View from the City: Generation Conflicts
Article contributed by Bert van Leeuwen, managing director, aviation research DVB Bank
The year is now well underway and already we have seen a number of surprises in the equipment market. Embraer announced a second generation Embraer E-Jet and the 787's electric problems reached nightmarish proportions.
The industry is in the midst of a wide-ranging generation change with many of the established programmes about to be replaced by new more fuel-efficient designs. Experience shows that the last produced aircraft of the old design may be subject to increased value volatility, while the value prospects for the early production versions of the new generation may offer a much better value outlook.
So how did the outgoing generation perform compared with the new kids on the block?
Last year was another strong year for the manufacturers with well over 2,600 western-built commercial aircraft ordered for civil operators. Orders were down just 8% compared with the industry's record performance in 2011.
Boeing achieved 1,339 new orders, surpassing Airbus, which announced a respectable total of 914 aircraft.
In the conflict between the current generation aircraft and the A320neo and the 737 Max, the outcome was fairly clear. While Airbus had benefitted from the massive interest in the A320neo in 2011, during 2012 Boeing enjoyed a wave of orders for the 737 Max, albeit not enough to overtake the new Airbus offering in terms of total backlog.
In order to ensure a stable single-aisle market for the financial community, it is important that both products continue a roughly fifty-fifty market split. Any significant deviation from this would probably result in the launch of an all new aircraft by the manufacturer unhappy with its minority market share.
Not even counting the approximately 150 orders for the COMAC C-919 and Irkut MS-21, the new generation clearly beat the oldies to the magnitude of two to one. Just under 1,400 new generation aircraft were ordered compared with almost 700 orders for the older modesl. During the early months of 2013, the re-instated orders from American Airlines boosted the Neo and Max totals by another 130 orders.
Given the well known "last off the line" effect, it is actually a major achievement of the manufacturers that still well over 600 of the outgoing 737s and current generation A320s could be sold. While there reportedly is a price premium for the re-engined aircraft versions, the lower fuel burn and better residual value expectations for the Max and Neo should make these more attractive assets for airlines and investors. Many of the current generation A320 and 737 orders probably came from customers that had a short-term capacity need or that were offered a very attractive purchase price for these models.
In the longhaul segment of the market, the situation is a little bit more complex as the generations are less easy to distinguish and aircraft sizes are not always comparable. Starting with the new generation twin aisles, the two "flagships", the Boeing 787 and Airbus A380, did not do too well in 2012. Both suffered technical "teething problems" that for the Boeing 787 eventually culminated in early 2013 in the grounding of the type due to the, well publicised, problems in the electrical system. Boeing's year-end 787 sales total was negative as a result of 50 new orders offset by 62 cancellations.
Equally worrying is the lack of market interest in the new 747-8. Seven 747 -8s were sold but six others were cancelled leaving a net order intake of just one. The order total for the 747-8 stands just over 100, with about two-thirds for the freighter version.
Airbus managed to sell just nine A380s while its direct answer to the Boeing 787, the slightly larger A350XWB, booked 27 net orders, but none for the smaller -800 version. The market enthusiasm for the -800 seems to be modest and it is expected that eventually the development of the larger -1000 will receive priority over its smaller sister. The 2012 total for the new generation longhaul aircraft adds up to approximately 106 gross orders.
In the meantime, two well-proven twin-aisle families continued to prosper. Airbus' A330 family booked 80 gross orders. The smaller -200 gained 10 orders, but the A330-200 freighter version lost three units. The clear winner was the A330-300 with 51 additional orders.
Airbus also announced a more capable 242 tonne version of the -300, in an attempt to further strengthen the position of the older design against the new high-tech competitors. Judging by the 2012 orders, the "mature" A330-300 indeed should not be written off.
Boeing had significant sales successes with its proven 777 family. While the curtain seems to be falling for the shorter 777-200ER, the stretched -300ER enjoyed 67 net orders. The ultra-long range "LR" added one net order, but sales of the freighter variant stagnated as a result of the woes of the cargo market. Boeing will need to manage its answer to the A350-1000, the 777X , very carefully in order not to hurt the market perception of the 777-300ER as a clear "winner".
The other "mature" widebodies, the Boeing's 767 and the Airbus A340, continued to struggle in 2012. The 767-300ER received 22 net orders in 2012, 19 of which came from FedEx for the freighter version. Adding all these up resulted in a gross order intake of 180 for the mature generation.
This leads to the somewhat surprising conclusion that for the third year in a row, the mature technology longhaul aircraft outsold the newcomers. During the period 2010-2012, about two-third of the longhaul orders went to the established programs (A330/A340/767/777) and only one third to the newcomers (A350/A380/787/747-8).
Moving on to the other manufacturers, Embraer saw its order total for the large regionals, or the so-called E-Jets, increase to 1,093 from 1,051, indicating only 42 new orders in 2012. At the end of 2012, the commercial jet backlog only stood at 185, with the majority for the E-190.
Early 2013, however, brought some major developments for Embraer. Republic Airways ordered 47 E-175 jets to operate under the American Eagle brand. Embraer also announced a switch from General Electric (GE) engines to archrival Pratt & Whitney's geared turbofans for the second generation E-Jets, scheduled to enter service in 2018. Not only is this step remarkable from a technology point of view, but also because GE is one of the leading aircraft lessors/financiers. It will be interesting how Embraer will fill its production capacity between 2013 and 2018 with first generation E-Jets as - contrary to Airbus and Boeing - the Brazilian manufacturer does not have the benefit of a huge backlog for its current generation aircraft.
Embraer's eternal rival, Bombardier, booked a much needed success with a total of 73 additional orders, including an order for 40 CRJ900s from Delta Air Lines, but only booked 15 net orders for the CSeries. Sukhoi Superjet reportedly booked ten net orders in 2012, while Mitsubishi had reason to celebrate as its MRJ design received an order for 100 aircraft from Sky West Airlines. This amounted to a total of 150 gross orders for the current generation regionals (CRJ/ERJ/E-Jets) and approximately a similar number for the new generation (CSeries/SSJ/MRJ).
Judging by the order-intake in 2012, the winners in the single-aisle segment are the A320neo and 737 Max and a lot of the "smart money" seems to be heading for these types. In the longhaul market the 787, A380 as well as the 747-8 were struggling with a relatively stagnant order intake last year, while the oldies were still doing fine, with the proven A330-300 and 777-300ER outperforming the new kids. Should the 787s troubles last longer than expected, owners of A330s as well as 767s may benefit from a short-term, lease-rate spike.
For the regionals, there are no easy conclusions, except that there seem to be too many manufacturers offering new products and for some of them the adventure is likely to end in tears.
While picking the right equipment is still as challenging as it has always been, at least demand for new products is still very healthy and that's something very few other industries can say.