Airliner markets are on the mend, but the fight for orders remains as fierce as ever.

Kevin O'Toole/LONDON

THE AIRLINER MARKET is finally on the upturn. While 1995 may not have been a vintage year for the big-three jet-aircraft manufacturers, the tally of new orders was respectable enough to illustrate that the market is improving.

Even after cancellations, Airbus, Boeing and McDonnell Douglas (MDC) collectively managed to show just over 500 new aircraft orders, worth more than $35 billion. The overall order backlog grew for the first time since recession began, as deliveries stuck at only 380, the lowest for a decade, although the three-month strike at Seattle played its part.

The order books also look more solid after two years of clearing out the dead wood. Cancellations in 1995 were down to around 56 aircraft, mild compared with the hundreds wiped off the books in the previous two years.

Order levels are still well down from the heady heights of the late 1980s, but manufacturers and their airline customers are not likely to complain about a return to steadier, more sustainable, growth levels given the damage of the last boom-to-bust cycle. "We see slow, but steady growth, but not a return to the order levels of the late 1980s," says Chris Tarry, transport analyst at London-based Kleinwort Benson.

Ron Woodard, president of Boeing's Commercial Airplane Group, stresses that the aim now is to avoid another roller-coaster cycle, which is one driver behind his campaign to bring down production lead times and increase productivity. Not least, the aim is to avoid what Woodard admits, are the "wild gyrations" in workforce levels, which were a major contributory factor, behind the industrial unrest.

"Our goal is to dampen out the cycles in this business, have a long-term secure workforce and not go through wild disruptions," he says, adding that there should be little change in numbers this year.

Woodard is equally optimistic of achieving "significantly higher" order targets in 1996. A start has already been made with the Malaysia Airlines order at the start of January for a mix of 25 777s and 747s.

Again, it is the Asia Pacific carriers, which Boeing expects to drive its order book. In 1995 it estimates that it won around 80% of business in Asia, triggered by the highly lucrative combination of 777 and 747 sales.

Woodard says that there may be some activity in the US narrow-body market, but hesitates to predict anything like a recovery to historic ordering levels. "We are watching as US carriers repair their heavily damaged balance sheets of the last five years. We anticipate that orders will come, but we are not sure that it will be in 1996, maybe a couple of years beyond that," he says.

Boeing's re-emergence to market leadership is perhaps one of the least surprising features of 1995. The group's dismal showing in 1994, when Airbus managed to draw level on new business, was always more of a short-term aberration than a long-term trend. Even Airbus admits as much, despite its evident glee at the time in humbling its rival.

The tally of 346 new orders in 1995 puts Boeing comfortably back on its long-running track of 60% market share. The Boeing order figures were helped by a certain amount of good timing. Its 777, for which Boeing failed to secure a single order in 1994, attracted an impressive second wave of new business as it went into service. A series of launch orders for the latest-generation 737 also bolstered the narrow-body figures.

Towards the end of the year, Boeing was also able to boost its orders with a string of announced, but previously unsigned orders. The massive Saudia order, for example, finally made it on to the order book, while Singapore's letter of intent became firm. Boeing, also revealed a tidy number of previously "unannounced" orders, led by 16 more 747s for Japan Airlines (JAL). These are in fact the remainder of the 50 orders announced by JAL a couple of years ago, but which had not yet appeared on the official order book.

Nevertheless, there is little argument over the underlying strength of the Boeing Commercial Aircraft business. The backlog edged back above the 1,000 aircraft mark in 1995, giving a cushion of around $73 billion in unfulfilled orders.


MDC, too, managed a better year in 1995, although the success may be transitory. Preliminary figures show a tally of 114 new orders, a remarkable achievement given the dire performance of the previous four years, in which the Long Beach manufacturer barely managed to offset cancellations.

A closer look at the figures dispels much of the optimism. The tally relies heavily on the delayed Saudia business and ValuJet's decision to launch the MD-95, on terms, which the airline proudly proclaims were highly favourable. Industry speculation suggests that the aircraft's price could have gone down to as low as $20 million.

Without these two pieces of business, the company would have scraped by on 32 orders. That total could be less, when the final paperwork for the year is done, with at least three MD-11s possibly to be docked from what are still the preliminary figures.

"McDonnell Douglas has had a surprisingly strong year, but the foundations of 1995 rest on far fewer pillars than do Boeing's," says Byron Callan, aerospace analyst at Merrill Lynch, reflecting a general caution over the celebrations at Long Beach.

The MD-11 order book is looking perilously thin, with a backlog of only 21 orders - that is less than two years of production at current levels. "The MD-11, as a passenger aircraft, remains an issue, but this aircraft may be able to retain a niche as a suitable freighter for long, thin, international routes," says Callan.

The MD-90 looks healthier, with more than 100 aircraft still to be delivered, while the MD-95 stands a chance of succeeding in the 100-seater competitions pending in the US market. The MD-95 will not be in service until 1999, however, and, in the meantime, MDC faces the prospect of seeing its share of world aircraft deliveries potter along at little more than 10%.

The future could be academic if MDC succeeds in pulling off merger talks with Boeing. Little hard facts have emerged since news of the talks was leaked late in 1995, but financial analysts are increasingly warming to the idea.

The attraction of the deal for Boeing clearly lies with the potential to emerge with a world-class defence business. Douglas Aircraft potentially adds little to the group, besides removing a small, but irksome, competitor. "Douglas Aircraft might be worth more dead to Boeing than alive," comments Callan.

In reality, however, the prospect of massive job losses at Long Beach is almost certainly a political impossibility, especially in the run-up to a US presidential election.

The outright termination of a programme, with the resulting collapse in resale values, would anyway add to the difficulties in managing MDC's potentially hefty lease-book liabilities.

The smart money suggests a longer-term assimilation if the merger goes ahead, with MDC continuing to compete in the market, but in tandem with Boeing. One potential formula could be that being proposed by Lockheed Martin to smooth anti-trust concerns over its pending merger with Loral, where the competing space business will remain a separate company in which the enlarged group has a holding.


Airbus, too, is faced with some hard strategic thinking, not because of the prospect of a MDC/Boeing merger, which could potentially help ease the market, but because of the need to sharpen its challenge in the wide-body market.

The consortium has built a solid 30% market share over the past decade, as the 1995 figures again confirm, but the prospect of achieving its long-standing ambition of drawing level with Boeing on new business by the end of the decade appears distant. As one analyst commented: "Airbus has done extremely well to get to where it is now, but the question is where do they go next."

Despite the success of the Airbus narrow-body family, Boeing's wave of 777/747 deals over the past year has exposed the consortium's weakness at the top end of the lucrative wide-body market. The consortium has gradually built up a decent stock of orders with the A330/340 family, boosted by a flurry of business towards the turn of the year, including the Philippine Airlines announcement (not yet included on the order book) for four A340-300s and eight A330-300s. Boeing has done much better with its larger aircraft types, however, and could soon reinforce its position with new 747 variants.

Airbus could still respond with its own new launches, including the A3XX proposals, provided that it can find the $10 billion, required to fund the project. That will almost certainly mean taking a fresh look at widening the consortium structure to allow new partners, opening new sources of funding, or both.

There are serious studies going on into the options for a new commercial structure for the consortium, which would ease Airbus' ability to raise funding on its own account - and, crucially, to take a firmer grip on its cost base.

Analysts remain sceptical about much progress. "The obstacles to doing anything useful to take it forward remain very tough. It looks as though the issue will remain utterly embroiled in national politics," says Chris Avery, aerospace analyst at Paribas Capital Markets.

He adds that to launch a true commercial company would require a detailed valuation of each of the individual Airbus production operations. So far, the partners have shown little enthusiasm to expose their Airbus operations to close scrutiny.

Industrial and political pressure is nevertheless growing for such a solution, not least to give Airbus direct control over costs. In a market which is likely to prove steady rather than spectacular for the foreseeable future, tight cost control is set to be decisive.

Source: Flight International