Steven Udvar-Hazy, the most high-profile and influential man in aircraft leasing, gave journalists a lengthy interview immediately following the International Society of Transport Aircraft Trading (ISTAT) conference today in Scottsdale, Arizona.
Because Hazy gave us so much fodder for stories, Flightblogger Jon Ostrower and I have decided to break the lion's share of the interview on our blogs.
Jon's blog covers Hazy's comments about widebody aircraft, while I'm covering narrowbodies and regional jets.
For the sake of historical context, here is
Udvar-Hazy's last interview with Flightblogger from February 2008's Singapore Air Show, prior to the launch of the CSeries, 787-3 cancellation and global economic crisis.
Speaking to us today about Boeing's studies into a clean-sheet successor to the 737, Hazy says:
Boeing is working very closely with the engine manufacturers to see what is the level of efficiency and fuel consumption improvement from the initial neo to the time that they would introduce their engine and so that's going to obviously be important because the airframe, they could probably get several percent better efficiency from an all-new airframe, but then you have to combine that with engine efficiency. And that could come in several ways. That could come, for example, and I'm not telling you what Boeing will do or won't do, but for example a slightly larger fan diameter on the new-generation Boeing airplane versus the neo could give it several percent fuel advantage just the way the airplane is designed, whereas the A320 is already an A320. It can't be redesigned for this engine. So Boeing has the advantage of a clean sheet of paper and therefore they can optimize whatever engine or engines they'll put on the next generation airplanes, whereas on an A320, it's mounting an engine to a current-generation airplane.
On whether Boeing should forgo a one-to-one replacement of the 737 and develop a whole new family:
All I can tell you is our recommendation to Boeing, and we've bought over 800 new Boeing airplanes, is to build an aircraft family rather than a single sized model and that family hopefully will encompass at the upper end an airplane that could replace the 757.
Size-wise, where would that family start?
That question has to go back to the cost of building airplanes. What you have to ask Boeing and Airbus is that with their current labour costs and facilities costs can they build a 120-, 130-seat airplane in Renton or in Toulouse and Hamburg versus these new emerging market airplanes that are coming out and that's really the challenge here. In other words, they have a high cost structure which when you go to the 777-300ER, where you have virtually no competition, is less relevant. But when you have five or six manufacturers that now will be crowding this...
So can Boeing and Airbus be the low-cost producers at the lower end of this new generation of aircraft and I don't know the answer to that, but my instincts tell me is that some of these new competitors could ultimately have the lower cost, just like when the Japanese car companies invaded the us in the 70s and 80s, you know Toyota, Datsun and Honda, they had a lower cost base and were able to price their product below GM, Ford and Chrysler, and the German cars and look at the market share they were able to gain because they had that cost advantage. [They started] with small, cheap boxes and they bought their way into the market. How did they get market share? Because they were pricing their simple products and they were very competitive in that respect. So the question you guys have to ask of Boeing and Airbus is can they build a 120-, 130- or 140-seat aircraft of the future the way they build aircraft today. Now maybe Boeing and Airbus can do that but maybe in a different plant or a different location or maybe even a non-union location. I mean the Charleston link.
But you understand the issue here. It's not just designing a great airplane it's can it be cost effective to build and that I can't give you the answer because a lot of that is facilities, labour costs that they have to tackle going forward and the IAM issues and all those things.
On whether Hazy is still keen on a twin-aisle "narrowbody":
In all of the studies that we have done and in talking to airlines, you can turn a twin-aisle aircraft faster if you have good passenger access. So the whole idea of a short- to medium-haul aircraft is maximizing utilization and if you can get ten minutes a turn and you do six segments a day you can get an hour more flight utilization.
Look, at the upper end of that market, once you get above 200 seats. How many of you have flown on a 757 when you're in row 39F and how long does it take to get off the airplane if they're loading only through the front. Sometimes it [feels like it] takes longer to get off the airplane then the flight itself. My feeling is that to be a really an effective airplane above 200 seats and a great competitor and have the cargo capacity, which is also an important element in the rev generation of airplanes, a small twin-aisle has a lot of advantages once you get north of 200 seats.
On whether Boeing will cede the small narrowbody market to other players:
How many 737-600s did they sell? How many A318s were sold? So what does that tell you? The Embraer 190 has outsold them. The Embraer 190 has just left them in the dust. Embraer has a huge advantage over Bombardier because they have a huge built in customer base. For example in Europe you got British Airways, KLM, Air France, Lufthansa, all operate Embraer 190s. We've talked about this idea of cooperating either Airbus or Boeing with Embraer. I currently don't see it. I think Embraer wants to stay pretty independent, but they're always looking at what they they're going to do to their products.
Thoughts on Mitsubishi's portfolio:
Mitsubishi is talking about stretching the airplane. They've come to talk to us about the MRJ100, which would be a two or three row stretch of the MRJ90 and Pratt can certainly deliver an engine. But now the situation in Japan is so awful. That could set things back as far as development money, other than what's in the pipeline. The 70-seater is mainly because of the US scope clause and the only reason they designed that aircraft is that they felt to penetrate the US market a lot of US majors will not allow their regional partners to fly [over 70 seats]. But if we take ourselves five years from today, it would not surprise me that they'll have the [MRJ]70, the 90 and the 100 or whatever they call it. It would not surprise me that that would become three airplane types in the family, just like the CRJ700, 900 and 1000 is a three-airplane family. [A 100-seater would help be more competitive] with certain airlines. As a [BAe] 146 replacement as a Fokker 100 replacement even as a 737-500 replacement, certain airlines may go for that. So if the Japanese want to be a real player, I think they'll have to build a 100-seat airplane. I just don't see that they'll have the market penetration with the current models they have now. They've already resized the fuselage based on our inputs. They changed the fuselage diameter by like 7cm or 8cm because they were building it based on the average Japanese sized adult and we had them completely redo the fuse diameter and now that's the new standard.
On whether Airbus is in a position to respond to a clean-sheet Boeing narrowbody design:
They have to get through the A400M programme and the A350 programme. If you're on the board of EADS, would you approve an all new programme today? I mean look at all the cash that's going out for the A350 so I think they've got to that under control.
Thoughts on the A320neo:
It took a while but the advantage is that they've been able to shed a lot of cost off to the engine guys. The engines guys are picking up the bulk of the headache. I mean there is still a lot of flight testing and the wing has to be strengthened. They've got the sharklet stuff, the gears, etc. [The sharklets] still involves strengthening the wing. So hopefully that strengthening will also work for the neos. They don't have to redesign the wing three or four times.
On the driver behind 737 production increases:
I think Boeing will build as many 737s as the supply chain allows. Why? They need the cash flow from the 777 programme and the 737s and they've got a very long backlog so they could increase production by say two airplanes a month. As many airlines as they go to and say, would you take a 2015 [delivery] in 2013 or 2014 and they'll have lots of guys raising they're hands saying 'yeah, we'll take a 737 early'. So there is financial motivation for Boeing to get more cash flow out of the 737 and 777 and that's one of the reasons they've increased production rates. It's not 100% due to demand, but there is demand so it's kind of a win/win. But I think the supply chain is the limiting factor whether they can go to 42 or 41.
They [Boeing] don't want to lose any big 737 operators to the neo. Neither would you if you're Boeing. I think Airbus will make a strong effort at Delta and United. United phased out their 737s but Delta has a lot of MD-80s and 737s and they have the Northwest A319/A320 fleets and lots of 757s at both so I think Airbus will make a very strong push at both Delta and United-Continental.
On supply chain constraints.
It's pretty close to the limit. For example, seats are becoming a huge constraint, especially after that Japanese disaster where [Koito] falsified certification. Galleys are constrained. Avionics are in pretty good shape because a lot of the military stuff has been cut back so people like Honeywell and Rockwell are able to move their avionics suites.
Some suppliers are telling us they are pretty stretched. It's the weakest supplier that really runs how many airplanes you can do. It's not your strongest supplier.
"Governments don't lead the industry. The industry leads government. And if you don't believe that, then boy this is really the wrong industry to be in because they are way behind us. Did you drink the Kool-Aid this morning with Randy [Babbitt]? The government is going to tell us how much money we're going to save with this new system that they are going to make us pay for. What the? We need to start passing out Kool-Aid at all these things. The SMS Kool-Aid. The NextGen Kool-Aid," Aeronautical Repair Stations Association executive director Sarah Macleod said in reference to how FAA administrator Randy Babbitt and regulators have a penchant for telling the aviation industry how much money it will save with NextGen and SMS through investment. 
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