 2015.
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Appendix D: Potential service providers for MC-21
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Appendix E: Cabin dimensions comparison
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