Lessor worries about Airbus, Boeing production rates

Here is an expanded version of a story we did last week for Flight Global Pro.

The refrain that Airbus and Boeing are over-producing the core-A320 and 737 programmes resurfaced with lessor AerCap in an interview with The Wall Street Journal.

Aengus Kelly, CEO, chastised the Big Two OEMs for production plans announced so far. Airbus will go to a rate of 42 per month by the end of this year and is considering 44. Boeing plans to hit rate 42 by 2014. Both companies are considering rates as high as 60 per month.

Airbus produces airplanes only 11 months of the year while Boeing is on a 12 month production schedule.

In its 2011 20-year forecast, Boeing predicts there is a need for 23,370 single aisle aircraft in the 90-210 seat category. Airbus predicts 19,165 in the 100-210 seat market.

Based on the announced production rates, and assuming no changes through the 2030 forecast period in production—or for adjustments in the forecasts—Airbus and Boeing will produce 18,551 single-aisle airplanes.

If both OEMs go to rate 60 by 2016, their combined production exceeds their own single-aisle forecasts.

 

Delivery Forecast, A320 & B737, 2012-2030

Rates to 42-44 per month

 

 

2012

2013

2014

2015

2016-2030

Total

A320

452

483

483

483

7245

9146

B737

420

447

474

504

7560

9405

           

18551

Rate/Mo            
A320

41

44

44

44

44

 
B737

35

37

39.5

42

42

 
Airbus based on 11 month production year.    
Boeing based on 12 month production year.

Bernstein Research and Flight Global Estimates

   

Delivery Forecast, A320 & B737, 2012-2030

Rates to 60 per month

 

 

2012

2013

2014

2015

2016-2030

Total

A320

452

483

483

483

10800

12701

B737

420

447

474

504

10800

12645

           

25346

             
Rate/Mo            
A320

41

44

44

44

60

 
B737

35

37

39.5

42

60

 
Airbus based on 11 month production year.    
Boeing based on 12 month production year.

Bernstein Research and Flight Global Estimates

   

 

Deliveries by Bombardier and Embraer, which have current offerings in the 90-125 seat market, are not included. Neither are deliveries by emerging competitors Bombardier, COMAC, Irkut and Mitsubishi. Bombardier’s CSeries (100 to 149 seats) is scheduled to enter service in late 2013. A slow ramp-up is planned to only 48 per year by 2016. Bombardier announced that it has the capacity to produce 20 per month or 240 per year, but no timeline has been suggested.

COMAC’s C919 at 158-210 passengers is supposed to enter service in 2016, but analysts expect a delay of at least two years. A production ramp-up has not been revealed. Irkut’s MS-21, also 150-210 seats, likewise has an announced EIS of 2016 but observers believe this, too, will be late. No ramp-up is known.

Mitsubishi recently announced a delay to its 70-90 seat MRJ programme, but it did not announce how long.

Deliveries for the 100-seat Sukhoi SuperJet are also not factored into the estimates.

On the face of it, AerCap’s concerns appear to have a solid foundation. But it must be remembered that following the 2008 financial market collapse, lessors and aerospace analysts called upon Airbus and Boeing to cut production by 30%-40%. Neither manufacturer did, and each successfully managed their skylines through the great recession with no discernable impact to production or aircraft values.

In fact, the companies suggested the lessors’ call for production cuts were largely self-service efforts to bolster their own supply-and-demand and lease rates. Some lessors freely acknowledged that this was the case.

Other factors in the Big Two OEM production rates are also at play. Jim Albaugh, CEO of Boeing Commercial Airplanes, said on several occasions that it was necessary to boost rates on the 737 line to avoid driving customers to other competitors, notably the CSeries.

But the backlogs for the A320 and 737 families are also important factors. At current rates, airplanes are sold out for 5-6 years. Additionally, with fuel prices heading back up sharply, airlines are demanding more efficient airplanes. The A320neo is scheduled to enter service in October 2015 and the 737 Max a full two years later. Boeing wants to accelerate EIS into 2016, but there is no assurance at this date this can be achieved.

Finally, Airbus and Boeing simply need the cash flow. Airbus’ A380 still is a cash drain. The A400M and A350 XWB are in development. Boeing’s 787 programme still is in disarray. The 747-8 is struggling to find customers and it is in a forward loss position. Boeing is also preparing to launch the 777X as early as this year. While the aircraft will be a derivative, there will still be several billion dollars of R&D required.

Whether other lessors and analysts will join the AerCap worry remains to be seen. But don’t expect Airbus and Boeing to back off of production for the single-aisle airplanes.

 

12 Comments on “Lessor worries about Airbus, Boeing production rates

  1. IMHO we will see the lessors “glue layer” being cut back to their original utility : a glue layer, away from being the profit center from “unproductive” services.

    Compare to the significant loss of relevance for the big financial rating agencies due
    to misusing their leverage.

  2. It is interesting to see the lessors talking about the issue. They do seem to have lost a little perspective about what their role is. They are there to serve the airlines by providing equipment. When they lose sight of that fact and start to consider themselves the primary customer, things become misaligned.

    This showed itself dramatically when NEO was first being touted. Airlines want a more efficient aircraft and are facing ever increasing fuel costs. A new aircraft impacts RVs for lessors so they don’t want it to exist. Therefore, forget the customers’ needs, lobby to say that NEO is a bad thing. I am quite surprised that the airlines don’t seem to ever tell them to shut up and remember what they are there for. When they wanted rate cuts during the recession they repeated the pattern and apparently this hasn’t changed

    Sure, as a lessor you have to do what is best for your business but I would think being a little less self-serving in public would be good for business.

  3. The AerCap interview with The Wall Street Journal, confirmed my concerns
    about the subject for quit a while, especially with the large deficits and result-
    ing unemployment rates mounting in Europe and the US as well.
    I hope I am wrong, but I am afraid that a lot of the airlines “buying” now, is
    more of an “insurance” and a “I am just as confident as you are” factor, than
    a justified confidence under the worldwide financial conditions prevailing at
    this time! It did happen many times before!

  4. I would argue that the production rate doesn’t matter much. The price of oil controls the value of aircraft relative to each other.

    • Will be interesting to see if Boeing pampering pricing for used articles will stay effective.
      i.e. will they be able to hold up their reality distortion field ?

  5. VeroVenia
    Your above mentioned entry, made for very interesting reading!
    However, my experience with the airlines I worked with, indicated that if
    traffic and thus revenue was/is down (substantially) the airlines are either
    going to have to cancel orders if they still can, or they will have to ground
    aircraft, no matter how efficient they are!
    Older, less efficient aircraft, will be grounded first, ofcourse, but that will also
    cost money, equivalent to revenue loss and the leasing/bank payments, both
    of which will amount to “less money coming in and thus less money out” to
    pay for efficient/not efficient aircraft already in service, making cancellations
    of new aircraft on order, the only option left!
    But than, I am NOT an economist!

  6. The manufacturers have added more flexibility in recent years and have less issues reducing the rate. The investments made are mostly in faster assembly. Neither Boeing nor Airbus have added any substantial infrastructure.

    • That is certainly not correct. Airbus over the last decade has added a great deal of infrastructure. Their foot print has expanded near exponentially. First with the A380, for example they added a chunk to the Hamburg factory that more than doubled the size of the existing factory. Then with the A350. They have also added a lot of infrastructure for A320 over that time as well, particularly in Hamburg, but also remodeling the A320 line in Toulouse, St. Nazaire, and Nantes.

      Boeing has added foot print in Charleston and Texas; and improved facilities in Renton, and in Seattle. Not to mention completely revising the interior of the factory in Everett.

      This doesn’t even begin to talk about the expansion that has happened at the Tier 1 and 2 Supplier levels.

      Your characterization is a very very long way off the mark.

      • I specifically meant the single aisles.
        Airbus doesn’t take empty orders for its wide bodies.
        But single aisle is different. A rate decrease of 20% can easily be handled without mayor layoffs of the core workforce (not mentioned the unlucky guys being temp workers). Further, the limited customization allows to shift orders between different customers. My statement is, that single aisle production has more in common with automotive production these days.

  7. Quite simply, manufacturers and lessors have different interests. Manufacturers are paid for each plane they sell. The more they sell, the more money they make. Lessors make most money by holding a desirable asset that is in short supply. They want fewer planes entering the market.

    It’s not absolute. If lessors don’t have a reasonable supply they can’t meet demand. And manufacturers have to be aware of residual values. All their customers – not just lessors – book the planes they own on their balance sheets. Fast depreciating assets aren’t attractive purchases.

  8. The interest in RVs for the operators depends on their business model. If they lease, they are focused on the lease rates obviously (which will have an RV element). If they own their fleet, are they planning to turn it over on a regular basis? If they like to keep their fleet young then RV issues affect them from a resale perspective and will impact on their accounting treatment accordingly.

    If they keep the asset for most of its life, they might not care. Indeed, having the ability to write the assets down fast is nice when you are a CFO asking what profit is wanted that year.

    It comes down to whether you use your assets fully, you trade early to keep your fleet young or you are running an Irish LCC that makes more in flipping its aircraft than flying passengers!

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