Premium #170 – The Ups and Downs of the A350XWB |

If we were to characterize the A350 program in one word, it would be volatile. The aircraft has seen highs and lows repeatedly through the program, which continue today. Production Volatility The Airbus A350XWB is now in service with Qatar Airways, which just took delivery of its third aircraft. But despite the relatively smooth introduction into service, compared with A380, 787, and CSeries, deliveries of the aircraft are quite slow since the first aircraft was delivered in December 2014. The third aircraft was delivered to Qatar last week, reflecting a very slow production ramp-up which is now three aircraft in nearly five months. This would certainly seem less than Airbus' planned production, indicating some teething pains in manufacturing. Airbus plans to deliver 17 A350s this year, or about 2.2 per month between May to December. While the original mid-2013 delivery date pushed back 18 months with program delays, those delays were lower than competitor delays in introducing new technology aircraft. Program Volatility Going back to the beginning of the program, the A350 concept began with a rocky start when Steve Udvar-Hazy criticized the original A350 design, which was more akin to today’s A330neo, and began a market reaction that forced Airbus back to the drawing board. That back to the drawing board exercise evolved into today’s A350XWB. The subsequent design, with composite construction, was well received in the marketplace and immediately gained orders for the three models proposed, the base A350-900 and the smaller -800 and larger -1000 variants. Originally a three aircraft family, the smallest variant, the A350-800, was not selling particularly well, and its economics against the competing Boeing 787 were questioned by industry pundits. With some customers seeking to change their -800 orders to the larger -900 model with better seat-mile economics, Airbus has been moving customers from the smallest variant to the larger -900 and -1000 variants, and will likely formally cancel the -800 once all of the existing customers are transitioned to other aircraft. From a peak of 56 orders for the -800, only 16 remain on the books, including 8 for Aeroflot and 8 for Asiana Airlines. Given the current geo-political situation, the Aeroflot orders appear to be at risk of deferral, if not cancellation, due to the economic impact of international sanctions. The Asiana order is likely to be renegotiated and transitioned to one of the larger models, each of which Asiana has ordered. Emirates cancelled an order for 50+20 A350-1000 aircraft on the day of last year’s Airbus Innovation Days, and appears to have selected the Boeing 777-8X instead, as the aircraft will be slightly larger and have better seat-mile economics. Competitively, the A350-1000 appears to be attractive, but lacks the size of the 777-8 and 777-9. With a wide gap between the A350-1000 and A380-800 - about 175 seats, the question now facing Airbus is whether they should introduce an additional stretched model of the A350 to better compete for the 400 seat market. The realities of the market are if Airbus does not stretch the A350 further, it will cede a generation of wide-body replacements to the Boeing 777-X and enable its competitor, which has a more balanced line up in terms of size, to seize control of the 350-450 seat market. With the 777X already gaining considerable market traction, Airbus will need to soon decide whether it will close the gap between the 369 seat A350-1000 and the 544 seat A380 with a new model. Rolls-Royce would have to likely develop a new engine, as the current Trent XWB may not have enough thrust for a larger twin. While Airbus does not want to cannibalize its A380 market, a 400 seat variant of the A350 would still leave a substantial gap between that aircraft and A380. Order Volatility Adding to the volatility in the aircraft family is volatility in orders, which are shown on the following chart. Once the A350XWB was offered to the market in 2006, it quickly garnered 457 orders by the end of 2008. From then on, however, with the exception of 2013, order volume has been lacking. It is notable that in 2011 and 2014, net orders for the A350XWB were negative, bracketing a very positive 2013 with 240 orders. Several customers, including Emirates, have changed their minds about the A350, causing this ripple effect in orders. Nonetheless, with 780 firm orders for the program, the A350 has a solid backlog, but has not generated many orders recently. This year’s Paris Air Show should provide an indication of the popularity of the program against the lower priced A330neo, which could cannibalize future sales in a low fuel price environment. The following chart shows the current A350 customer list. Potential Customer Volatility? Recent stories indicate that several of the firm orders may be in trouble, however. Air Asia has been rumored as wanting to change its A350 orders to A330neo, and statements by Tony Fernandes reported at the CAPA Aviation Summit in late April indicate that “they have renounced the A350.” That could place 10 orders for 2018-2019 delivery at risk. Aeroflot’s CEO, Vitaly Saliviev, indicated last week in a statement that “the Russian market is not ready now to get this huge aircraft” in the wake of economic sanctions that have resulted in a decline in the value of the Ruble. And late last month, TAP’s CEO indicated that their order for a dozen A350 could be cancelled if the privatization plan collapses. Fernando Pinto indicated “the new aircraft are ordered, and these aircraft have a much higher market value than was paid” in response to a question regarding whether the airline had a plan B in case privatization failed. With Yemenia, another customer, suspending operations due to the civil war, there are several potential possibilities for a reduction in the order book. A Bright, but Volatile Future Of course, the order book does contain solid orders from major carriers, including Qatar for 80 aircraft, Singapore for 70, Etihad for 62, Cathay Pacific for 46, United for 35, JAL for 31, Asiana for 30, Delta, Lufthansa, Air France-KLM and Air Lease each for 25, and the 22 for US Airways that now will wear American's colors. It is an impressive backlog. But with a net negative order position in 2014 and none so far in 2015, the program needs additional orders to regain momentum, especially with the slow start to deliveries. Once production problems are sorted out and the aircraft is being delivered at planned rates, we expect the A350 to generate additional success, particularly for those airlines waiting to see how the aircraft actually performs in service. With a current dip in orders and a slow production rate, we expect better new for the A350 at Paris and the remainder of 2015 as the first 17 aircraft reach service.

US Flight Planner	Airbus vs Boeing
US Airline Schedule Performance	Daily Production & Deliveries

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