Commercial airliners: eyes on supply chain – and product strategy
In an ideal 2017 for commercial aviation, Boeing will deliver the 737 Max 8 into service without a hitch and start flight tests of the 787-10, Airbus will overcome the production ramp-up challenges that held back the A320neo family and A350-900 in 2016, Bombardier will build on the sales momentum for the CSeries with several profitable new deals and Embraer will smoothly certificate the fly-by-wire E190-E2.
If events take a darker turn, 2017 would be the year a one-year sales blip solidifies into a long-term slump, imperilling the industry's ambitious output plans for single-aisle programmes. All the OEMs would also discover that a few critical shortages in the supply chain cannot be easily overcome.
More likely, the industry will find itself somewhere between these two extremes as the clocks tick over to midnight on 31 December 2017.
The hardest prediction to make is how the wave of political nationalism that swept through the UK and US electorates in 2016 will impact an increasingly global aerospace industry.
Incoming US president Donald Trump has warned US companies about sending work overseas and assumed a challenging posture towards China. Boeing has already announced plans to open a 737 completion centre in Zhoushan, which would be operated by a joint venture with Comac. With 737 output planned to rise dramatically through 2019, the new facility in China is unlikely to reduce output at Boeing's existing 737 delivery centre in Renton, Washington – but will expectations match reality?
The supply chain also will absorb the industry's attention. For a long time, a breakdown in the supply chain for premium seating and lavatories, of all things, has threatened delivery goals for Airbus and Boeing. Now, the industry is shifting the focus of its concerns to the engine suppliers.
Pratt & Whitney and CFM International have each re-invented fan blade composition and production for next-generation single-aisle engines, but can they deliver as production rates start to escalate? P&W has already stumbled out of the gate, forcing Bombardier to slash planned deliveries in 2016. As the 737 Max starts deliveries in the second quarter, it will be CFM's turn to find out if its preparations were enough to keep pace with a steep ramp-up in 2017.
Only a year ago, it seemed that product strategy was set for the foreseeable future, allowing the OEMs to focus exclusively on executing deliveries. But that apparent stability wobbled slightly in 2016. In Renton, Boeing was forced to re-imagine the low and high ends of the 737 Max product portfolio. As a result, the 737 Max 7 was stretched and, as this article went to press, Boeing was continuing to analyse options for a larger version of the 737 Max 9.
Ambiguity still exists at the top of the widebody market, too. The days of the A380 and passenger version of the 747-8 are numbered, as the advance of more efficient twin-jets finally encroaches on the market segment above 400 seats. The details of the 777-10X and the A350-2000 remain shrouded in mystery, but are likely to be revealed along, possibly, with launch orders in the new year.
The final piece of the product puzzle – Boeing's "middle of the market" (MOM) concept – has languished in analytical purgatory in Seattle for more than a year. If it moves forward in 2017, Boeing must invent a production system that can achieve narrowbody efficiency at widebody production rates. No easy task.
Airlines: mixed prospects
Airlines have thrived off the back of lower fuel costs and modest, if mixed, economic growth. But IATA's updated industry forecast underscores the message coming from carriers: that profits are levelling off and starting to descend.
The outlook from IATA, the International Air Transport Association, is for collective airline net profits of $35.6 billion in 2016. While this would mark a new record profit for the industry, it is only slightly ahead of last year's previous record of $35.3 billion. Indeed, at an operating profit level IATA estimates industry profits of $58.3 billion – below 2015 levels.
The association also set out its first projection for 2017, in which it sees collective net profits falling to just under $30 billion. This would be the first fall in six years in collective airline net profits – but it would still be a standout year for airlines, and mark what IATA director general and Air France veteran Alexandre de Juniac termed a soft landing.
"The upward momentum we saw in airline profitability does seem to have run out of steam in the first half of this year and dipped a little in the third quarter, albeit from historically high levels," says IATA chief economist Brian Pearce. "Essentially our forecast for 2017 is a continuation of the trend we have already seen in the second half of the year."
While there have been plenty of shocks and uncertainties in 2016 that have been significant for carriers in particular markets, the wider picture is simpler: unit costs are no longer falling faster than unit revenues.
At the heart of the change in unit-cost momentum are fuel costs. Oil prices remain at relatively low levels, but following a spike after OPEC’s recent announcement that it will cut production, IATA is projecting the oil price will be around $10 per barrel higher. "Our forecast is based on staying at these sorts of level [in 2017]. The market is still as we speak oversupplied," says Pearce.
Fuel price hedging will take the edge off the pain for airlines in 2017. IATA projects the industry fuel bill creeping up $5 billion to $129 billion – a level that has not been seen since 2006.
That is partly offset, though, by a slightly more positive economic outlook. While there is plenty of uncertainty around Brexit and the Trump presidency, financial markets have interpreted evolving US economic policy – focusing on potential tax cuts and infrastructure spending – favourably.
"Our expectation, along with the majority of other economic forecasters, is we are likely to see slightly stronger economic growth next year [of 2.5%], which will provide some counterweight to the effects of higher fuel costs," says Pearce.
IATA, though, is projecting a slowing in passenger traffic growth in 2017, after several years of above-historic-trend growth. It sees traffic growing 5.1% in 2017, compared with just under 6% this year.
"That's dying away, because spot prices are rising [and] hedges are falling away," says Pearce. "So as we go into 2017 that will be a headwind for air travel, offset a little by this improvement in economic confidence.
"But we are not expecting to see a dramatic slowdown," he adds. "In fact, growth of 5.1% is a pretty good result. It's not far away from the 20-year trend."
Growth of 5.1% is below the 5.6% extra capacity IATA expects airlines to add in 2017. That would mean another a second year of falling load factor – it has already slipped from the industry high of 80.4% in 2015 to 80.2% this year. For 2017, IATA sees load factor falling to 79.8%.
Business jets: lights at end of tunnel?
Is a long run of bad years finally coming to an end in the light jets market? After years in the doldrums, the lighter end of the business jet sector – covering aircraft in the $2 million to $15 million price range – is beginning to show signs of recovery, albeit fragile, buoyed mainly by the uptick in the US economy and the introduction of new, innovative designs.
The light business jet segment is heavily dependent on the US market. The nation is home to the world’s largest population of business aircraft, owners and manufacturers, and traditionally accounts for more than 60% of new aircraft sales.
During his time in office, president Barack Obama did little to promote the benefits of business aviation. This was due largely to an outpouring of negative publicity caused by the apparently casual use of corporate aircraft by the leaders of the major US motor manufacturers, as they travelled from Detroit to Washington DC to plead for a state bail-outs following the 2008 financial crash.
The business jet industry hasn’t completely shaken off this image, so it will be hoping president-elect Trump – himself a high-profile owner of a VIP Boeing 757 – will start to send a pro-business and pro-corporate aircraft message to the country this year, and persuade cautious buyers that it is time to make that longed-for purchase.
There are a wealth of programmes to choose from. Established light jet designs such as the Cessna Citation CJ4 and XLS+ are selling in modest numbers, but the newest models are awakening prospective buyer interest.
Honda Aircraft’s HA-420 HondaJet, which entered service about a year ago after a 13-year certification campaign, has been well received with orders for over 100 aircraft. Sixteen of the light twins were delivered in the first nine months of 2016, and the airframer plans to ramp up deliveries this year. Embraer’s fly-by-wire Legacy 450 entered service at the same time as the HondaJet, and the Brazilian manufacturer has subsequently boosted its range by another 10% to 2,900nm (5,365km), helping to bolster its position in the superlight sector.
The Legacy 450 is facing stiff competition in this niche, however – particularly from Pilatus Aircraft’s latest programme, the PC-24, which is on track to enter service this year. The six-seat twin – the first business jet to emerge from the Swiss airframer in its 78-year history – is referred to by Pilatus as a “super-versatile jet” due to its large cargo door and ability to operate from short, unpaved runways. These have certainly been persuasive selling points. The first tranche of around 80 orders – equivalent to three years of production – sold out within hours, and eager buyers are keen for the order book to reopen.
Flight testing is now in full swing and the third prototype is set to join the certification programme in the first quarter. European and US validation are on target for the second half of the year.
Cirrus Aircraft’s Vision SF50 personal jet also looks set to make its mark in 2017. The six-seat single crossed the finishing line at the end of last year, capping a ten-year development effort. The first unit was delivered to a private owner on 19 December, and Cirrus plans a steady ramp-up in 2017 to begin clearing its 600-strong order book.
Thanks to Cirrus’s dogged determination and the deep pockets of its Chinese owners, CAIGA, the Vision is the company’s only surviving programme in the personal jets niche from an original line-up of five. This has certainly helped to heighten demand for the Williams International FJ33-5A-powered aircraft. Private owners – in particular, owners of Cirrus SR piston-single series – make up the majority of its extensive orderbook, but the US airframer has its sights on the lucrative and eclectic air taxi market, where the SR22 is already making its mark. Talks are already under way with select operators, so Cirrus will be hoping to reap the rewards in 2017.
US Defence industry: who holds Trump card?
Donald Trump has sent the US defence industry on a rollercoaster ride before even stepping foot into the Oval Office. Indeed, if the initial weeks following Trump’s election are any indication, it could be a tumultuous 2017 for the US defense aerospace industry. While defence industry share prices soared after Republicans captured the White House and achieved a majority in Congress in November, the honeymoon was a short one.
On 6 December, Trump fired off a Twitter blast at Air Force One replacement costs, sending shockwaves through the industry and deflating Boeing’s stock. During an annual Aerospace Industries Association event that same day, the trade body’s chief executive, Dave Melcher, tried to achieve a reassuring tone: “What is tweeted today is not necessarily going to be the policy of tomorrow.”
Whether Trump tones down the rhetoric once in office remains to be seen, but as president-elect he has maintained the quick-draw style of his campaign. In an 11 December interview with Fox News, he slammed Washington’s so-called “revolving door”, saying government officials working on defense acquisition programmes should be barred for life from moving to supplier companies after retiring.
In the same interview, Trump took aim – again – at the Lockheed Martin F-35 programme, which drew his ire during the campaign. The barrage of criticism continued the next morning with a tweet that tanked Lockheed’s stock by 4%: “The F-35 program and cost is out of control. Billions of dollars can and will be saved on military (and other) purchases after January 20th.”
While industry may be suffering from market whiplash, Trump’s pick for defence secretary has garnered bipartisan support. Known for his brazen style and colourful remarks, retired Marine Corps general James Mattis has emerged as one of Trump’s least polarizing cabinet picks. But Mattis’ military background marks a departure for the Pentagon, which has not had a general at the helm since 1950. Antennae will, though, be tuned to inter-service rivalry, as the USMC’s aviation programmes jockey for dollars in the fiscal year 2018 defense budget. Semper Fi?
In any case, divining Trump’s defence policy priorities has so far been difficult if not impossible. On the one hand, Trump has called for more brute force, with an emphasis on beefing up the army and the number of navy ships – assets which could come at a budget tradeoff cost to, say, the swarming drones called for in the Pentagon’s new third offset strategy. At the same time, Trump has touted the need for increased cyber capabilities.
Although the president-elect has shaken the industry with broadsides at billion-dollar defence programmes, harsh acquisition reform should not yet be assumed from a Trump administration. On the F-35, for example, it would take a Herculean political effort to roll back the programme at this advanced point – Lockheed Martin has achieved initial operational capability on the A and B variants of the F-35 and completed first deliveries to Japan and Israel.
As for Air Force One, Trump may have publicly vowed to be the new dealmaker, but it is the Pentagon, not the White House, which is the government’s defence purchase negotiator.
So far, Trump’s style seems to follow a familiar pattern: a barrage of tempestuous comments followed by a meeting with his target that is meant to calm the storm. The day after he publicly criticized Boeing over Air Force One, Trump told NBC News: “Well, I think the planes are too expensive.” But, he added in reference to a conversation with chief executive Dennis Muilenburg: “I spoke to a very good man yesterday, the head of Boeing, a terrific guy, and we're going to work it out.”
Mergers & Acquisitions: seeking security
When viewed through the prism of merger and acquisition activity, 2016 was average for the aerospace and defence industry – and 2017 looks like being another, well, average year. Scott Thompson, the Virginia-based aerospace and defence assurance leader for consultants PwC, says that 2015 was a big year for M&A, so it’s not surprising that the level of “base” deals – that is, with values below $50 million – have been declining for many quarters; indeed, there has been a 38% decline in M&A activity in the four quarters through to Q3 2016.
PwC analysis shows deals bigger than $50 million to have been up in number, to 11 deals, but down in average value during Q3. And, given the small number of big-value deals, a single transaction can skew the figures one way or the other, so base deals trends might give better indication of deal momentum. There, it’s worth noting – again from PwC’s Q3 report – that strategic investors (that is, companies buying other companies) accounted for nearly three-quarters of the Q3 activity. Financial investors – private equity being the prime example – increased activity by more than half.
Those two facts may imply that aerospace and defence is moving out of what amounted, for private equity, to a difficult time after the financial crisis. The typical private equity plan is to buy a company in distress, fix it up, and sell at a profit, either to a strategic investor or on the stock market. But the 2009 crash shut down the so-called initial public offering (IPO) exit route and left strategic investors wary of acquisition. The result was that private equity investors found themselves holding and operating their targets for longer than planned.
But now it seems those financial investors are managing to exit investments, and are grabbing new opportunities.
Strategic investors, on the other hand, are to some degree achieving a realignment of the industry. Much recent deal activity has been linked to security and government services – a growth area that traditional “hardware” companies looked at hungrily pre-crash but have, in truth, struggled with. Defence contractor saw much overlap with security and services, because they know government customers. But IT-centric services are very different products from aircraft and weapons; not surprisingly, IT companies tend to perform better. Thompson says the trend now is towards “pure-play” security/services firms, and this is the sector that will see most A&D action.
More broadly, he notes, commercial aerospace business growth remains positive, but is slowing down – albeit from a healthy level – and US budget realities are that defence spending increases will be in the low single digits. On top of that, expectations that a Trump presidency will be friendly to defence spending mean that valuations already figure for growth: that is, the days of buying low and selling high are gone.
But Thompson stresses that aerospace and defence is still a good industry to buy into; as a sector it’s a safe harbour for cash and many companies pay attractive dividends.
Super Puma: super struggle
Despite Airbus Helicopters’ protestations – and the views of group chief financial officer Harald Wilhelm – there appears little appetite for the beleaguered H225 Super Puma heavy twin to be returned to service in the North Sea. Its troubles stem from the 29 April 2016 crash of an H225 on Norway’s west coast, in which 13 people were killed. The accident was subsequently traced to a fault with the main gearbox and a European flight ban for the H225 and AS332 L2 ensued. Although that restriction was subsequently lifted by Europe’s regulators, grounding orders remain in Norway and the UK – to Wilhelm’s great irritation – and accident investigators have yet to identify a root cause for the gearbox failure.
Airbus Helicopters’ problem, then, is three-fold. First it must persuade the civil aviation authorities in Norway and the UK that Super Pumas are safe to fly again. That seems unlikely to be a speedy process.
Second, even if Airbus clears that hurdle, the oil and gas market is depressed and any capacity shortfall has been taken up by other types, mainly the Sikorsky S-92 – so the Super Puma is not really needed. Sure, there are some missions the H225 can perform more ably and cost-effectively, but so far the industry is coping.
And third, assuming regulatory and commercial acceptance, the challenge will be to persuade the offshore workforce – both pilots and passengers – that they want to get into the Super Puma again. So far, there is little sign of a thawing in attitude. It would seem that 2017 is likely to be another difficult year for Airbus Helicopters’ heavy twin.
Reaction Engines: gearing up to turn and burn
When it comes to revolutionising access to space, 2017 will not be a year of drama. It will, however, be a year when the ground work is done – literally – in preparation for major events in 2019, when Oxford-based Reaction Engines expects to start ground testing a rocket engine that promises to power a true spaceplane, actualising the dream of airline-style single-stage-to-orbit flights to and from a runway, with essentially complete reusability.
Ground-breaking for a test facility in Walcott, Berkshire is imminent in 2017 and, in parallel, construction of a demonstration engine to test in it. The concept for that engine – SABRE, for Synergetic Air-Breathing Rocket Engine – dates back some 30 years to the UK’s ultimately abandoned HOTOL spaceplane concept. HOTOL engineer Alan Bond, who went on to found Reaction Engines, continued to develop the engine concept – and in the last five years has convinced the European Space Agency and the US Air Force Research Laboratory that it’s viable. Bond’s team has also sketched out a spaceplane design, called Skylon, that overcomes HOTOL’s daunting shortcomings.
Now, the elements – including the money – are in place for this British project to press on and “turn and burn” in 2019, as Reaction Engines’ chief executive Mark Thomas puts it. Flightglobal caught up with him after he addressed the annual Rutherford Appleton Laboratories space conference last month, when he said that the £100 million ($125 million) raised so far from investors and partners, including the UK government, ESA and BAE Systems, will see it through to proving that SABRE works.
From 2019, Thomas says, the project will need new money to reach the total of $500 million Reaction reckons will be needed to also build and fly an X-plane demonstrator before 2025. He adds that he’s always talking to investors, and has a good idea which ones might be interested and have the cash to take the project beyond ground testing.
Thomas – a former Rolls-Royce chief engineer who joined Reaction in 2015 – has previously referred to SABRE as promising another “Whittle moment” – referring, of course, to the UK’s jet engine pioneer. That comparison may not be overblown. If realised, the air-breathing rocket engine concept will demolish barriers to runway-to-orbital flight. Like other rocket engines, SABRE’s thrust will come from the energy released when hydrogen and oxygen are mixed. The difference is that a Skylon spaceplane won’t have to take off carrying heavy, tanked liquid oxygen because its heat exchangers will liquefy incoming air until reaching about M5.5 at 26km (16 miles) altitude. At this point tanked oxygen takes over and SABRE becomes a normal, self-contained rocket engine.
What makes SABRE a real prospect rather than a pipe dream is, literally, pipes – as in 1mm tubing made into a radiator capable of liquidising oxygen from intake air by boiling off relatively low-mass tanked liquid hydrogen. Reaction Engines has overcome the critical problem of these radiators frosting up, and has also worked out how to manufacture such a complicated, delicate device.
SABRE also promises in-atmosphere hypersonic flight – think London-Sydney in 4h – and the lightweight, compact heat exchanger concept could conceivably be applied to improve cooling on ordinary jet engines.
So, the UK’s next “Whittle moment” promises to be dramatic. It also offers the prospect of a prominent place in the space propulsion industry for Reaction Engines and BAE Systems, which is putting £20 million into SABRE in exchange for a one-fifth share of the company. That partnership is significant; Reaction has driven the engineering behind SABRE and BAE is hugely experienced at running test programmes – and well-connected in aerospace and finance. The full budget for an X-plane programme, and commercial versions to follow, may well not come entirely from UK investors. But assuming the technical programme continues on track, SABRE may well be a big factor in ensuring the UK remains an aerospace power well into the 21st century.
Rotorcraft industry: recovery in 2017?
After 2016 contrived to be even more cheerless than the previous year, the world’s helicopter manufacturers are clearly hoping that 2017 will offer some respite from the doom and gloom – or at least a glimpse of the green shoots of recovery. However, they are likely to disappointed.
Oil prices, although inching fractionally upwards in recent weeks, are still far from the $100 per barrel highs of a few years ago, which means that the offshore transport sector is likely to remain becalmed for a while yet.
Mature Western markets for civil and parapublic helicopters are also showing few signs of life, and difficulties in emerging economies have curtailed hoped-for growth there, too. China might eventually yield the rewards that everyone believes it will, but that is unlikely to take place in the next 12 months.
The other potential engine for recovery – the arrival of new helicopter models – is also likely to misfire in 2017. Bell Helicopter will have the light single-engined 505 available, but its bigger and more valuable brother, the 525 Relentless, appears unlikely to make up time lost due to the hiatus in its flight-test programme and obtain certification in 2017. Leonardo is in a similar position with its AgustaWestland AW609 tiltrotor, and Airbus Helicopters has nothing in the pipeline until its H160 arrives in late 2018 or even the following year.
All the manufacturers are betting that a recovery will eventually take place, and public pronouncements are relatively upbeat, but 2017 looks set to be another lost year.
UAVs: airspace remains contentious
Civil uses of unmanned systems remain a challenging proposition. In August the Federal Aviation Administration loosened up rules that all but banned the operation of small UAVs, which was hailed as a step in the right direction by many. This, alongside continued testing in Europe on the technology and regulations required to integrate UAVs into national airspace, is paving the way for progress. However, airprox incidents and continued misuse of UAVs has somewhat undermined unmanned advocates’ case, and influential groups maintain that the airspace is not now – if it ever will be – ready for integration.
Only time will tell if these incidents affect the good work put into the safe integration and operation of UAVs. Interest is rising in relatively novel applications – UAV pizza delivery being one – so the battle continues between more conservative voices in the aerospace sector, and the technology supporters who envision the skies filled with UAVs.
In the more familiar territory of military UAVs, the ferry flight to Europe of NATO’s new high-altitude, long-endurance unmanned air vehicle is imminent – and if 2016 did not deliver, 2017 will have to in order for the programme to remain on track. The first of five Northrop Grumman RQ-4 Global Hawk-based Alliance Ground Surveillance (AGS) systems was unveiled in June 2015, and the ferry flight to its new home at Sigonella air base in Italy was expected to take place in 2016.
Initial operational capability status is touted for 2017, with full operational capability to follow the year after, so the next 12 months will be telling for the programme. AGS will be a sovereign NATO asset alongside the organisation’s fleet of Boeing E-3A Sentry airborne early warning aircraft, and its entry into service will offer reassurance to those states in Europe feeling tension with neighbouring Russia.
General Atomics Aeronautical Systems’ Predator family of unmanned air vehicles may have dominated the medium-altitude, long-endurance market for some years, but there are two key tangible contracts that it is yet to secure. Germany selected the rival Israel Aerospace Systems Heron TP for its surveillance requirement in 2016, but General Atomics subsequently filed a protest to the high court in response to the decision. The results of this are expected in 2017. The Netherlands, meanwhile, has had its purchase of the MQ-9 Reaper approved, but financing the buy has become a challenge that the air force chief is very keen to overcome. India’s membership of the Missile Technology Control Regime in June could signal movement in a new market, too, as New Delhi has long sought technology as advanced as the Reaper.
Virgin Galactic: still, space beckons
We ask every year if this is the year, and every year the answer is: “no, Virgin Galactic won’t make it to space”. But after a lost year – lost to flight testing, anyway, following the October 2015 crash that destroyed its space ship and killed a pilot – Virgin Galactic heads into 2017 with momentum. A new and updated passenger-capable spaceship – named Unity – was delivered last year, and underwent carry and glide testing. So 2017 should see rocket-powered flight for the air-launched craft.
How high it gets remains to be seen. The previous SpaceShipTwo got to around 70,000ft from air launch at 50,000ft, but the goal is more than 300,000ft – beyond the internationally-agreed 100km “border” between Earth and space. A new rocket fuel is going to be part of the mix, but it needs to prove energetic, reliable and safe.
Ultimately, while the air-launch concept was proven by the US Air Force’s X-15 programme in the 1950s, the business of ferrying fee-paying passengers to the edge of space for a great view of the Earth and a few minutes of weightlessness is clearly riddled with risk, and development is proving to be a very long-running affair. To its credit, Virgin Galactic isn’t rushing.
Whether American rival Blue Origin gets any people to space this year is another question. That project, led by Amazon billionaire Jeff Bezos, is working with a reusable, vertical-launch rocket and crew capsule. Not simple, but perhaps less ambitious than VG’s six-passenger spaceplane-glider. And the concept works – 2016 saw multiple flights to higher than 100km. The capsule and booster were recovered by parachute and a powered soft landing back at the West Texas launch site, respectively. The company is understood to be aiming for a crewed flight this year, but not necessarily commercial operations.
As with Virgin Galactic, the passenger project is set to be overtaken by air-launched satellite orbiting – a potentially lucrative and long-term business. VG’s proprietary LauncherOne rocket, to be carried to launch altitude either by the twin-fuselage WhiteKnightTwo that will carry SpaceShipTwo or under the wing of a specially-prepared 747 named Cosmic Girl, is expected to fly – and reach space – this year. Operational flights are promised in 2018.