Don’t assume A320, 737 RE programs

Geneva, Switzerland: Here is a report we did for Commercial Aviation Online from the Aircraft Finance and Commercial Aviation conference, followed by some additional commentary and reporting exclusive to this column concerning the prospect of re-engining the Airbus A320 and Boeing 737. Our additional commentary includes a discussion of the Bombardier CSeries and the PW GTF engine.

Here is a podcast we did today on the topic.

Don’t assume A320, 737 RE programs

From Commercial Aviation Online

Aerospace analysts and observers have already concluded that it is probable Airbus and Boeing will announce this year that they will re-engine the A320 and 737 families, with projected entry-into-service in 2015/16, but officials of both OEM’s said today that it is premature to assume the re-engine (RE) programs will proceed.

Andy Shankland, VP Marketing at Airbus, and Randy Tinseth, his counterpart at Boeing, told the Geneva, Switzerland, 24th Annual Aircraft Finance and Commercial Aviation Conference crowd that neither company has made a decision, that many issues need to be resolved and the business case needs to be made internally before a decision whether to proceed is made.

Shankland noted that his boss, COO-Customers John Leahy, remarked at the ISTAT conference a week earlier that it would be nice to have an announcement at the Farnborough Air Show, but Shankland made no promises.

Tinseth said Boeing was in “no hurry” to make a decision, though he, like Shankland, said one would be forthcoming this year.

All the re-engining talk in recent weeks came under criticism during a lessors’ panel at the Geneva conference that pressure to proceed with a program might come “before it’s thought through” as a result of “announcement-itis.”

“I’m afraid that’s what is happening,” Richard Cherney, EVP of Aviation Capital Group, said from the audience after panelist David Swan of RBS Aviation Capital asserted Bombardier’s CSeries has Airbus and Boeing “spooked.” The CS100 and CS300, powered by Pratt & Whitney’s P1000G Geared Turbo Fan (GTF), is directly competitive with the Airbus A318/319 and the Boeing 737-700. The two larger OEMs are considering the GTF, CFM’s Leap-X and the Rolls-Royce 2- and 3-stage engines for the A320 and 737 families.

The mainline OEMs have each said that no additional enhancements to their airplanes are being considered beyond those directly related to the potential RE requirements. Engineers at both companies want to incorporate more changes, but Airbus’ Leahy and Boeing Commercial Airplane President James Albaugh each have reigned in their engineers at this time with the instruction that unless a change brings real value in the form of operating and maintenance cost reductions to airlines, the customers are saying whiz-bang enhancements that add to the purchase price aren’t wanted.

Additional commentary and reporting:

Another story coming out of the Geneva conference comes from Andrea Rothman of Bloomberg NewsThis concerns the challenge Airbus and Boeing are making to the funding scheme undertaken by Bombardier for the CSeries. This rare agreement by these two bitter rivals illustrates the seriousness with which they take the CSeries, contrary to mindless babble of some pseudo-analysts.

We know from our own conversations that Airbus and Boeing are quite concerned with the prospect of Bombardier’s CSeries and the potential sales impact on the A319 and 737-700 the CSeries directly competes with. Although the sales of these smaller models have been declining compared with the increasing preference for the A320 and 737-800, the smaller aircraft still represent a decent revenue source for Airbus and Boeing.

The conundrum for the two incumbent OEMs is whether the value for the customer is there for a re-engined program, once the higher capital costs of purchasing an RE, plus the maintenance costs plus the addition of new spares inventory, etc., are factored in. The double-digit fuel savings may fall to single-digit and this might not be enough to justify an RE, the OEMs fear.

Bombardier, in its analysis, believes that the CSeries will have a significant direct operating cost advantage over an RE or either Airbus and Boeing because it is a clean-sheet design. Sales have been slow because of poor market timing, the company says, and there is no doubt this is true. The CSeries was designed as a DC-9 replacement for Northwest Airlines but the post-9/11 era delayed any prospect of NWA considering a replacement. Then Delta Air Lines and NWA agreed to merge, putting a replacement on hold. Then the global financial market meltdown and recession happened, stalling sales and affecting Airbus and Boeing as well.

It is also true that Bombardier initially struggled in defining the CSeries, but such is not at all unusual for a new airplane program. Boeing had several false starts with the 747 follow-ons after the -400 Series and spent a lot of time and money on the Sonic Cruiser before settling in the 787. Airbus’ troubles with the A350 definition are equally well-known.

Skepticism over the viability of the Pratt & Whitney Geared Turbo Fan was deep as well. PW has been working on this technology for more than 20 years, and there were–and are–concerns over the maintenance costs. More than a year ago, we were told by a potential CSeries customer that the then-projected on-wing time was a mere 8,000 hours (vs. 20,000 for the CFM 56) and that lifetime maintenance costs were greater than for the CFM 56. We asked PW about this at the Geneva conference. The representative said the on-wing time is projected to be 20,000-25,000 hours and maintenance costs will be lower than the CFM 56 and the CFM Leap-X. We, of course, must take these promises on faith just as we need to take on faith Boeing’s performance promises for the 787, 747-8 and Airbus’s for the A350 until all new airplanes enter service and prove their designs.

Bombardier expects two or three more sales this year, smaller than the Republic Airways order for 40+40, though no order is expected to be announced by the Farnborough Air Show. (In fact, the Air Show is already forecast to be rather devoid of news.)

We still believe Airbus and Boeing will proceed with RE programs. We also expect CSeries sales to pick up, whether this year or next. Bombardier is taking a risky bet on a narrow market segment against two companies that can crush the CSeries if they choose to do so. But any suggestion by pseudo-analysts that the CSeries isn’t viable is simply out-to-lunch. Airbus and Boeing are taking the airplane–and the threat–seriously.

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