Boeing’s on the defensive in single aisle market as Airbus enhances A321neo

Subscription required.

Introduction

Boeing is on the defensive in the single-aisle market.

The Airbus A320ceo and neo families have about a 57% market share against the Boeing 737NG and 737 MAX when starting from the same point, the A320 program launch.

As recently as Wednesday’s third quarter earnings call, Boeing CEO Jim McNerney expressed confidence in market share recovery to parity. We don’t see this happening.

The development by Airbus of a 97t “A321neoLR” (Long Range) airplane as a 757 replacement for the long, thin routes of around 3,900nm, although a small market of perhaps 100 airplanes, enhances the A321neo model and could give a boost the the A320neo campaigns.

We had the worldwide exclusive on the development of the A321neoLR Wednesday.

Boeing’s image in the single-aisle sector took a big hit at the ISTAT Europe conference last month. About 1,200 people attended the event and in an audience poll, only 23% voted that Boeing has the most competitive narrow body family; 50% voted for Airbus.

Photo taken at the ISTAT Europe conference in Istanbul last month. Photo via Twitter.

Despite Boeing’s public, professed optimism, our Market Intelligence tells us that Boeing is indeed worried about its single aisle market position. And even though the market potential for the A321neoLR is small, there is the knock-on effect to consider. There is demand for a 757 replacement from airlines and in market perception. The same ISTAT Europe conference asked what Boeing should do next; 54% said replace the 757 and another 18% said replace the 737-9, a combined 72% pointing to a need for Boeing to do something with the single-aisle sector.

Photo from the ISTAT Europe conference at Istanbul last month. Photo via Twitter.

Summary

  •  Airbus’ latest move with A321neoLR increases pressure on Boeing
  • A321neoLR could support additional A320neo sales
  • 737-9 can’t be further enhanced to match A321neoLR.
  • 737-7 unlikely to be built; A319neo becomes niche model
  • Market perception gives “most competitive” edge to Airbus
  • What Boeing has to do next

Read more

Boeing earnings: margins up, cash, deferred costs disappoint some

Boeing announced its third quarter earnings today. Here is the press release. The initial analyst take:

Bernstein Research (Buy)
Boeing reported Q3:2014 core EPS of $2.14, well above our estimate of $1.89 and consensus of $1.98. Revenues of $23.8bn were above consensus of $23.0bnand our estimate of $22.9bn, and Commercial Airplanes margins remained strong at 11.2%.

Fully-reported Q2:2014EPS was$1.86, compared to our estimate of $1.78and consensus of $1.77.

The company raised2014guidanceforcore EPS to $8.10-$8.30from$7.90-$8.10, i.e., by
$0.20/share, and reiterated revenue guidance of$87.5-90.5 bn. Guidance for operating cash flow was raised to greater than$6.25 bn from ~$6.25 bn previously. Margin guidance at BCA is raised to ~10.5% from>10%, while BDS margin guidance remains steady at ~9.5%.

787 deferred production level of $25.2 billion is consistent with our model, but slightly high compared to Boeing’s target of a peak at roughly $25 billion in Q4. Deferred production costs for the 787 increased by $0.95bn in the quarter, compared to $1.1 bn in Q2. We estimate that continued progress at this rate should lead to deferred production peaking at $25.5-26.0billion. While this is slightly above Boeing’s original estimate of ~$25bn, we see it as consistent with our expectations and consensus. 787 cost reduction is central to the longer term cash flow story for Boeing.

Read more

Boeing’s 777X wing factory; earnings today

Boeing’s 777X wing factory: We had to bow out at the last minute attending the groundbreaking of the 777X wing factory in Everett (WA), so we’re linking coverage.

Boeing press release, with statistics

Seattle Times, with links to animation and photos

Puget Sound Business Journal, another take vis-a-vis The Times.

This is a major event for Boeing, its Everett workers and the Washington State. Siting the factory here was the culmination of an extraordinarily bitter contract vote in November and a revote in January by IAM 751 members, the union that provides touch labor for Boeing in Puget Sound, including the 777. Boeing conditioned the site selection in Everett on give-backs by 751 in its previously approved contract, and an extension to 2024. After rejecting the contract the first time, 51% of the vote, in a smaller turnout, approved a slight modified offer.

Washington State gave $8.7bn in tax breaks, a US record.

Earnings today: Boeing announces its 3Q2014 earnings today. The link to the webcast is here, beginning at 10:30am EDT. Here’s what to look for in the earnings announcement and teleconference.

 

Exclusive: Airbus launches “A321neoLR” long range to replace 757-200W

Airbus has started marketing a long-range, higher gross weight version of the A321neo that it says will have 100nm more range than the Boeing 757-200W used on long range, trans-Atlantic routes, Leeham News and Comment has confirmed.

We learned three weeks ago Airbus was working on what we will call the A321neoLR (Long Range); Airbus doesn’t yet have a name for it, but began showing the details to airlines a week ago. The airplane is a higher gross weight aircraft, at 97 tonnes, and will have three auxiliary fuel tanks. With most long-range 757 configurations around 169 seats (United Airlines), the A321neoLR will have 164 seats, a slight loss, with 20 lie-flat business seats and the remainder in coach configuration.

Read more

E-Jet, the project that shaped Embraer

By Bjorn Fehrm

Introduction

In a recent visit to Embraer in Brazil we got a thorough brief on the background and decision making around the E-Jet and E-Jet E2 programs. We have written about these programs before but we will now cover how they came about, what was the program objective when the decision was taken and how it panned out. Both programs have had and will have a profound influence not only on Embraer but the whole civil aviation segment between 70-150 seats. It is worth looking into how Embraer, once an also-ran in the regional market, rose to the top three spot in civil aviation after Airbus and Boeing and how EMB intends to stay there.

Summary

  • American Airlines was part of changing history in regional jets, long before in single aisle.
  • E-jet started as a product program and soon put Embraer on a steep learning curve how to support an E-jet in the market above 50 seat regional jets.
  • Embraer today rates their support second only to Boeing and Airbus.
  • The requirements for the mid-life update of their E-jet, the E2, is all about delivering a mature product. This has shaped all aspects of the program, from cooperation with suppliers to how testing and qualification is done.

KLM E-jet

Figure 1. KLM Cityhopper E-jet taking off. Source: KLM

Read more

Mitsubishi rolls out MRJ90

Mitsubishi rolled out its MRJ90 regional jet, the first passenger airliner to be produced in Japan since the YS-11 turbo-prop in 1962.

The MRJ90 challenges the Embraer E-175/190 and E2 and the Bombardier CRJ900. The smaller MRJ70 won’t be developed until after the MRJ90 is well on its way. The MRJ90 faces six months of ground testing before the first flight test. Entry into service is now scheduled for June 2017, some four years late.

The MRJ90 is a 2×2 configuration with 18 inch wide seats and aisle, making it nearly as wide as the E-Jets, which are fractionally wider. The MRJ will have better passenger comfort than the CRJ, a ground-breaking airplane in its day but increasingly outmoded when it comes to passenger comfort.

The Mitsubishi is a clean-sheet design, but Embraer claims its new E-Jet, with a new wing, the same Pratt & Whitney GTF engines, a new fly-by-wire system, a smaller tailplane, and aerodynamic improvements, will nonetheless beat the MRJ’s economics.

Regardless, we believe the MRJ and Embraer will dominate the 70-99 seat market. BBD’s share of this sector continues to decline. The Sukhoi SSJ100, while posting reasonably good orders, is and will remain handicapped by its Russian lineage and overhang of Russian politics. Production and delivery rates haven’t lived up to promises.

Mitsubishi, while discovering that being an airplane integrator is much more difficult than being a supplier (it designed and built the wings for the Boeing 787, which produced challenges in its own right), should in the end produce a solid airplane.

The company has been looking into this long enough. We recall that at least 15 years ago Mitsubishi made the rounds of US regional airlines getting input about what a new airplane might be. At that point, the 50-seat market was still viable. We were retained by a consultant to Mitsubishi to facilitate a meeting with a regional airline–so we know how far back this goes, and what Mitsubishi was asking. (We thought at the time Mitsubishi needed to go “up,” rather than do a “me too.”)

Mitsubishi has already talked about an MRJ100, but there are no firm plans.

A380neo becoming a reality

Subscription required

Introduction
We last looked at the Airbus A380 economics in February, when the airframer was promoting the giant airplane as a 525 seater. Since then, Airbus recast the airplane as a 555 seater. This changes the economics somewhat. Further, Airbus is floating an 11-abreast coach configuration vs the out-of-the-box 10 abreast.

Tim Clark, president of Emirates Airlines, continues to press for a re-engined A380. In our companion Assessment of the Very Large Aircraft market, consultant Michel Merluzeau believes Airbus will re-engine the airplane.

So do we.

It has been pretty clear to us that Airbus will do an A380neo. The question is when. Emirates’ Clark last month predicted the decision would be taken within six month. Our latest Market Intelligence says he will be right; we understand that Airbus is right now preparing for an A380neo project.

Summary

We thereby see the time ripe for looking into the A380neo again. When we last covered the subject (Updating the A380: the prospect of a neo version and what’s involved, Feb. 3, 2014) we concluded:

• The present configurations for the A380 of 525 seats fills the A380 to a much lower density than is the norm today.
• A cabin configuration of 555 seats would be a realistic three-class configuration with the economy section on the lower deck still in a spacious 10 abreast with seat width at 19 in.
• The efficiency of the A380 filled to that low density was on par with the best per seat benchmarks in the industry, the Boeing 777-300ER with the economy section in a tight 10- abreast, 17- inch configuration.
• The best in market benchmark would move considerably when the Boeing 777-9X enters service 2020. The per fuel seat cost would then we almost 20% lower than today’s A380.

Today our article shows:

• A re-engined A380neo, with other improvements typical in such an endeavor, reclaims the per-seat advantage for the A380.

When re-running the data in our proprietary model, we have more and better data around the likely engine variant, the Rolls Royce Advance, which was announced by Rolls Royce in March. It will be available for an A380neo rolling off the production line 2020. We have also put in more work into our standardized cabins, adjusting the relationship between premium and economy seating to a ratio closer to the one airlines use today. Airbus has also been active on the A380 cabin side. It has had several studies how to better utilize the cabin space in the A380. The results are now presented to the market.

In a recent A380 update, Airbus showed an 11-abreast main economy cabin with 18 in seats, now without raising the cabin floor to fit the seats. By adjusting how the seats interfaces the cabin’s sloping walls, Airbus avoids changing the floor height in part of the cabin.

We will now use this latest data to check where an A380neo would stand in terms of efficiency against the Boeing 777-9X, its most difficult competitor when it comes to the cost of transporting passenger from A to B. In later articles we will look at a more complete cost picture and also look at the A380’s strong side, the revenue and yield when one can fill the aircraft. Read more

Assessing the VLA market

Free content.

Introduction
The business model for the Airbus A380 and its future has long been subjects of sharp debate.

Airbus launched the giant airplane in 2000, with a maximum capacity of 850 passengers and a typical airline configuration of 500-555 (though some carriers have fewer than 500). The airplane would compete with the Boeing 747, then holding a monopoly in the Very Large Aircraft (VLA) category. Airbus concluded there was a 20-year market demand of about 1,300 VLAs, of which it expected to sell 650. Boeing already was beginning to move away from the VLA sector with a hub-bypass strategy evolving from the Boeing 777 and Boeing 767 medium-twins.

While many analysts, consultants and Boeing criticized and even ridiculed the decision by Airbus to proceed with the A380, officials have stubbornly clung to the forecast of a demand requiring 1,200-1,300 VLA passenger aircraft each year for the next 20 years. Sales have remained disappointing every year, with net orders of just 318 14 years after program launch. There should have been sales of 910 VLAs by this point to meet the 20 year demand suggested by Airbus in 2000.

Summary

  • Residual values and secondary market worry some.
  • Emirates Airlines, the largest A380 customer, isn’t worried about RVs and resales, plans to store and scrap its aircraft when time comes.
  • Re-engining and/or operating the A380 at much higher capacity is necessary to lower CASM.
  • Boeing 777X threatens A380 despite its own limited market demand.
  • One consultant sees A380 coming into its own in five years.

Read more

Airbus, Boeing production gaps for the A330, 777

Airbus last week announced it will reduce production on the A330ceo from 10 per month to nine per month, beginning in 4Q2015. We predicted in 1Q2014 that the rate would have to come down, due to the sharp decline in the backlog beginning in 2016.

Buckingham Research Group included this chart in its note Friday about the Airbus A330 production rate cut announcement from 10/mo to 9/mo in 4Q2015. BRG predicts a 777 cut from 8.3/mo to 4.3/mo in 2017. We think the rate will step down, first to seven and then to five, before production of the 777X begins. Click image to enlarge.

We also predicted then that Boeing will have to reduce the production rate on the 777 Classic due to its sharp decline beginning in 2017.

Boeing so far continues to claim that it can maintain its production rate at 8.3/mo right through the introduction of the 777X into service in 2020. We don’t believe it can. We’ve illustrated why we believe a rate cut is inevitable. Buckingham Research Group, in a note issued Friday following the Airbus announcement, neatly encapsulates the data in a single chart.

Read more

Indigo order raises questions of demand in India, elsewhere

Free content.

Introduction

The Indigo order announced this week for 250 Airbus A320neos raises once again questions of whether Indian airlines in particular and the greater Asian region in general are over-ordering airplanes.

We’ve written in the past that we believe Asia and India are dicey markets for which a shakeout is yet to come.

The USA entered deregulation in 1979/80. There was a proliferation of new airlines that started service–by some counts, more than 200. Nearly all failed through a combination of poor business plans, under-capitalization, mergers, economic and travel collapses due to Middle Eastern wars, fuel price hikes and other factors.

Even legacy airlines collapsed. Eastern Airlines, Pan Am, TWA and Braniff–all storied names in US commercial aviation–are gone. (The new Eastern Airlines hopes to start service this year, 23 years after the original one ceased operations.) Northwest Airlines and Western Airlines merged out of existence.

The US airline industry is down to American, Delta and United as the holdovers from a by-gone era. Southwest Airlines now carries more domestic passengers than any of these legacies. Alaska Airlines remains. jetBlue, Spirit Airlines and Frontier Airlines are a new breed of Ultra Low Cost Carriers (ULCC).

In Europe, a shakeout of airlines has occurred but arguably it has hardly gone far enough. During our trip last week to Brazil to visit Embraer, officials pointed out that there are 40 airlines in Europe serving a market similar in size to the USA, where essentially there are 10 carriers.

In Asia and India, the shakeout is only beginning.

Summary

  • Shakeout of airlines in US has occurred.
  • Shakeout in Europe has occurred, but it hasn’t gone far enough.
  • Shakeout in Asia is only just beginning.
  • “LCC Evolution” is shrinking.
  • ASEAN region is over-ordered.

Read more