Reports from ISTAT

We were at the ISTAT conference Monday and Tuesday, where 1,250 industry officials attended.

We wrote several stories for Commercial Aviation Online. These are below:

Lessors downplay Neo impact on residuals

Date: 16/03/2011 10:00
Source: Commercial Aviation Online
Location: Phoenix
By: Scott Hamilton

In a shift of opinion from just one year ago, executives on the lessors’ panel at the 28th annual ISTAT conference aren’t concerned about the residual value impact of the Airbus A320neo family on current generation A320s.

A year ago, lessors -as well as appraisers and financiers- were whinging about the presumed immediate and negative affect on legacy A320 values if Airbus proceeded with the Neo. It has, and now the lessor opinion has changed-and so, it appears, has that of financiers if unscientific ISTAT surveys are any indication.

Jeffrey Knittel, president, CIT Transportation Finance, recalled last year’s ISTAT conference surveys and the negative reactions before asking for a show of hands among lessors and bankers at this year’s event. Only a handful of these groups indicated they still had concerns.

Steve Townend, deputy MD and chief commercial officer for BOC Aviation and a member of Knittle’s ISTAT panel, noted that the first Neos “won’t replace aircraft of today, they will replace the MD80s and 757s and 20-year old 737s and A320s.”

GECAS CEO Norman Liu, another panelist, said, “You can’t say it will have zero impact on residuals, but it’s six years away. By 2027 you might get parity point” on deliveries of the Neo to the current A320s. “That’s when you will have residual affect.”

The third panelist, Steven Udvar-Hazy, cautioned appraisers.

“I hope the appraisal community doesn’t overreact to Neo. It’s five years away and in meantime a lot more current generations will be built and will have a higher proportion of the installed base,” he commented. ” It will take another three to four years where Neo will even be 10% of installed fleet. The impact will be a very slow progression. A lot of Neos will be for growth, not replacement.”

Up-gauging isn’t just for the mainline aircraft: lessors

Date: 16/03/2011 09:30
Source: Commercial Aviation Online
Location: Phoenix
By: Scott Hamilton

Airbus, Boeing and some observers focus on market forecasts and potential new single-aisle airplane designs that indicate up-gauging and a decline in the 100-149 seat market, lessors at the 28th annual ISTAT conference point out that up-gauging also includes growing from the 70-90 seat segment.

There is broad industry consensus that the next new single aisle airplanes Airbus and Boeing will produce will likely begin at 150 seats or higher as the 100-149 seat market represents a shrinking segment worth $600 billion (as opposed to $3 trillion for the 150-seat to Very Large Aircraft market), but opportunities also exist to up-gauge from less than 100 seats, said Jeffrey Knittel, president, CIT Transportation Finance.

Steve Townend, deputy MD and chief commercial officer for BOC Aviation (BOCA), agreed, noting that the operating lessor is looking at the 100-149 seat jets.

Steven Udvar-Hazy, CEO of Air Lease Corp, last year ordered the Embraer 190/195, which serves the lower end of this market segment and agrees there is a market for this size airplane.

GECAS’ Norman Liu dodged the issue, noting that GECAS is long in the market already and hasn’t evaluated the sole new jet for this segment, the Bombardier CSeries, which in any event is equipped with the Pratt & Whitney Geared Turbo Fan engine. GECAS generally has a policy of not buying new aircraft equipped with engines from competitors of sister GE Aviation.

The lessors also agree that there remains a market from turboprops.

“Turboprops is a segment of the market we are looking at very closely, says CIT’s Knittel. “When you look at the cross sections of the ATR and Q400, they look a lot like a single aisle A320 or 737. We believe there is an interesting opportunity.”

Hazy said a developing world and third world is a developing segment ripe for turboprops. “We see multiple applications and these will be a small portion of our portfolio.” ALC ordered the ATR72-600 model last year in a flurry of aircraft orders announced at the Farnborough Air Show.

Townend said BOCA is not looking at turboprops to avoid spreading itself too thin.

2026 before NEO impacts A320 Legacy values: Airbus

Date: 15/03/2011 09:30
Source: Commercial Aviation Online
Location: Phoenix
By: Scott Hamilton

It will be 2026 or 2027 before the A320neo will negatively impact values of the A320 Legacy aircraft, a company sales official told the ISTAT conference 14 March.

Andy Shankland, Airbus, VP marketing, said, “We can’t really predict the future but we can look at the past.” Citing Ascend and Avitas value databases, Shankland looked at 737 Classic compared with the Next Generation and noted that Classics lost about 20% of value only after deliveries of the Next Generation equaled 50% of the Classic installed base.

There were “large differences between the Classic and the Next Generation,” Shankland said, noting that there is 95% commonality between the NEO and the Legacy aircraft .

At the anticipated orders and production rate for the NEO, Shankland thinks it will be 2026-27 before NEO will negatively impact Legacy values.

Airbus projects sales of 4,000 NEOs. It also believes sales of the Legacy and NEO will continue for 42 years after the 1988 entry nto service.

The NEO is projected to save airlines $1 million per aircraft annually in fuel reduction.

We won’t abandon Southwest: Albaugh

By Scott Hamilton

Boeing won’t up-gauge its new airplane in the 737/757 class to such an extent as to abandon Southwest Airlines requirements, pledged Jim Albaugh, CEO of Boeing Commercial Airplanes.

Albaugh made his remark to CAO on the sidelines of the 28th Annual ISTAT Conference 14 March following his formal presentation to more than 1,250 delegates.

His comment is significant because Mike Bair, vice president of Advanced 737 Product Development, has been giving a series of interviews in which he indicated a new, “light twin” and aircraft sizes of at least 150 seats through 210 or 220 are being considered with an EIS of 2019-2020.

Albaugh threw cold water on the light twin concept in answer to a question during his presentation. He also pro vided more clarity on the likely size of the airplane.

“The airplane that we’re going to build will not be a replacement for the 737. We might up-gauge slightly from 137 seats,” he said. “I think it doubtful that the new light twin is the answer.”

CAO later asked Albaugh if this meant the new airplane would start at 150 seats; Albaugh, while not providing a definitive answer, didn’t dispute the figure.

As for what technologies the airplane will include, Albaugh told the audience, “If you look at all the new airplane, there are a lot of new technologies [that could be included. But] I don’t want this plane to be the son of the 787—we have to de-risk the new airplane. The engines of 2020 will be 4% better than today. We can get to the numbers. The question is to limit the risk and not to bite off as much as we did on 787.”

A decision is expected perhaps by the Paris Air Show.

9 Comments on “Reports from ISTAT

  1. Great survey. I suspect Boeing are more concerned about the timing of their 737 replacement than they’re admitting to – and in particular which new technologies to adopt. If the Airbus NEO is a useful advance over existing narrowbodies, which appears to be the case, then a replacement 737 using currently available technology is likely to be a step change from existing narrowbodies. But only a useful advance over the NEO. Now, if upcoming technologies mature in time for the A320 replacement following the new Boeing plane by a few years, then Boeing could find itself behind early on in a 40 year cycle.

    Of course if those technologies don’t mature in short order, then Airbus will be forced to respond to the 737 replacement using similar technologies. Boeing will have by then got a head start. But it’s a big gamble. It could be less risky to bide their time by re-engining the 737, as Airbus has done.

  2. It seems to me that if the value of th 100-149 seaters is $600B USD, that in itself is a very sizeable market for both Airbus and Boeing, should they decide to build an airplane in that segment. To compare this class of aircraft’s value of $600B USD to all other classes of aircraft, that span 150 seats to 550 seats (B-737-800/A-320 to the A-380) combined with that value of some $3T USD is disingenous.

    After all, that places the value of the 100-149 seat class aircraft at 20% of all the other classes of aircraft. To me that is significant.

  3. Interesting articles, Scott.
    The attitude from lessors and the bankers last year was baffling… NEO clearly had a very strong market acceptance and they had no option but to follow. What I find strange is, take the SUH quote:
    ”It will take another three to four years where Neo will even be 10% of installed fleet. The impact will be a very slow progression. A lot of Neos will be for growth, not replacement.”
    Didn’t they think of that before? Why has light bulb only gone on now? I honestly don’t get it?

    Boeing’s recent PR offensive has been interesting to say the least. Last year they said that the decision on the NSR would be made by the end of 2010. Then it slipped to mid 2011, then they said they want to see how NEO is doing before making a decision and it would take to the end of 2011. Then Bair came on the scene with all sorts of ideas for a new a/c EIS in 2019, now apparently being contradicted by Albaugh. However in the mean time they can apparently also do 787-9, 787-10, improve the 777 and do the tanker of course… It would be truly amusing if Boeing turned around and launched a 737 re engine, as Avitas is expecting.

  4. In all honesty, most bankers are not very bright. I presume the same applies to analysts working for leasing companies. Even industry outsiders like me could see last year when these quotes were being peddled that these guys were talking out of the wrong end. 🙂

  5. I don’t see the numbers working for Boeing as far as a re-engine option is concerned. That is why Boeing kept saying they weren’t getting a very warm response, because of the cost of the investment for them. An unfortunate matter, this wing clearance issue. But who would have expected the design to be selling close to 50 years after its introduction.

    Boeing and Airbus are now playing the hopscotch chess game of all time. Airbus does the A380, Boeing counters with the 787 and a reworked 747 to bust the A380. Airbus responds with a worked over A330, gets bad reception, and is forced to go with the A350XWB. The A350XWB provides Airbus with a potential 777 buster. Boeing holds on any 777 work. Both feel obliged to respond to the C-Series and other competitors, whereby Boeing opts for a new design for a narrow body, which supposedly will start at the larger 737 size, obviously hinting (hoping?) that the smaller 737 can hold its own against the NEOs whie providing for a 757 replacement at the same time in one family. Airbus “plans” on a new narrow body a few laters, in the hopes of utilizing newer technology.

    All quite fascinating. The only hiccup to the whole chess game is both companies total inability to execute anything properly. I do not see either company correcting this in the near future. Despite all the claims of lessons learned and such, Airbus is continuing to shop out work to other companies and countries, in the search for cheaper, and less experienced labout. Time will tell if Boeing has actually learned anything either. Seeing as they started the phase of homegrown workforce reduction some years ago, I don’t see them suddenly changing that tune now. Just as I have my doubts of Mr. Bairs concept of all the suppliers building little satellite factories around Everett.

    Incidentally, what would the situation be now, if Airbus had gone with the initial A350 concept? I could believe that it would be now selling like hotcakes, based largely on the 787 troubles. I also wonder if Airbus might not resurrect the initial A330 replacement concept. After all, isn’t the 787 actually a larger aircraft than the A330? And doesn’t the A350XWB straddle the larger 787 and the 777 range? It just might provide an opportunity for Airbus to exploit the situation with minimal cost and effort.

  6. I’m still trying to find out myself what caused SUH’s 180 on the NEO? From criticizing it last year to 100 orders this year.

    • Hazy has not ordered the NEO, though his view seems to have softened considerably. ILFC placed the order but Hazy left ILFC in Feb 2010 to for Air Lease Corp.

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