Pontifications: Context is everything

By Scott Hamilton

Aug. 7, 2017, © Leeham Co.: The quote appeared on Twitter, citing the chairman of Air Lease Corp, Steven Udvar-Hazy:

“I would simply but strongly encourage the OEMs to carefully review their production rate aspirations closely and realistically.”

Hazy, often (but erroneously) called the “Godfather of leasing,” is a voice to be reckoned with. He is enormously influential with Airbus, Boeing, lessors and the industry. He’s been a launch customer of several aircraft new aircraft models and, if he’s not the Godfather of leasing (this title really belongs to the late George Batchelor), Hazy raised aircraft leasing to a fine art.

So, when the quote appeared on Twitter, I sat up in my chair.

Was Hazy suggesting Airbus and Boeing will be producing too many airplanes, creating a supply-demand imbalance?

The Great Recession

During the Great Recession that began in 2008, Hazy and other leading lessors with speculative aircraft orders urged Airbus and Boeing to cut single-aisle production rates 30%-40%.

The Big Two OEMs sniffed at the suggestion and continued full bore. In some ways, they could hardly do otherwise. Both were immersed in new development programs, each with their own production difficulties, and both badly needed the money from sustained, new production of legacy products.

Despite repeated suggestions from the lessors to cut production—after all, they had airplanes delivering during the Great Recession and wanted to narrow the supply-demand equation—neither OEM did so. They juggled their skylines and worked through the Recession.

So did the lessors.

But was Hazy suggesting a poor economy was around the corner?

Supplier pressure

The answer is “no.”

When I went to ALC’s 2Q2017 Aug. 3 earnings call transcript, the context of Hazy’s remark put an entirely different light on the Tweet.

“I feel compelled to reiterate our concern over stress in the supply chain, which we fear will only grow worse if production rates increase. Having been in this industry for more than 50 years, I would simply but strongly encourage the OEMs to carefully review their production rate aspirations closely and realistically.”

This certainly puts things into a different context.

Reason for concern

Hazy has reason for concern.

Every Airbus delivery to ALC is late. Issues with engines from Pratt & Whitney, CFM and Rolls-Royce are delaying deliveries of A320neos and A330neos.

The PW and RR delays to Airbus are well known. Delivery delays by CFM to Airbus also are occurring, as CFM runs a little behind on production ramp up.

Although ALC doesn’t have any A350s scheduled for delivery until 2019, other customers experience delays due to issues with interior supplier Zodiac.

Boeing had some minor issues with CFM LEAP-1B engines for its new 737 MAX.

Backlogs for single-aisle airplanes are strong. Boeing goes to rate 57 in 2019. Airbus goes to rate 60 in 2019. Higher rates are under consideration.

Widebody rates, on the other hand, look softer. Although Boeing continues to strive to take the 787 rate to 14/mo by the end of the decade, officials acknowledge they are not there yet.

Middle Eastern airlines—the biggest single block of widebody customers—are struggling and talking about deferrals.

 

40 Comments on “Pontifications: Context is everything

  1. The A320s and 737s (3000?) of the nineties are up for replacement. Then there is growth, mainly LCC and Asia. Does anyone have a graph?

  2. Steven Udvar-Hazy most important job is to protect the assets of ALC.

    The best way to do this: To secure the marked not flooded with aircraft.

    .
    KR/
    Airboe

  3. In other words production rates should go up but more slowly to accommodate stress in the supply chain. Right or wrong?

    It does allow Hazy to resell leases at higher prices. But then, presumably Hazy (and Al Baker) get priority when deliveries slow down.

    All in all a good way of improving profits (for some)!

  4. Airbus probably don’t need this advice. P&Ws troubles must be adding up to a serious amount of money by now. Usually this would be a few teething problems, but even the warranty issues must be a huge strain on resources given the numbers of engines involved. Christmas presents will be delivered to Bombardier and Mitsubishi executives for their help in smoothing the ramp up rate.

  5. Any knows if the T7000’s have been mounted on an A339 yet. Would love to see a photo, will make me feel better.

  6. I pretty much put Hazy remarks into the same category as Al Bakar.

    He was the driver for the A350, said the A330 revamp was a waste.

    Now he says 1000 A330-NEO will be produced ( and I am noting that the -800 is not going to be now) . Its now a great aircraft etc.

    He has contributed immensely to aviation as well as the Aircraft Museum at Dulles and I think that should be recognized fully.

    After he left ILFC his comments have become Plebian. I think with ILFC he took a much broader view.

    • Remember all the nay sayers in view of an Airbus A320 NEO : no demand, will kill value of older models. bla, bla, bla. ( And that other faction that stated that Airbus must NEO as Boeing is ahead and even a NEO would be no danger to Boeing sales and values ecology.)

      Hindsight is unendingly amusing. .. every time.

  7. Reflecting on recent history of the industry raises a bigger question on the test and certification process and one wonder how effective is the process from both the industry and the regulator. Are new planes well tested and safe to carry pax.

    1. A380- Started service 2 years after certification and had one of his engines explode during commercial flight only several months later . Disaster was averted only due to excellent performance of the crew.
    2. B787-8. Caught fire several times during flight and even when parked.
    3. A320Neo PW. One can only wonder how come such a prevalent problem was not discovered during the year and half of the test period.

    • Well, bad things happening is always a good reason to question the processes in place.

      1. RR were surely deeply embarassed by that. AFAIK there was nothing intrinsically wrong with the design, they just weren’t making the pipes properly (apologies if I have not remembered that correctly). “Certification” also examines (or at least it should examine) the quality control processes in place at the manufacturer as well as the fitness of the design. Given that their QC hadn’t been adequate to spot the defective parts, the knock on impact across RR’s entire business could have been very bad.

      2. Boeing were very embarrased by that. QC again…

      3. I too was amazed by that. Rotor bow is a problem dating back to the very earliest days of jet engines, and was also a well understood phenomenon in steam turbines in ships dating back to the late Victorian days. Ships’ steam turbines had to be warmed up slowly to avoid temperature differences before applying higher power; it’s the same problem. How on earth P&W had forgotten about it?

      I can only surmise that P&W had lost some key staff who actually knew stuff, and had started again with an inexperienced design team. To much hiring / firing?

      Rotor bow sounds like one of those basic design problems that no one has ever written about because “everyone knows it”. So if that oral history is lost by getting rid of all the old timers, from where are the new set going to learn these important things?

      Apparently the problem also occurred in the engine for the F35.

      • 3. Is it possible that the problem never occurred during the test Airbus was conducting with the plane. Aren’t they testing it in real “environment” which for a 320 type machine is to conduct a full day of flying between close city pairs such that it takes off and lands many times during the day with the minimum interval between taking off and landing. This is a basic requirement today for a plane of this type.

      • cubicle minds.
        rotor bow is well known for engines mounted via fan _and_core.
        Now you change that to mounted core, core but still apply your established cargo cultish understanding of the issue and in an environment of vertical educated engineers nobody will even dream at night about any need to rethink.

      • Something different and for those in the know. Is the “all bells and whistles” first flight of a new aircraft always/really the “first flight” or were there instances that the aircraft flew “under cover” before the big event.

        Just thinking of the 339 with T7000 that never flew on a test-bed such as the 380, or has it flown on RR’s 747?

        • There has indeed been no fly test bird for T7000 engine…

          But I never heard about any “under cover first flight” for any Airbus (neither Boeimg)

          • Thanks Alban. Think the A339 will do a significant amount of high speed ground miles before its first flight? Guess most things are forward modeled and done in the simulator lately.

  8. How fed up are P&Ws costumers? I’m starting to take Big Al a bit more seriously.

    • It is surely very frustrating for them. However, *when* it comes good and all the problems are solved it promises to be a superb engine. That’s what’s keeping a lid on it, otherwise they’d all be moaning (justifiably so) like Big Al. A thin smear of jam today, lots of jam tomorrow.

      If it were a so-so, incremental engine, P&W would be dead in the water.

      I just hope that P&W have learned that there’s more to productionising an operationally effective engine than merely having a good idea. Basically they need to get through these current problems, and then get their next design underway to production immediately before they forget all over again. I know they’ve made a huge change to how they do business (lots of partnerships), but one feels that intermingling big business changes with the run-up of their first new design for decades(?) was asking for problems. Could have killed the company had it gone more wrong that it has.

      It will be interesting to see how well RR do with getting the T7000 going (seems pretty good so far), and anything based on Ultrafan and Advance. It seems to me that RR have had a lot of practise recently at getting designs out the door an onto wings and into main line service. Being able to do that smoothly, predictably and more-or-less on time is worth a fortune.

      GE – they’ve done GEnx for 787 / 747-8, the upcoming 777-X. Should be OK.

  9. I cannot blame the OEMs for their aspirations to increase production. I would probably want to do the same if I were in their position. There has never been such an opportunity before and the profits are huge.

    That being said, they still have to be cautious because of the increasing pressure it puts on the supply chain. But for me that is not the most important aspect of the situation. I think the OEM’s should pay more attention to the price of oil, which remains stubbornly low.

    Not all new orders are for growth, and many of them are replacements for older aircraft that will be gradually flooding the market in the coming years.

    This could create a situation where numerous used aircraft will be readily available and at good prices. While we will have the opposite situation with new ones: long lead times and high price tags.

    The OEMs run the risk of seeing their backlog going down more quickly than they would like. For I don’t see the market continuing to order narrow body aircraft, or any other type of aircraft for that matter, in similar numbers that we have seen in the recent past.

    Many of them will prefer to buy used airplanes instead, and we may find ourselves in a situation where the OEMs will be competing against their own airplanes in the used market.

    The commercial aircraft market is an ecosystem, and like any such system it is fragile and can quickly get out of balance. It all depends on the type of predators we are dealing with…

  10. Hazy is stating facts about the supply chain. Sad to see so many Airbus frames sitting waiting for parts, but the suppliers are being pushed hard. Boeing is not making it better when they continue to push back into the system to take more of the chain’s margins. Might make sense for the chain to push back and cause slowdowns until the airframes understand the current hit against margins?

    • “Boeing is not making it better when they continue to push back into the system to take more of the chain’s margins.”

      Airbus is doing the same and I don’t doubt that Bombardier & Embraer are trying it also.

  11. It seems the saying “putting the cart before the horses” is valid in many instances with certain aircraft models?

    Maybe Boeing is in the right track with the “797”. First sort out the engine/s and then build the aircraft around it.

  12. This thread is “over” by now but was wondering if Airbus should not be more “hard-baked” with P&W on the 320/1NEO engine circus.

    Just tell clients they will not take any further orders with P&W engines until the problems have been resolved. This could/will give CFM a green light to increase production rates of the -1A’s?

    If I was AB will also work closer with CFM to work on a higher thrust “-2A” for an A321X/322?

    By the way, think Delta is smarter than many thought when they are ordering 321CEO’s.

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