What felt like another slow August in aviation quickly turned interesting with three developments that could reshape competitive dynamics. Boeing may finally secure the breakthrough it has been waiting for in China, Airbus faces disruption in the UK that may actually work in its favor, and Embraer is quietly positioning itself for a bold next step beyond regional jets. Boeing is selling 500 aircraft to China - We live in interesting times. Didn't tariffs mess up trade? Apparently, that has gone by the wayside. Aerospace is outside tariffs (phew) and looks like we are friends again. We have been waiting for a deal since the last order was in 2017. The reality is China cannot (yet) depend on COMAC. China also cannot push Airbus any harder. For Chinese airlines to compete effectively, they require access to the best aircraft. The only viable option after exhausting COMAC and Airbus' production limits is Boeing. The MAX is becoming very compelling as the program seems to have solved its teething issues. You'll hear more about this from us next week. While China may be buying 787 as well, we bet the majority of the order is for MAXs. A huge order from China will immediately lead to a phone call from Kelly Ortberg to the FAA asking to hasten the MAX production increase beyond 38/month. That call may have already taken place. The FAA may need to ease its approach because this deal is crucial for the US, not just Boeing. Airbus workers at Filton go on strike - Bad news, right? Actually, it may be fortuitous. Airbus is struggling to meet its delivery target this year. We did a piece on this just two days ago. The strike is a blessing in disguise. Airbus can now say the company will miss its delivery target because of this strike. Our quick estimate is that the strike could cost ~30 deliveries. Airbus management appears transparent, whereas the strikers are portrayed negatively. What may be bad news for the company can now be channeled onto the union. Management has the excuse they were looking for. Embraer's KC-390 looking at another win? Embraer is having a mixed year. Many say it's a great year, but we are not so sure. The KC-390 is undoubtedly on a tear, garnering a lot of attention. Each win acts as a risk reducer for the next deal. Each wavering customer can see that others have done their due diligence and chosen the KC-390. This boost provides Embraer with more cash to continue its development. That development is crucial because its commercial line needs help. The backlog on the E2 is not as strong as it needs to be. (The backlog for the competing A220 also looks soft) The E175 has been the bread and butter program for the commercial division, and that also looks softer. Which means Embraer needs something new. That "something" they won't talk about, but whispers are there's MOM in the works. Remember the last time an OEM tried to break into the duopoly? While the MOM is the right area of focus, the risks are tremendous. Consequently, the silence is appropriate. Embraer must derisk anything like this, and that requires partners. Those partners are in India and Saudi Arabia. These partners likely want to be part of the program. It won't just be capital. They want jobs making parts and assembling pieces. Embraer's need is their windfall, and they will not miss this opportunity. Especially India. That means a long supply chain. Like the one Airbus has for its FALs outside Europe, or the one Boeing has with suppliers worldwide. Embraer has been increasingly vertically integrating its production. So this supply chain flies in the opposite direction. While Embraer's engineering talent can design this airplane, along with all the necessary planning, the big picture is cloudy. The challenge isn't technical. As we saw with the loss of LOT, politics plays a huge role. Brazil lacks a sufficient economic base to drive the business. Deals with India, for example, may be painted as between equals. But that isn't the whole truth. It is a complicated situation. Does Embraer need this new program? Absolutely. Can they do it? Technically, yes. But you can be sure Embraer learned from Bombardier's CSeries, and will offset risk before it goes public with any news. It will lock up partners. Fortunately, deals with Saudi Arabia and India should come with orders. Saudi Arabia's AviLease, for example, could place a significant order. India's airlines would jump at faster deliveries of larger aircraft. There's money in this for everyone, once the risk is offset and managed.
