Insight: Wednesday 15 July 2020: Implications of Two News Items

A Change in the Status of the CR929?

The industry rumor mill indicates that the joint-venture for the CR-929 widebody to be built in China largely based on Russian design is potentially falling apart. Apparently, COMAC is demanding sales rights worldwide outside of Russia, and that is not acceptable to UAC.  A rift has begun from what began as a fragile partnership.

Russia, which has experience in building widebody aircraft, including the Ilyushin IL-86 and IL-96 models, strong experience with composite materials in the MS-21, and expertise in commercial engines that the Chinese lack, is bringing most of the technology to the party, while the Chinese bring cash and a large potential domestic market.

Given the balance of technology, one can see why UAC does not agree that China should be the marketer and exporter of the aircraft, and likely feels that the relationship should be the other way around – Russian or joint marketing outside of China with COMAC selling in the domestic market.

China will find a way to clone whatever technologies Russia provides, and UAC is now taking additional steps to protect intellectual property in the joint venture. With limited cooperation from western suppliers and now more limited cooperation from UAC, the Chinese will be forced to spend a bit more time in developing their own advanced technologies for the second generation of the C919.

The C919 looks remarkably like the A320, much like the ARJ-21 looks like the 717 (MD-95). But there is much more to developing aircraft than simply copying a design, as COMAC has discovered with years of delay for the ARJ-21 and a C919 that will be competitive with the last generation from Airbus and Boeing when it enters service.

What most people don’t realize is that COMAC doesn’t care if its aircraft aren’t competitive with the latest and greatest from the west.  The C919 is a learning airplane meant to gain experience and be adequate for the domestic market. The C939, or second-generation aircraft, is when China is planning to begin closing the gap, but this is all part of a 50-year plan for the country to become truly competitive in aviation.

Irkut has very competitive technologies, and the MS-21 is an exceptionally efficient and light-weight design that, we think, would win head to head against the A320neo and 737 MAX. It is a solid design, but without financing and a global service support network will not sell well outside of Russia. The C929, with composite structures and wings, should be equally efficient and will likely be powered by Rolls-Royce or Russian-built engines.

The question is whether Russia wants to give up its technologies to COMAC for a smaller slice of the pie than it planned for and at the risk of intellectual property theft. The Russians are determined not to be treated as second-class citizens by China in this regard, and the C929 project is now facing a potential delay or restructuring. This will be an interesting program to watch, so stay tuned.

The Boeing First Half Numbers are a Disaster

Boeing did manage to deliver one aircraft in June and 70 aircraft during the first half of the year. That compares with 239 delivered last year, a 70% drop. Net orders were significantly negative with 373 MAX cancellations, which when combined with 431 orders removed from the backlog in 2020 to comply with ASC 606 accounting rules, brings Boeing’s total backlog to 4,552 aircraft. This compares to 196 deliveries at Airbus, a 50% drop from 2019, and a total backlog of 7,584 aircraft.

Since order backlog is a window into the future, it appears Boeing has 37.5% of the future market versus 62.5% for Airbus. While the war is far from over, the narrow-body battle has clearly been won by Airbus in the near term.

What makes things worse for Boeing is that of the MAX it has already made, more than 370 that were delivered to customers but grounded and 450 more were built during the grounding, will be ready to enter service just as airlines don’t need them. With airlines taking as few deliveries as possible, the aircraft already sold will need to be modified and re-enter service first. Unfortunately, that additional capacity is not needed, and will likely displace the deliveries of some of the 450 aircraft already built and awaiting delivery, who are, at the same time, asking for delivery deferrals for those aircraft.

Boeing is unlikely to find customer demand for 450 new aircraft in 2021, as the industry is recovering very slowly from the global pandemic. As a result, new production should effectively remain at zero next year to bring supply and demand back into balance. But Boeing can’t afford to shut down its 737 production line nor risk losing its supply chain for that product. As a result, low-level production will resume and exacerbate the market glut for narrow-body aircraft.

The key for Boeing will be getting customers to take delivery of aircraft that they no longer want and cannot immediately use. That is likely to take some additional financial or “in-kind services” adjustments to contracts to accomplish. But Boeing is in a weak position, as the grounding has resulted in virtually every aircraft being late, and therefore subject to cancellation without penalty by airlines.

The result is that Boeing will be pressed to either reschedule deliveries or have the orders canceled in the near term. While a few months ago, Airbus had no capacity to deliver additional A320 family aircraft, that pressure is now off, should a major Boeing customer wish to switch camps. The leverage today has moved from Boeing to customers, and they know it. American’s threat to cancel additional MAX orders unless Boeing provides financial assistance is evidence that even long-term Boeing customers are sharpening their pencils.

Boeing is in a no-win situation. If they stop production to balance supply with demand, they lose their supply chain and key employees. If they keep making aircraft, they will end up over-producing to what the market can absorb, and keep parking lots filled with excess inventory. Either alternative entails continued financial losses, as hopes for a V or U shaped recovery for the pandemic have been dashed and replaced with W and Swoosh shaped forecasts.