ANALYSIS: The View from the City

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Where are we now?

(article submitted by Bert van Leeuwen, managing director, aviation research DVB Bank)

Our favorite industry guru, Adam Pilarski, once again was spot-on about the industry’s mood in early 2014, when he played the tune from the LEGO movie “Everything is Awesome” during his opening speech of the ISTAT 2014 conference. Indeed, from a business perspective - excluding the mysterious circumstances of the MH370 tragedy - there seems little to complain about in commercial aviation today.

Orderbooks for most aircraft types are bulging.

For the lessors, investor money is coming out of their ears and even the airlines are somewhat profitable on a global basis. Of course, there are some exceptions. For the Bombardier CSeries, the Airbus A350-800XWB and the Boeing 747-8I, things aren’t totally awesome yet. And, while the North American airline market is as stable as ever after deregulation, several European and Asian carriers are suffering under increasing competitive pressure from the ever-expanding Middle East airlines and the local low-cost boys.

So, are things really awesome or – as Adam suggested – are we living inside a comfortable bubble that may burst in the not too distant future, exposing us all to the harsh reality of a downturn?

Time will tell, but for the time being, let’s see where any bubbles in the various jet programmes may be.

During the first quarter of 2014, the order intake, according to Flightglobal’s Ascend Online database was 510 aircraft, including all Western-built commercial jets and all civil operators.

Certain already “announced” orders, including those from Tiger (Airbus A320neo), SpiceJet (737 Max) and ANA (Boeing 777/787/A320), were not officially firmed up, according to the database, so these are not included in the order totals.

And while this figure isn’t nearly as high as the 741 orders recorded during the first quarter of 2013, at 510 units, this is still a respectable sum and marks the fourth highest order total ever for this period.

The order total is actually quite remarkable as, according to the manufacturers, the single-aisle top-sellers, the A320 family and the 737, are supposed to be sold out for the next seven or eight years. In addition, it should be taken into account that the 741, 575 and 734 orders placed during the first quarters of 2013, 2012 and 2008, respectively, were not insignificantly boosted by a few mega-orders (> 100 aircraft) from carriers, such as American Airlines and Lion Air.

In terms of sales successes, during the first quarter of this year, the Boeing 737 Max took the lead with 171 announced orders, including significant bookings from Air Canada, Sun Express and several “unannounced” customers. The good old 737NG managed to book another 82 orders.

The A320neo, which, overall, is still well ahead of the Max, secured 72 orders, while the A320 obtained another 44 units, with Vietjet being the most important customer for both generations.

In the regional jet category, Embraer booked orders for no fewer than 50 second-generation E190/195-E2s from Air Costa, an Indian start-up airline currently operating just four leased first-generation E-jets. Let’s hope this will not become another Indian bubble that will burst in a few years. Good luck Air Costa!

Bombardier’s main success during the first months of 2014 was an order for 16 CSeries units from SaudiGulf, another start-up, this time in Saudi Arabia. SaudiGulf will have to compete against government-owned flag carrier Saudia. Reportedly Saudia will continue to enjoy subsidies on domestic ticket prices, despite increasing competition, so good luck SaudiGulf!

The most interesting category at the moment seems to be the widebody jets. The top segment, consisting of the four-engined A380 and 747-8 didn’t do too well. Airbus firmed up last year’s hotly debated “order” from lessor Amadeo (ex-Doric), while Boeing sold one more 747 freighter to Cargolux, probably inspired by the expansionist mood of its new Chinese owners.

In the twin-engined, twin-aisle segment there is a lot of movement, so let’s take a closer look at what is going on. Airbus offers a range of aircraft in this segment. The current products are the A330-200 (246 seats in three classes), the stretched A330-300 (300 seats) and the A330-200 freighter. A “regional” variant is offered and is essentially a cheaper version with a lower maximum take-off weight compared with the A330-300. While the A330 is still selling in acceptable numbers (reportedly thanks to friendly pricing) the aircraft represents conventional technology.

As most will remember, in 2005, responding to the all new Boeing 787, Airbus announced an updated, re-engined version of the A330, called the A350. In March 2006, Steven Udvar-Hazy made it clear that this “warmed-up A330” was not enough, so Airbus went back to the drawing board to design the all-new A350XWB, which was announced in July at the Farnborough air show.

Initially the aircraft would be offered in three optimised versions, the -800 (270 seats), -900 (314 seats) and -1000 (350 seats). In 2007, under pressure from some important customers, a major change in the design of the A350-1000 was announced. Rolls Royce was to up-rate the engine core to boost the 1000’s range. In 2010, Airbus had to admit the -800 would no longer be an optimised design, but a simple shrink of the -900. Was this the beginning of the end for this version? It certainly looks so, judging by the orderbook.

Boeing followed a different strategy. It’s aging 767 was clearly outgunned by the newer A330, so after Boeing’s failed attempts to respond with a 767-400ER and the Sonic Cruiser, the 787 Dreamliner was launched to kill the A330. The initial three versions would be the -8, the stretched -9 and the -3, a short-haul “Japan-special”.

As the -3 would probably never have become a commercial success, Boeing wisely killed that variant of the Dreamliner in an early phase, probably saving itself a lot of development money. The well-documented delay in the 787 certification, and subsequent incidents, offered Airbus the opportunity to sell more A330s and so they did.

However, with the 242-seat 787-8 production now in full swing, and the 280-seat -9 to follow soon, life for the current A330 has become more difficult. The new 323-seat 787-10X that was added to the range, only will add to this.

Interesting enough, rather than design one family covering the sub-A380/747 segment, as Airbus did, Boeing decided to re-design its 777 family, launching the 355-seat 777-8X and the 406-seat 777-9X.

Even without making any judgments about which strategy will be the more successful one, a conclusion that can be made now is that there are an awful lot of twin-aisle aircraft designs coming our direction.

As we have seen in the recent past, there are no guarantees that all of them will be successful.

According to Ascend’s numbers, during the first quarter of 2014, the A330-300 was still the best-selling twin-aisle, followed by the A350-900.

Looking at order volumes during the period from January 2013 to March 2014, it becomes a little more clear where the market’s preference is heading.

The A330-300 is still doing well with 80 more units sold, while the 777-300ER also booked 44 more orders.

From the new generation of aircraft, the A350-900 was the best seller (192), followed by the 787-10 (122).

The 787-9 booked 39 additional orders and the -8 secured only a modest 24.

The “big twin” segment seemed to be in balance with 58 of the new 777-9Xs sold, compared with 59 units booked for the A350-1000. And this is where it becomes a little tricky, as the official orders don’t tell the entire story. Announced-but-yet-to-be-confirmed orders, letters of intents, deferrals and announced cancellations have to be taken into account.

Putting all of these factors together results in the following current view, from a future value and liquidity prospective:

A330-300 : still doing well, but may need support in the form of discounting or a “neo” refresh

A350-800 : on its way to the exit

A350-900 : doing well

A350-1000 : OK-ish but under pressure from 777X

787-8 : still OK but more customers may move to the -9 variant

787-9 : doing well

787-10 : likely to do well

777-300ER : OK-ish for now, but potentially under pressure from 777X

777-8X : Direct competitor to the A350-1000 but seen as niche aircraft, unless ….

777-9X : Potential success taking orders from the big quads as well as 777-300ER/A350-1000

So, in tennis terms it seems “advantage Boeing” at the moment, but, for sure, the game isn’t over.

What kind of reaction do we expect from Toulouse?

The bottom-end of their twin-aisle range seems vulnerable with the potential demise of the A350-800. Neither an all-new twin aisle, nor an A322 are realistic options. In the short-term, the much discussed A330neo seems the only affordable quick fix, and it actually may do surprisingly well. The more interesting question may actually be, with what engine?

The market seems a little limited for more than one engine supplier, but which one? While a version of the Rolls Royce Trent seems the obvious choice, General Electric seems to be re-focusing on the A330.

The A350-900 should be fine, but the A350-1000 is facing some formidable competitors. The seat-width discussion (17 inch vs. 18 inch) probably won’t be enough to convince the airlines to stay away from the 10-abreast 777X.

So, what’s left?

Is it possible that we will see a stretched A350-1100? Will Rolls improve the engine-efficiency? Or, could we even expect an all-new “A360”, slotted in-between the A350-1000 and the A380?

While from a market perspective the latter seems the optimal solution, such an aeroplane would cannibalise both the A350-1000 as well as parts of the A380 markets. Taking the huge development costs of such a programme into account, it seems that this would be a bridge too far.

Whatever it will be, it seems likely that Airbus will have to do something at the top end of their twin-aisle, twin-engine range.

While Boeing seems to be in the lead, there are some potential issues as well. The last chapters of the 777-300ER story will need to be carefully managed, so not to fall off the cliff created by the -9X. The 787-8 may go the same way as the 767-200ER and the 777-200ER - both are reasonably successful designs, but overshadowed by their higher-capacity sisters.

The -10 should be fine for the short-to-medium term, but eventually a -10ER may become necessary (unless airlines recognise “range” has a cost at $100 bbl oil).

Finally, the 777-8X is already a bit in the shadow of its bigger sister, but size-wise is a more direct competitor to the A350-1000. It is unlikely Boeing will be satisfied with a sales volume similar to the 777-200LR (the 777-300ER’s little sister, only sold 59 units in passenger configuration), so “something” may still happen there.

So, overseeing the complete picture, it seems the A320neo and 737 Max are fairly safe bets.

In the regional jet market, no obvious winner can be identified yet, but “the writing is on the wall” for some of the slow selling designs. For sure, not all of the new regionals will become a success. The twin-aisle twins leave the most room for speculation. Some of the officially launched designs seem to have problems and we fully expect something “major” will be done.

The end of the A350-800 seems near, and an A330neo launch seems increasingly likely, but with which engines?

How about the A350-1000 vs. the 777-8X? Have we seen the end of that game yet?

As one of the many armchair aircraft designers in our industry, it is easy to come up with all kinds of brilliant ideas, but the reality in Toulouse and Seattle is a little more difficult. But that’s one of the privileges of having a view from another City.