2009 has faded into history and 2010 is here. Last year wasn’t kind to Airbus or Boeing—though it was worse for the latter than the former. How will this year be?
We’ll get right into how we see things lining up for the two largest airframe OEMs for this year.
With Airbus a spectator to Boeing’s difficulties with the 787 and 747 programs and the A350 still three years in the future (if entry-into-service is 2013 as promised), one would think the European manufacturer should be looking at a good year. But there are significant challenges ahead that make 2010 anything but sanguine.
Setting the production rates and soft skyline aside, the A320 family is humming along nicely. The most significant event last year was the decision to equip new production airplanes with “sharklets,” the Airbus-designed version of winglets, to replace the wingtip fences that have adorned the airplane since inception. These will be available from 2012 and will improve fuel burn by about 3.5%.
The A320 will be first, followed by six months with the A321 and then the A319. Sharklets on the A321 will be just enough to give the airplane better US trans-continental range, which is marginal today. (Even the A320 occasionally has range issues in certain wind conditions.)
This will be followed in 2010 by a decision whether to re-engine the airplane with a new generation engine. We believe the answer will be yes and that Airbus will offer either the CFM International LEAP-X or the Pratt & Whitney P1000G Geared Turbo Fan. The GTF will almost certainly be through PW’s joint venture International Aero Engines, which currently supplies the V2500 engine in competition with CFM’s CFM-56 power plant. These new engines promise fuel burn improvements of 12% to 16%. Coupled with the sharklets, you are looking at a gain for the A320 family of nearly 16%-20% over today’s airplanes. Boeing will have no choice but to respond with a re-engining of the 737 (see below).
An A321WRE will be a strong competitor to replace United Airlines’ 94 Boeing 757s; Boeing will be hard-pressed to match even with a 737-900RE. We think Airbus will be the favorite in UAL’s competition to be initiated this year.
This airplane continues to hum along, given new life by the problems with the Boeing 787. The development of the A330-200HGW (High Gross Weight), with a 7,200nm advertised range, is within 6% of the advertised range of the 787-8 of 7,650nm. Despite weight and Specified Fuel Consumption (SFC) issues, Boeing says its airplane will meet customer guarantees. Test flights, just underway, will affirm or invalidate these assurances. If the 787-8 falls short on range, the aging A330 will maintain competitiveness with the 787-8.
Although the A330 is of current generation design, and therefore has higher operating costs than those projected for the 787, Airbus has argued from the launch of the 787 that the slightly larger A330-200, carrying more passengers and more cargo, can produce an estimated $192,000 per year per airplane more revenue than the more efficient and less costly 787. There are all kinds of variables that can reduce or increase this number, of course.
Airbus has no choice but to promote the A330-200 as hard as it can; it offers no new generation competitive airplane to the 787-8, which carries 210-250 passengers vs. the A330-200’s 250-293 passengers.
The A330-300, with a 295-335 passenger capacity and a 5,650nm range, is promoted by Airbus are a perfect medium-range aircraft for intra-Asia, Europe-Africa and US-Trans Ocean routes.
Airbus expects the A330 will be sold alongside the A350 for many years. The backlog at November 30 for the passenger versions is 333, or 3.7 years at current production rates.
No change from 2009; dead product; still not buried.
Airbus promises a 2013 EIS for the A350-900, followed at yearly intervals for the -800 and -1000 derivatives. Given the history of program execution for the A380 and A400M, as well as the composite-related problems with Boeing’s 787 and the 787 knock-on effect on the Boeing 747-8, observers are understandably skeptical whether Airbus can meet these EIS dates.
Aerospace analyst Richard Aboulafia, who is widely if somewhat unfairly perceived as anti-Airbus, is already predicting a two-year delay. (Aboulafia’s anti-Airbus image comes from his unrelenting criticism of the A380 program and the fumbling efforts to settle on an A350 design. He believes the A350 XWB is a winner, despite concerns over EIS, and he credits Airbus for putting money into R&D during the decade Boeing was miserly in the same area.)
We think it is too early and too severe to be predicting two-year delays, and so do A350 customers we’ve talked to. But we are hearing through suppliers that they are concerned critical decisions are taking longer at this stage and delays of six months are being speculated.
Airbus is well aware of its challenges and the need to perform on time and on budget. Officials not only have their lessons learned from the A380 and A400M debacles, they have closely watched the problems with the 787 and vow to avoid making the same mistakes in the A350 program.
When we visited Airbus in September, one of our prime missions was to drill down on the A350 program and how Airbus would keep it on time. We came away convinced officials have a reasonable plan, but as those at Boeing found out, execution is the hard part. It remains so with the A350.
With the first lay-up of composite structure for the production A350—test composite structures have been built for some time—2010 will be the time to really begin to pay attention to milestone progress and indications whether program delays will be forthcoming.
At this time last year, we actually thought Airbus had its production issues sorted out for this airplane—though we expressed dismay that officials said it would still be three years before production ramped up to the planned four-per-month (which was before the depth of the global economic crisis became clear). But Airbus still doesn’t have its act together on this airplane. This remains a financial albatross and instead of getting better it seems to be getting worse.
Despite initially predicting it would deliver 21 A380s in 2009, it delivered just 10. What a disastrous performance. To be sure, a few deferrals were at customer requests but these cannot mask the reality that the program remains chaotic. Production costs remain out of control.
Boeing reduced its 20 year forecast for Very Large Aircraft from 940 to 740, with only 500 of these being passenger models, split between the 747-8I and the A380. We think this is a bit conservative but Airbus continues to stick to its forecast that there will be 1,300 VLA-Ps sold over the next 20 years, a figure we believe to be wildly optimistic. (It took Boeing more than 35 years to sell 1,400 747s.)
In 2007, after the delays in the program were first quantified as two years, Airbus said it would have a break-even of 450 A380s. Officials stopped talking about break-even long ago. With the continuing production, delays and cost issues, the break-even has to be moving to the right. We were once of the opinion that Airbus could break-even in 10 years. We now doubt this can be achieved in 20 years, but admit that this is a WAG (wild-assed guess) as opposed to any financial analysis.
We have been a consistent supporter of the A380 and believe it will indeed prove to be a technically proficient airplane that passengers will enjoy. But given the long-term financial implications, we have to ask, Has the time come for Airbus to cut its losses and terminate the program? While we continue to believe that the company will sell 500-600 airplanes over 20 years (down from our previously believe of 700), if you stand little chance of making money, why bother? The resources are better put to use on the core A3-Series programs.
At the start of 2009, we wrote that last year was the year Airbus had to get the A400M flying. It did, barely, with the first and second flights in December. Real testing, however, won’t begin until this year.
This troubled program may as well be called the A400M-380 for the financial detriment it has had on the company. Along with the A380, this program diverts critical cash and engineering resources from the core A3-Series airplanes that are the company’s bread-and-butter. We remain concerned that the continued diversion of resources will work to the detriment of the A350, inevitably leading to delays on this airplane that is critical to the future of Airbus. A similar diversion of resources at Boeing to the 787 has been detrimental to the 747-8 and future airplane programs.
The issue for Airbus is that the A400M is actually an innovative design that fills a good slot between the aging Lockheed Martin C-130 and the larger Boeing C-17. We think the airplane has good potential if the engine/software problems have been sorted out. Still, only EADS/Airbus member countries plus Malaysia have ordered the airplane (South Africa canceled). Does this airplane truly have a future in worldwide military and humanitarian service or is it merely a jobs-and-prestige program?
Canceling the program means Airbus will have to repay several billion Euros to customers, unless they are willing to simply write off these amounts Thomas Enders, the Airbus CEO, was quoted in a French newspaper within the last week suggesting the program could be canceled. Given the implications and the European way of doing business, we can’t dismiss this possibility. But in the end we think prestige and jobs will override business sense.
If only Airbus were beholden to the free market instead of the European way of doing things….
This month will be critical for Airbus, its parent EADS and its tanker partner Northrop Grumman. The US Air Force is expected to issue its Final Request for Proposal for the KC-X contract to provide 179 tanker-transports to replace the 50-year old Boeing KC-135s. Northrop says it won’t bid unless specifications are changed because in its view the Draft RFP tilts toward the smaller Boeing KC-767 (we generally, but entirely, agree).
From the start of the 2006 competition, won by Northrop but overturned by the Government Accountability Office, we said that if all the USAF wants is “just” a tanker, the KC-767 is the choice. If the USAF wants a highly flexible multi-role tanker-transport, the KC-30 is the better choice. We also believe there is a strategic argument, as well as a political one, that supports buying both airplanes because there are simply different mission requirements. But the Pentagon is adamant that it will not split the order.
Winning the contract is critical to world-wide tanker sales; many countries follow the US lead, though it must be acknowledged that in each case where the KC-30 competed with the KC-767 outside the US, the KC-30 won.
Winning the contract is also critical to the Airbus strategy of establishing a commercial A330-200 production base in the US. Northrop and EADS promise to build a tanker assembly plant in Mobile (AL) if the KC-30 is selected. Airbus pledged to build the A330-200F there if this happens and expectations are that the A330P will follow. But no tanker contract, no US plant.
And this is why we believe Boeing and its supporters are fighting so hard to block a tanker award to Northrop. This, we believe, is more important to Boeing than winning the tanker contract, though we also acknowledge Boeing wants the contract on its own merits as well as to keep EADS out of the largest DOD contract to come along in years.
The MRTT is running about 18 months behind schedule for delivery to launch customer Australia. About six months was due to customer change orders, according to the RAAF and EADS. The balance rests with developmental issues.
There is no getting around it: 2009 was an awful year for Boeing and nearly all of the bad tidings can be traced to the 787 program. (We speak of BCA; Defense also had a bad year; the Pentagon decimated Boeing’s defense programs in the FY2010 budget.)
At the start of 2009, we wrote that Boeing was then projecting first flight for the 787 in April. This slipped to June, and in a monumental embarrassment, Boeing promoted a June 30 test flight during the Paris Air Show June 15-16, only to take it all back on June 23 with the sixth program delay. The first flight finally occurred December 15, followed December 22 by the first flight of Airplane #2 and the second flight of Airplane 1 on December 30.
The 747-8 program was delayed as a result of resources that continued to be diverted to the 787 program and its own design issues.
The KC-767 International program remains troubled, despite deliveries to Japan.
While these programs dominated the headlines, they also overshadowed the successes. The Legacy airplane programs (737, 767, 777) went smoothly all year. Production rates on the 737 were maintained at 31 per month all year despite skeptics and calls to reduce rates. The 737-based P-8A rolled out and is in flight testing. The long-delayed 737-based Wedgetail was finally delivered to Australia. Boeing Capital Corp. proved correct with its forecast that there was a management customer funding gap of $0-$5bn vs. dire predictions that the gap was $10bn to $25bn.
Challenges facing Boeing this year include:
Here is a program-by-program rundown for 2010.
Boeing’s venerable line continues to be the unheralded flagship of the company. The 787 and 747 may be sexier and the 777 is a solid performer, but it is the 737 that is purchased in the greatest number and sustains the cash flow more than any other 7-Series airplane.
Boeing continues to provide modest improvements for the airplane. Officials announced last April that it will introduce aerodynamic improvements and the CFM-56 Evolution in 2011 that will improve fuel burn 2%; and a 787-inspired Sky Interior in 2010. The Sky Interior has a “wow” effect that will overshadow the 2007 update by Airbus of the A320 Family interior, a highly functional and attractive upgrade that nonetheless is conventional in its look. These Boeing improvements keep the 737 slightly ahead of the A320 Family in performance, look and feel.
But the advantages will be short-lived. In 2012, Airbus introduces the “sharklet” winglet on the A320, with installation following by six months on the A321 and A319. The sharklet improves the SFC by about 3.5%, which depending on the plane-for-plane match up is predicted by Airbus to give the A320 Family a point to three point SFC advantage over the 737s. Boeing unofficially believes the sharklets only allow Airbus to catch up to the 737 SFC. Airbus is also is implementing aerodynamic improvements to reduce SFC by another 1%.
Either way, the 737’s SFC advantage is diminished or overcome by the A320 enhancements.
Boeing might be able to “live with” this situation since the lighter-weight 737 means lower landing fees and maintenance is said to be somewhat less on the 737. The 737-800 also typically carries 12 more passengers than the A320, providing greater revenue opportunity. But Airbus is, in our view, certain to decide this year to proceed with a re-engining program for the A320 Family that will add another 12%-16% improvement in fuel burn. Boeing cannot let this stand, and we believe Boeing will likewise announce a re-engine program for the 737. Airbus will likely have an EIS of 2015 and Boeing will follow in 2016. This is because we believe Airbus will launch its re-engine program with the Pratt & Whitney P1000G Geared Turbo Fan, offered via the PW joint venture International Aero Engines. We think Boeing will launch with the CFM LEAP-X engine, which won’t be ready for service until 2016, based on today’s information. Airbus will almost certainly offer the LEAP-X on the A320 Family as well.
These improvements will, we believe, push replacement airplanes out to the latter half of the 2020 decade unless some regulatory environmentally-based legislation intervenes or a dramatically better airplane technology emerges in the first half of the 2020 decade.
We see the A320 and 737 families being around for another 15-20 years.
This program struggles. Freighter sales are stalled due to the continued global cargo market depression. Passenger sales are stalled, spurred we believe with the recent order for five from Korean Air Lines by compensation for 787, 747-8F and 747-400BCF delays to KAL. We think there will be more 747-8I passenger orders placed this year, but we also think these will be to customers affected by delays to the 787 and possibly the 747-8F programs and as a result, any 747-8I sales will be sharply depressed in pricing.
Cancelling the program has too much collateral damage to customers and suppliers, as well as Boeing’s already tattered reputation and balance sheet. This program will continue to limp along.
Like the A340, this is a plane that won’t die. Unlike the A340, the 767 is still a viable program, if reduced to a back-up for the 787 delays. At November 30, there was a backlog of 55 aircraft, or 4.5 years at the current one-per-month production rate. The current plan is to go to two per month in 2011. If Boeing wins a tanker contract with the KC-767, another rate increase of 1 to 1 ½ a month will be forthcoming from 2015.
Because of the need for a 787 production Surge Line (see 787 discussion below), the current 767 line will be relocated to the aft part of the bay it now occupies. A Lean production line will be implemented, reducing unit costs by about 20%. Relocation begins this year and will be completed next year.
The long-term future of the 767 depends on the tanker contract.
This stalwart airplane is a superb long-haul machine. But the countdown to its end-of-life is now underway.
The 777-200 is essentially already dead. There are few -200ER sales and the -200LR is a niche airplane; niche airplanes historically have a short life. The -200LRF will enable the 777 line carry on for a respectable period when the passenger versions are eclipsed by the next generation of airplanes. The A350-900 has already dominated this market segment.
The 777-300ER continues to dominate its class, which is opposite the morbid-bound A340. With the development of the A350-1000, the 777-300 days are numbered. The conundrum at the moment is what Boeing will do about it. The answer is, wait another year to decide. The A350-1000 still is too early in development for Boeing to have a clear picture of the threat the Airbus poses. Airbus claims the -1000 will have up to 25% better operating economics than the -300ER. We’re told Boeing believes this will prove to be only about 10%. If Boeing is correct, the company might be able to get away with major upgrades to the airplane for about 20%-30% of the cost of developing a new one. Even if Boeing can’t precisely match the presumed 10% A350-1000 gain, because the 777-300ER carries slight more passengers and more cargo than the -1000, the A330-200 vs 787-8 argument recounted under the A330 segment above is reversed here in Boeing’s favor.
On the other hand, if the Airbus assumptions of a 25% operating improvement are correct, Boeing will be faced with a decision to design an entirely new airplane. But this is a decision for 2011 and we are getting ahead of ourselves.
For 2010, Boeing previously announced production of the 777 will reduce from seven to five a month from this June. Other than this, the word for the 777 this year is “status quo.”
At long last, Boeing got its first flight off the ground in December. Now, as many say, comes the hard part, though it is hard to see how flight testing can be much harder than the difficult birthing of this airplane.
Accordingly to Flight International, four test airplanes are to be in service by the end of February and all six by the end of April. This is two months faster than Boeing CEO Jim McNerney told analysts on the third quarter earnings call. Flight testing is scheduled for 8 ½ months, faster than the 12 months announced on June 23 when the June 30 first flight was postponed for the sixth time. First delivery to launch customer All Nippon Airlines is planned for the end of September with 10 787s delivered to this customer by year-end, according to Flight.
If all this comes to pass, there will be a huge sigh of relief worldwide.
KC-7A7 Tanker Program
Boeing took a new approach to the KC-X tanker competition at the Paris Air Show, announcing that it is prepared to offer the USAF either the KC-767 or a tanker based on the 777, the KC-777. Speculation has arisen that Boeing might submit two bids, one for each airplane, to bracket Northrop’s KC-30 bid—should Northrop decide to proceed with one. We think Boeing will submit only one bid, for the KC-767, in a configuration that is close to that of the Italian tanker. If Northrop drops out, there is no need for Boeing to submit two bids. If Northrop stays in, we still think Boeing will submit only a KC-767 proposal. All the sunk costs are in this program, while the KC-777 is entirely a developmental airplane. The DRFP discourages developmental aircraft, according to those who have slogged through the entire document.
We remain concerned that Boeing has yet to deliver the KC-767 to Italy, now some four years late. We are told problems remain with the centerline hose-and-drogue system (Boeing has never confirmed or denied this). We are also told that issues remain with the wing-mounted refueling pods, though Boeing says these have been fixed. Although Boeing intended to deliver the first of four tankers to Italy last year (“the Year of the Tanker” in a Boeing internal message), that this still has not happened indicates all is not well. Since the US tanker is similar to the Italian tanker, we remain skeptical about the program.
The fourth Japan KC-767 tanker was ferried to Japan from Wichita in December and delivered to Boeing’s Japanese partner, the Itochu Corp. It is currently undergoing pre-delivery processing before Itochu delivers it to the Japan Ministry of Defense.
The Italian tankers continues to complete flight testing and to address all findings. Boeing thens will work with the US Navy to schedule and complete a Military Utility Observation (MUO) required under contract. Boeing then begins the Tender for Acceptance process with Italy to deliver their advanced KC-767 tanker. Boeing is still not forecasting any dates concerning these remaining milestones.
This 737-based airplane is designed to replace the aging P-3A Orion as a sub-hunter and airborne detection system. The P-3A is based on the Lockheed Electra four-engine turbo-prop designed in the mid-1950s.
The Poseidon rolled out from the Renton factory last year and is in flight testing. The successful management of this program serves as an example for the KC-767 tanker team. Last year we reported that the tanker team was consulting the Poseidon team for lessons-learned on running a successful program. (A Boeing official later confirmed the coordination, though not the lessons-learned part.) This is a Boeing success story of 2009 that got submerged in the bad news that dominated the headlines.
This 737-based program was not a success story. An electronic surveillance airplane for Australia, it is years late. Delivered in the second half of last year, Boeing has written off hundreds of millions of dollars in connection with this program. Acting as the systems integrator, Boeing had problems with the Northrop Grumman electronic gear, which was responsible for a good portion of the delays.