Last Friday we had an opportunity to catch up with Airbus Chief Commercial Officer Christian Scherer. As the global commercial aviation industry starts to climb out from the pandemic, Mr. Scherer is a very busy man and we fortunate to get some time with him.
AirInsight: Christian, thank you so much for spending some time with me. I appreciate it. With the increase in vaccinations and herd immunity, there appears to be light at the end of the tunnel. Emerging from the pandemic, we see changes in airlines’ balance sheet strength, from pathetic to hopefully a little bit recovery. But changes in demand and route structures. So how can Airbus innovate and help its customers post-pandemic?
Scherer: How do we help our customers after the pandemic? Well, the same way we did before the pandemic is the sort of snotty answer. By making sure we have the right products for them now. I do not think that the breadth and the scope of the product options from Airbus, ranging from the 220-100 to the 350-1000, has any fundamental flaws in it after the pandemic, as a result of the pandemic. If anything, our strength, I want to say in the sort of mid-market segments, is a strength. The fact that we have a long-range single-aisle airplane that can take a considerable amount of risk out of international or cross-border destinations is a good thing. The fact of, alongside the big brother A330 is a good thing. And you can change up and down from an A321 to an A330. That’s a good thing. So the product range is probably, post-pandemic, if anything, slightly more relevant than ever before. On the very big airplanes, the very long-range airplanes, the fact that we have the longest-range airplane and that A350-900, 1000 are positioned one notch smaller than the 777s is a good thing. And, then on the bottom end, we have the only new technology small airplane with in the A220. So I think we’re pretty well-positioned.
AirInsight: Right. I’m glad that you answered the way you did because what I noticed from the Orders & Deliveries published yesterday, adding the A321neos and the A220s, 39% of your deliveries this year are just those two airplanes. It’s really an amazing performance because you are in the sweet spot, as you stated.
Scherer: Yeah. It’s a good place to be in. You’re right with the stats. I’m sure you are. The A220 really sits there by itself with the new technology offering. And then most importantly, it’s a bit subdued right now, the long-range segment. The big airplane segment is really dormant, as we all know right now. But the A350, where fuel-burn, for example, matters most is new technology and clean sheet design airplane, up there in that segment. So on the two extremes, I think we’re really, really well positioned. And in the middle where we have the strength of the A320 and A321 if anything through the last few years it materialized even more.
AirInsight: So that as you said, the Airbus product line appears better suited to what airlines are looking for in the near term. Do you see continuing demand growth going from the A320 to A321?
Scherer: If anything, there’s a little bit of a tendency towards the A321. And the reason is that I think the vast majority of airlines around the world have already made the decision to go through from the CEO to the NEO. Or from the NG to the MAX. The vast majority of carriers have already made that decision. So in other words, the next ordering is going to be more of the same, but as airlines continue their pursuit of lowering costs, it’s only natural that you’re going from one module to the stretch module. Because by definition, that’s going to allow you to reduce your unit costs even more. So that’s the phenomenon we’re seeing now, we’re there’s an increasing demand of the proportion, if you like, of A321s.
AirInsight: My next question pertains to the A330. We’ve seen that many of the older A330s, though a fine airplane, have been parked. Is this an opportunity for airlines, and I’m thinking of Delta, for example, where the older A330s and even the 767s are retired. And they move towards the A330neo. While the A330neo is a big improvement, many of the A330s needing replacement are not that old. It’s the same problem Embraer has with the E2 and the E1. Do you think now that so many of the older A330s are being retired, that the time of the A330neo is upon us?
Scherer: It could be. I wouldn’t be that categorical, because I think you’re going to see a number of these A330ceos probably coming back when the international flying resumes. But where I do share your point of view, I would assume is that the A330neo’s heyday has yet to come, because it addresses the replacement in excess of 1,200 A330ceos out there. And so whether that replacement wave is now accelerated slightly by the pandemic and the grounding of existing airplanes or not remains to be seen. Intuitively, you may well be right, but I’m not sure we’ve seen that confirmed just yet. Certainly, the surplus, or the glut if you like, and I won’t deny that of large aircraft makes for a relative depression of rentals of A330ceos, 767s, old 777s, et cetera. And that’s going to make these airplanes quite attractive when demand resumes.
Whether it’s accelerating the replacement wave or it’s just a little blip and the math will normalize, it doesn’t change the fact that the replacement wave is yet to come for the A330neo. And that’s what makes me somewhat bullish on the A330neo, as I sit here. I will confess that, when I took this position, this job three years ago, I’d been away from the commercial scene for a little while. And so I said, oh, the A330neo is kind of a strange positioning. And now that I’ve played around with it and marketed the airplane for three years, it’s really grown on me. It’s a formidable seat cost machine, and a very easy transition and natural step in the direction of more sustainable flying and more comfortable flying. Into a huge market, an embedded market of A330ceos. And now having flown the airplane now, recently a few times, I also, the cynic in me said, okay, it’s just a new A330. No, it’s a brand new airplane. So I’ve become quite fond, I must say, of the A330neo.
AirInsight: One thing that is of great concern, and I’ve heard this from the former Airbus CEO, is about the duopoly being unstable. Given the combination of the MAX crisis and then the pandemic disrupted what was a reasonably stable duopoly, but now the market is substantially tilted in favor of Airbus, particularly the narrow body segment. So on the one hand, what do you do to maintain your advantage? And also, you have to evolve a strategy, really, that defends your market share. But also, how do you deal with what could be a very unstable duopoly?
Scherer: I’m tempted to say that we are in, I don’t want to say in control, that would be presumptuous, but we are masters of our destiny on the single aisles. One, we’ve done a really decent job, I say this modestly, in matching our production levels to our ability to deliver the airplanes into the markets. So when we reduced the production rate of the single aisles, and we did that purely on speculation in March of last year, when we reduced down to 40/month. That turned out to be exactly the right level that we could serve without building inventory, but without delaying aircraft for people who really wanted them. In other words, we found the right balance of supply and demand. That enabled us to maintain the value of these airplanes and hold on, in the case of the A321, actually increase the assessed market value of the A321 throughout the pandemic. And despite the fact that our competitor, for their own unfortunate reasons, has had to discount their products massively. So that’s a convoluted way of saying that the way we try to manage our destiny is by making sure that we maintain the value of our airplanes. And so far, the market is crediting us with that statement. And I think that’s pretty much what I would say there. Did I answer your question?
AirInsight: Yes. One item, what is your view on the stability or instability right now of the duopoly? Do you have any thoughts that you would share?
Scherer: I don’t think that it has to be permanently destabilized. I don’t want to speak for or about my competitor too much, but I think in a duopoly, you’re kind of forced to do that. I think our friends at Boeing are in a pretty terrible spot where they have to make sure that they get the blood flowing through their system again. So they have to get rid of their inventory, they have to spool up to the 737 as quickly as they can. Now, is that something that we can do something about at Airbus? Not really, frankly, because as I told you, we have so vastly matched our production to the demands of our customers that even though the salesman in me would like to have more airplanes to sell and I could sell them with my eyes closed right now, I just don’t have to. So the Boeing situation you have to expect they will do what they have to do to get rid of planes. To finish their garage sale, and then a certain degree of stability will come back into the market.
The A320 and A321, are fly-by-wire, contemporaneous technology airplanes. And because of their embedded technology, and sizing, and market penetration, they do command a premium. Whether it’s in market share and/or price. And so I expect that to continue, but I don’t think the market has been destabilized permanently.
AirInsight: My next item is, Airbus has outlined an environmentally friendly airplane by 2035, including the use of hydrogen. I think a lot of people feel that goal is very aggressive. Do you think over the next two decades, we could actually see alternative fuels to SAF being economically useful and viable?
Scherer: Well, I’m not a technical expert. But I’m old enough to have observed the world. And disruption and innovation are systematically met with skepticism, cynicism, and it is always those who express that skepticism that ends up crying. So that’s a somewhat pretentious general statement. I realized that. But, but I know that hydrogen is technically quite the right avenue to explore, to verify because of its energy density, because of its scalability. The devil is not so much in the technology. Well, I say this very loosely, the devil is not in using hydrogen as a source of energy, the devil is rather more in the distribution system and logistics, production, storage of it. So do I believe, as a member of the Airbus management team, in the feasibility of this? Absolutely. Without that, this company would not have gone so public about its intentions.
And why is that the right idea? Anybody who would deny today that society will embrace solutions – society meaning at large, the population, the policymakers, the technology providers. That society would embrace, at large, propositions to decarbonize and render sustainable anything that’s important for society, would be a fool. So you know it’s the proverbial Kodak situation. Remember, digital photography is not photography. Photography has to be done in a dark room with chemicals and that was what a mere 20 years ago.
I can get really carried away on this and I realize I’m giving you a very general answer, but I want to underline it. I’m more of a business guy or a strategist. So the strategist in me is saying, this is the right path. Why? Because it puts a stake in the ground for something that society wants. Society wants to travel, it wants connectivity, and it wants decarbonization. So one way or another, we’re going to have to address those two necessary wants from society. Point one.
And point two, that’s going to take a whole lot of money, and a whole lot of research, and a whole lot of convergence of interests to do so. And you cannot do that overnight. And that’s why I think the timeframe is about 15 years from now and is the right one. And during those 15 years, my company happens to have the more advanced and therefore more sustainable proposition between now and then. Which is allowing us to generate the cash flows and the profit to be able to invest in this new technology. So this isn’t a publicity stunt. This is, I mean, a calculated strategy based on scientific facts, societal requirements, and business reality.
Co-Founder AirInsight. My previous life includes stints at Shell South Africa, CIC Research, and PA Consulting. Got bitten by the aviation bug and ended up an Avgeek. Then the data bug got me, making me a curious Avgeek seeking data-driven logic. Also, I appreciate conversations with smart people from whom I learn so much. Summary: I am very fortunate to work with and converse with great people.