Odds and Ends: Air France/KLM trims cargo fleet; ExIm Bank countdown; BBD v EMB; More

Air France-KLM trims cargo fleet: Steve Wilhelm of The Puget Sound Business Journal reports that Air France-KLM group is sharply trimming its cargo fleet, with the company declaring the capacity continues to shift to the belly capacity of passenger airplanes. This further validates what we have been writing for some time and, in our view, further bolsters our argument that the demand for new-build, dedicated freighters continues to fall. This in turn means Airbus won’t see recovery for the A330-200F nor will Boeing see recovery in demand for the 747-8F or 777-200LRF.

ExIm Bank Countdown: September 30 is the date the US ExIm Bank runs out of money. Although there is talk of a short-term extension of a few months (conveniently taking it past the election and perhaps defusing some of the Tea Party angst over the agency), Emirates Airlines said it will still buy Boeing airplanes even if ExIm isn’t renewed.

This can’t help Boeing’s argument that ExIm should be retained.

Left unsaid in Emirates’ statement, however, is something we heard in the market: Boeing’s deal for the 150 777Xs with Emirates nearly fell apart over the ambiguity over the Bank. We’re also told Boeing agreed to backstop the Emirates deal.

Neither Boeing nor Emirates comment on financing support.

Bombardier vs Embraer: Here is an interesting thought piece on the financial returns of Bombardier vs Embraer. One obvious error in the article: Malmo Aviation didn’t cancel its order for the CS100; it just decided not to be the launch operator.

Neither do you: Flight Global writes this about the end of plans between COMAC and Bombardier to have a common cockpit between the C919 and the CSeries:

“Basically in the development of the C919, Bombardier is not involved,” says [CAAC}. “They have experience in building regional jets, but not so much in narrowbodies.”

We can’t help but think the Chinese learned what they wanted to learn and moved on.

787 safety: This is one of those stories for which we have skepticism but which is already getting enough press that we don’t feel we can ignore it. Al Jazeera America has a special Wednesday night about the safety of the Boeing 787. AJM previously did an investigation of the safety of the Boeing 737. The Seattle Times has an early review. We’ll hold our opinion until after watching the program.

Ryanair finally orders 737 MAX: Once Boeing announced the launch of the 200-seat 737-8 MAX at the Farnborough Air Show, an order from Ireland’s Ryanair was only a matter of time. It became official today: Ryanair ordered 100+100 of the new version, the 737 MAX 200.

 

Odds and Ends: Russian MC-21 subsidy; C919 assessment; ExIm countdown

Two news items popped up today on emerging aircraft.

MC-21 subsidy: Government subsidies for commercial aircraft development have been a sore point between the US and Europe (i.e., Boeing and Airbus) for decades. Although the US and Europe went through years of international disputes at the World Trade Organization on behalf of Boeing and Airbus, with adverse decisions now under appeal by both sides, and even though Canada and Brazil previously won cases over illegal subsidies to Embraer and Bombardier, nothing has come of the decisions–and nothing has been done about government subsidies by Japan and China to their aerospace industries. No complaints to the WTO have been filed against either country, which are members of the WTO.

This article updates some information about Russian aid to Irkut, which is developing a competitor to the Airbus A320 and Boeing 737 families. The MC-21 and China’s COMAC C919 are directly sized against the best-selling single-aisle airplanes. Russia is not a member of the WTO, so there is no legal basis (that we know of) to file a complaint.

Long-time readers know we disdain the entire WTO process anyway as more political than practical. The WTO has no enforcement powers and sanctions that might be authorized by the WTO against offenders don’t have to be implemented (as in the case of Canada and Brazil) or even applied against the offender’s products–another industry altogether may be sanctioned, a silly and unfair prospect.

C919 assessment: This article provides an assessment of the prospects for the COMAC C919. What’s especially interesting in this article is what we aviation geeks have known all along, and that is China uses Western technology to develop its airplanes (and trains, the article points out). Airbus and Boeing identify China as the next viable competitor in the airliner field, albeit perhaps a generation in the future. But the technology is coming from Airbus, Boeing, Embraer, Bombardier, the engine makers and the supply chain. They are creating their own future competitors.

While China’s industrial espionage contributes to its understanding and acquisition of Western technology, most of it comes from joint ventures between Chinese companies and the Western OEMs and suppliers.

ExIm countdown: The authorization for the US Export-Import Bank expires next month, and Boeing is pulling out all stops to get a recalcitrant Republican Party to agree to extend the life of the bank, reports The Hill, one of the specialty publications that covers the US Congress.

Killing ExIm will put Boeing at a disadvantage to Airbus, which uses and will continue to use European Credit Agencies (ECAs) to support sales of its aircraft. Boeing will have to fall back on its internal Boeing Capital Corp. or attempt to help customers find private financing if ExIm tanks.

After-market support becoming key to winning engine orders

Maintenance and power-by-the-hour parts and support contracts are increasingly becoming the deciding factor in deciding which engines and which airplanes will be ordered—it’s no longer a matter of engine price or even operating costs, customers of Airbus and Boeing tell us.

Ten years ago, 30% of engine selection had power-by-the-hour (PBH) contracts attached to them. Today, 70% are connected, says one lessor that has Airbus and Boeing aircraft in its portfolio, and which has ordered new aircraft from each company.

“We’ve seen a huge move in maintenance contracts,” this lessor says.

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GE analysis post Farnborough

Our wrap up of Farnborough would be incomplete without looking closer at the world’s leading engine supplier, GE Aviation, which together with partners (like SAFRAN in CFM joint venture) garnered more than $36 Billion in orders and commitments during the show. This figure was only significantly bettered by Airbus ($75 Billion) and it came close to Boeing’s $40 Billion. With such level of business the claim by GE Aviation CEO, David Joyce, that the Airbus A330neo engine business was not the right thing for GE as they have more business than then they know what to do with, was certainly no case of “sour grapes”. Continue reading

Odds and Ends: GAO report on ‘Boeing’s bank;’ C919; Airbus widebody strategy

GAO report on ‘Boeing’s bank:’ The US Government Accounting Office, a non-partisan investigating agency, completed a study of the funding and guarantees provided by the US ExIm Bank, which is under criticism from Congressional Republicans, and concluded non-US airlines do benefit from what amounts to subsidies.

These put US competitors at a disadvantage, GAO concludes. The full 29 page PDF may be found here.

The study period covered the global financial crisis, during which a good deal of private capital funding dried up. Airbus and Boeing each relied more heavily on export credit agencies for customer financing–ExIm in Boeing’s case and collectively European Credit Agencies, or ECAs, for Airbus.

The GAO found that ExIm funded or guaranteed financing for 789 Boeing wide body aircraft while the ECAs supported 821 Airbus wide-bodies.

Parenthetically, this statistic alone should demonstrate to Congress the need for ExIm to continue to be available for Boeing airplanes.

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Farnborough Air Show preview

The Farnborough Air Show is just around the corner, and we don’t expect the event to be especially newsworthy.

Here are our expectations for the show:

Airbus
Market expectations are that Airbus will launch the A330neo at the air show, and we know John Leahy, COO of Customers, would like to do so at this event. His bosses, Fabrice Bregier and Tom Enders, have been less than encouraging that this announcement could come at the show.

Although news stories last week indicated Airbus’ board may green light the program in advance of the FAS, it was nonetheless reported that a formal public launch may not be made at the show. So what might happen? An “Authority to Offer,” or ATO, might be how Airbus proceeds. We don’t think there will be firm orders ready to go when the FAS begins July 14—although certainly Airbus could also take Boeing’s 777X approach and announce “commitments” as was done at the Dubai Air Show.

We are skeptical whether there might be any A330 Classic orders announced, as customers await the neo. We certainly expect the usual orders for the A320 Family. We expect A350 orders. We’re doubtful of A380 orders.

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Odds and Ends: LEAP vs GTF; CSeries flight testing; MRJ FAL

LEAP vs GTF: Reuters has a story looking at the intense competition between CFM and Pratt & Whitney for the market dominance of the LEAP vs Geared Turbo Fan engines.

The only airplane where there is competition is on the Airbus A320neo family; CFM is exclusive on the Boeing 737 MAX and COMAC C919 and PW is exclusive on the Bombardier CSeries, Embraer E-Jet E2 and Mitsubishi MRJ. PW shares the platform of the Irkut MC-21 with a Russian engine. PW says it has sold more than 5,000 GTFs across the platforms. CFM has sold more than 6,000 across the three models it powers.

On the A320neo family, the competition is 50-50 at this point, with a large number of customers yet to decide on an engine choice. However, 60 A320neos (120 engines) ordered by lessor GECAS never were in contested (GECAS buys exclusively from CFM) and 80 A319/320neos from Republic Airways Holdings (160 engines) were part of a financial rescue package for then-ailing Frontier Airlines.

PW’s joint venture partner, International Aero Engines, shares the A320ceo family platform with CFM. Late to the market, IAE caught up to CFM in recent years.

On platforms where they compete, the sales figures so far show a neck-and-neck competition between CFM and PW.

Update, 12:30: The link has been fixed. Update, 9:30 am PST: Flight Global has this story reporting that PW plans a Performance Improvement Package on the GTF that will further cut fuel consumption by 3%.

CSeries flight testing: Bombardier’s CSeries flight testing has been slow to this point, but it’s beginning to ramp up. Aviation Week reports that FTV 3 should be in the air by the end of this month and FTV 4 should follow in April. FTV 3 is the avionics airplane and FTV 4 focuses on GTF engine testing.

Mitsubishi MRJ: Aviation Week also reports that the Mitsubishi MRJ airplane #1 is nearing final assembly.

Odds and Ends: CSeries timeline; KC-46A roll-out; China’s new airplane

CSeries timeline: Bombardier last week announced a third delay in the CSeries program, this time for as much as a year.

This probably should have been expected. BBD originally planned a five year period between program launch and entry-into-service. As we saw with the Boeing 787, launched with a four year timeline, even five years was too ambitious.

CSeries Timelines. Leeham Co Chart

CSeries Timeline. Leeham Co Chart

The EIS period for the 787 turned out to be the standard seven years, almost eight–and even then, the EIS was anything but smooth.

Airbus’ launch-to-EIS for the final A350 version is somewhat more than eight years. Even though BBD is a sub-contractor on the 787 program and said it benefited from lessons learned, it’s clear officials were far too ambitious.

KC-46A roll-out: Boeing’s first tanker for the USAF based on the 767-200ER will roll out this summer. The Everett Herald has this story. The airplane is a somewhat revised 767-200ER called the 767-2C. In addition to upgrades with the airframe, the Pratt & Whitney PW4000 engines will have upgrades which improve fuel consumption.

China’s new airplane: China isn’t just developing the ARJ21, C919 and some military airplanes. It’s also developing the world’s largest amphibian.

Looking ahead to 2014

Here’s what to look for in 2014 in commercial aviation.

Airbus

A350 XWB: The high-profile A350 XWB program continues flight testing this year. Entry-into-service has been a sliding target. The program is running about 18 months behind original plan and EIS was intended for mid-year following initial delays. Even this has slipped, first to September and then to “the fourth quarter.” Currently first delivery is scheduled in October to launch customer Qatar Airways, which is slated to get four A350-900s this year. Emirates Airlines is listed as getting two of the total of six scheduled for delivery.

A320neo: Lost in the shadow of the A350 program is the A320neo. Final assembly of the first aircraft is to begin in the spring and first flight, followed by testing, is scheduled for this fall. The Pratt & Whitney Geared Turbo Fan is the initial variant. First delivery is scheduled in the fall of 2015.

Others: Airbus continues to evaluate whether to proceed with developing an A330neo. Based on our Market Intelligence, we expect a decision to proceed will come this year. Concurrently with this, we expect most if not all of the remaining 61 orders for the A350-800 to be upgraded to the A350-900 and the -800 program to be officially rescheduled if not dropped. The -800 is currently supposed to enter service in 2016, followed by the A350-1000 in 2017. But recall that as delays mounted on the A350-900, Airbus shifted engineers to the -900 and the -1000 at the expense of the -800. Salesmen have consistently shifted orders from the -800 to the larger models. We long ago anticipated the -800’s EIS would be rescheduled to 2018, following the -1000. The -800’s economics aren’t compelling enough just justify the expensive list price. So we expect Airbus to upgrade the A330 to a new engine option, using either or both of the Trent 1000 TEN and GEnx with PIPs (Performance Improvement Packages) or with some modifications. EIS would be about 2018. This precludes Pratt & Whitney from offering a large version of the Geared Turbo Fan, which wouldn’t be ready by then.

We also expect Airbus and the engine makers to look at re-engining the A380, driven by desires of Emirates Airlines to see a 10% economic improvement. Emirates announced an order for 50 A380s at the Dubai Air Show but instead of ordering the incumbent engine from Engine Alliance for these, Emirates left the engine choice open. This leaves open the possibility the A330neo and the “A380RE” could share an engine choice.

Boeing

After many years of turmoil, 2014 should be quiet for Boeing (now that the IAM issues have been resolved—see below).

787: Barring any untoward and unexpected issues, Boeing seems at long last to be on an upward trajectory with this program—but we’ve said this before. There are still nagging dispatch and fleet reliability issues on the 787-8 fleet to resolve, but flight testing of the 787-9 appears to be going well. Certification and first delivery should come without trouble this year, to launch customer Air New Zealand.

737: Nothing to report on the Next Generation program except ramp-up to a production rate of 42/mo is to take effect this year. Development continues on the 737 MAX.

Others: The 777 Classic is humming along. Now that the 777X is launched, we’ll be closely watching sales for the Classic; Boeing has a three year backlog but six years to 777X’s EIS. How is Boeing going to fill this gap, and what kind of price cuts will be offered to do so?

The 747-8 continues to struggle, barely holding on. Boeing says it thinks the cargo market will recover this year, boosting sales of the 747-8F. We’re dubious.

The 767 commercial program continues to wind down. The 767-based KC-46A program ramps up.

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Outsourcing focus of Boeing report, but misses bigger picture; IAM vote aftermath; Boeing’s 2013

A long article (10 pages when printed) discusses the pitfalls Boeing had by outsourcing so much work on the 787. This much is not new. The point the article raises–transferring technology and the potential decline of US aerospace dominance–isn’t especially new, either; we’ve written about this in the past.

What the article, however, overlooks is that Boeing isn’t alone in doing this. To certain degrees, Airbus, Bombardier and Embraer also are guilty–as are a number of other OEMs and suppliers. CFM International, for example entered into a joint venture with the Chinese that would help them develop an modern commercial jet engine. Fortunately, CFM pulled back on this over concerns of technology transfer.

Airbus has an A320 assembly line in Tianjin, China, and Embraer had an ERJ-145 assembly line in the PRC. McDonnell Douglas had an MD-80/MD-90 line in Shanghai.

Bombardier contracts with Chinese companies to produce the Q400 and CSeries fuselages, the latter with the advanced aluminum-lithium metals.

The airframe OEMs will tell you that final assembly represents a small portion of the airplane and the risk of technology transfer is minimal. But it’s probably no coincidence that the COMAC/AVIC ARJ21 looks the the MD-80 (but sized like the DC-9-10) or that the C919 looks an awfully lot like the A320.

The article points out that Mitsubishi, which builds the wings for the Boeing 787, is now using this experience to design and build the MRJ-90. True enough, though it should be noted that having experience the composite wing issues associated with the 787, Mitsubishi abandoned plans for a composite wing for the MRJ and is proceeding with metal instead.

Suppliers are basically extorted by China: if you want to sell us your goods, you have to be prepared to transfer technology. Suppliers can’t ignore this huge market, but try to mitigate the blackmail by transferring “yesterday’s” technology or at least developing tomorrow’s technology today while transferring today’s technology to China.

It doesn’t stop with China, of course. Boeing and Airbus have Russian ties with engineers. Bombardier is planning a Q400 assembly line in Russia. Indian engineers work on Airbus and Boeing airplanes and now plan their own turbo-prop.

The days of the Big Two Duopoly are numbered. And it’s not just Boeing that is guilty of aiding and abetting the new competition.

Boeing’s Good Year in 2013

Set aside the disruptive and embarrassing ground of the 787 in January through April, Boeing had a very good year in 2013. It posted a record rate of deliveries, besting Airbus for the second year in a row. It’s order book was the best since 9/11. Here is the press release.

Airbus announces its 2013 production and delivery results on January 13.

Boeing-IAM vote: After-thoughts

We can’t go by this week without a short commentary on the Boeing-IAM vote on Friday, but we’re not going to spend a lot of time on this—we’ve analyzed this issue a number of times and there is little more to say except this:

It was a very tough vote for the union members of IAM 751. Giving up benefits won in previous hard-fought battles is always tough. But the Boeing 777X will be assembled in Washington State, and the composite wings will be built in Washington, too. Our view is that having 80% of something (benefits) is better than 100% of nothing (the 777X).

Boeing, of course, will return to the State and the union for more tax breaks and concessions when the 757 and 737 replacements are designed and a decision is needed about where to build these airplanes. Boeing is now in a position to seem more concessions from labor during a contract that’s in place to September 2024, and the union can’t strike. It’s been significantly weakened, losing leverage ion addition to benefits as a result of Friday’s contract vote.

But this enables Boeing to tell customers the threat of delivery disruptions from strikes is gone, and this will reassure them, which may or may not help sales—thus providing more work for IAM members.

Boeing faces a huge morale problem for the members who feel they’ve been had in this process. IAM members have long, long memories. Although there is no option to strike, members can “work to the rules” or find other ways to decrease productivity. Boeing has some real fence-mending to do. We’ll see whether it makes any effort to do so.

Labor isn’t content with the narrow yes vote, however. Some are calling for a third vote, arguing the January 3 election date was set to deliberately disenfranchise a large number of union members who likely would have voted No. Turnout last week was lower than the November 13 vote because many members were still on vacation from the Christmas and New Year’s holidays.