It is the time of year for prognostication. In that tradition, AirInsight will boldly go where all pundits have gone before – but with better accuracy. With our psychic powers in full swing, here are our fearless predictions for 2012:
1. The world will not end – the Mayan calendar was carved on a stone of a certain size, and they ran out of space. Period.
2. Yes, we will see increasing amplitude in climate, natural disasters, and even the location of limited wars and revolutions, with Syria and Iran currently the most likely candidates. But political change will limit the impact of the powers that be today.
3. We will see interim solutions to the Eurozone crisis, as well as the US dollar, as governments and central banks join forces to salvage the financial system and limit future derivatives and risky behavior. We may go back to investing in whole aircraft again, rather than A,B, and C tranches of bundled EETCs and derivatives, if regulators have the intestinal fortitude to increasingly limit derivative instruments. We believe they will, especially with housing assets.
4. Aircraft manufacturers will increasingly become financiers of last resort – constraining capital for important R&D initiatives and new product development.
5. The business aviation recovery will begin, albeit quite slowly, but business jets and turboprops will increase sales in 2012.
6. The new generation of fuel efficient aircraft engines and high fuel prices fueled by political instability will force Boeing, Airbus, Bombardier and Embraer to increase production capacity to meet new demand. New NB aircraft will be sold out thru 2022 by YE 2012.
7. Just as when jets replaced turboprops, some relatively young narrow bodies with older engines will become economically obsolete at a young age, causing some residual value issues for leasing companies and financial institutions. One can’t assume a 25 year economic life any longer for a new A320 or 737NG delivered in 2012.
8. With American in Chapter 11 bankruptcy, expect the America West management team of USAirways to make a run at American, further consolidating the US legacy carriers.
9. The EU emissions trading scheme will continue to be controversial for the foreseeable future, and will likely impact some Airbus orders for China in retaliation, as well as provoke retaliatory actions by the US Congress in the US — which could negatively impact the Eurozone recovery. Brussels hasn’t awakened to reality yet, and likely won’t until the Euro collapses, and the British celebration haunts the continent.
OVERVIEW
2011 was a boffo year, with record orders at Airbus and outstanding orders for Boeing’s 777-300ER. Had Boeing’s 737 MAX commitments become orders by year end, Boeing would have had a boffo year, too. With the expectation that these commitments will become converted to orders this year, Boeing should easily become more even with Airbus. Having been bolstered by some 1,500 neo orders last year, sales can be expected to slow this year because delivery positions are now well out to the end of the decade.
With cargo statistics beginning to soften dramatically toward the end of last year, this usually is a leading indicator of softening passenger traffic. Might this also depress orders? We’ll see.
But in the USA, the New United Airlines is expected to place an order for 150-200 single-aisle aircraft. Proposals from Airbus and Boeing were due in December. The Old United has a large aging fleet of A319s/A320s and Boeing 757s and a smaller fleet of launch-customer 767-200s. This is going to be a big catch, and it will be interesting to see if Airbus can convince United’s new Boeing-centric Continental Airlines management that it should win at least some of the order. Now that Boeing has the MAX to compete with the neo, the competition is much more even than had it been neo vs 737NG.
This will be an important year to watch for Airbus and the A350 development and for Bombardier and the scheduled first flight of the CSeries. This will be an important year for Boeing and whether it can efficiently ramp up production of the 787 and if it can complete on a timely basis all the rework on those nearly three dozen 787s sitting around Paine Field in Everett.
Here is a company-by-company rundown.
Airbus
A320 program
This couldn’t be humming along better. We expect sales to slow this year as long as the backlog grows and delivery slots push out to 2017 and beyond. If Airbus hikes production again, this could change. Can Airbus win the UA/CO order and would they need to establish a US assembly facility to meet demand?
A330 program
Along with the A320, the A330 is carrying Airbus right now with profits and cash flow. (Boeing is in a similar situation with the 737 and the 777.) This fact of life might be why Airbus wants to sharply increase its services business, similar to the Boeing CAS business unit that contributes to about 7% of BCA revenues. Airbus continues to improve the A330 and expects to continue production to the end of this decade, at least.
A350 program
This is an important year for the A350. First flight was pushed to next year and first delivery from 2H2013 to 1H2014. Assembly of the first airplane is slated for this year and how well it comes together will dictate whether there is another delay.
A380 program
Airbus seems to have finally got production working smoothly on this super-jumbo and the plane is getting rave reviews. If the economy slides again, sales could slow and deferrals might happen. It will still be several years before the program is profitable (allowing for the previous write-offs). We’re not sure United Airlines will ever order the airplane, as Airbus’ John Leahy suggested November 30 and December 1, but it’s a nice dream. Cathy Pacific is evaluating the A380 and 747-8I, and in the past has not been enthused about either airplane. But an order for one or the other should be forthcoming this year.
Boeing
737 Program
Airbus has a two year EIS jump on the 737 MAX with its A320neo and airlines need airplanes before the 2017 EIS for the MAX, so we expect some more NG sales. But we also think NG sales will begin to slow, and likely most will be part of a MAX sale: see American with NG-MAX, Lionair with NG-MAX and Southwest with NG-MAX. Boeing still has a lot of design work to do with MAX, and Southwest will be key to this, according to Boeing at the press conference last month announcing the order.
We expect a large number of the MAX commitments to convert to firm orders this year, which should even out the sales competition between Airbus and Boeing compared with Airbus’ lop-side win last year.
One interesting comment in the wake of the Southwest order: the MAX will be 80%-90% common with the 737NG. This compares with 95% common between the A320 and A320neo. This will be a difference Airbus will exploit in public relations but we don’t think it will matter to Boeing customers. 80% common is still better than a 100% different fleet type. We don’t expect to see many defections from Boeing to Airbus, unless Airbus can do something about delivery slots.
747-8 program
Great airplane. Great legacy. Slow sales. Highly niche product. Slowing cargo market. Little interest in passenger model. If Boeing proceeds with a 400-passenger 777-9X (or “10X”), this airplane is toast.
767 program
Cargo airplane and air force tanker. Now that the 787 is finally delivering, even less interest in passenger model.
777 program
Along with the 737, the 777 serves as Boeing’s cash cow and profit-making airplane. While the 200 Series is all but dead, surviving on cargo orders and very few -200LRs, the -300ER is gangbusters. Delays in the A350-1000 program gave a boost to the -300ER last year and may continue to do so.
There seems to be general market expectation Boeing will be ready this year to launch the 777-8 and 777-9 enhancements. We’re not so sure. There doesn’t seem to be an urgency for Boeing to launch the “777E” and it may slip to next year. But we expect sales to continue to be strong for the -300ER.
787 Program
Boeing finally delivered the first aircraft to launch customer ANA, but it struggled to meet its goal of 5-7 airplanes by the end of 2011. In fact, it didn’t hit target. AirInsight believes Boeing delivered only two 787s (possibly, but not likely, three) due to rework requirements not being finished.
Production ramp-up and rework on more than 24 787s parked at Everett plus more coming off the line will be the big challenges this year. The first few reworked aircraft, which have been rejected by airlines, will be problematic for Boeing to sell, even with massive discounts, and will become the modern day equivalent of “L-1011-1 lead sleds” in the marketplace – overweight and difficult to move.
Although Boeing lowered its internal production forecast in the Z24 plan, it is sticking with the goal of building 10 787s per month by the end of 2013—a goal Wall Street aerospace analysts doubt will be achieved.
It is expected Boeing will launch the 787-10 variant, sized across from the all-but-dead 777-200 series and the A330-300. Boeing calls the -10 the “A330-300 killer,” but the same hubris was said of the 787 vs the A330-200.
Other programs
The commercial-based 737-derived P-8A Poseidon appears to progressing well. Limited sales outside the US to nations operating the aging Lockheed P-3 Orion are possible.
The 767-based KC-46A USAF tanker is already going to cost Boeing $500m more than the initial fixed priced contract allows, according to Pentagon announcements last year. It’s too early in the program to know whether the KC-46A will have some of the same issues experienced by the KC-767 International tanker program. Boeing hopes lessons learned from the International will enable it to avoid the troublesome technical and design issues. One benefit: Boeing is building the tanker with its cargo capabilities “in-line” on the 767 Everett production system rather than the International’s reliance on Alenia for a cargo conversion. This eliminates one of the major issues.
Bombardier
CSeries program
This is a critical year: Bombardier promises first flight of the aircraft this year and EIS a year later, in late 2013. Given industry skepticism as a result of the delays of the Airbus A380, A400 and A350 programs and the 787 and 747-8 at Boeing, few believe BBD will meet its timeline. At least one customer is already forecasting a three or four month slip.
As for orders, the industry continues to wait for the big order, the grand seal of approval that would serve as endorsement of the airplane. It matters not that CSeries now has 10 customers, including Lufthansa. A British Airways or a Delta Air Lines ordering the plane in large quantities is what observers want.
Delta bypassed the small airplane selection last year and is to re-run the competition this year between the CSeries and the Embraer E-195. One of the reasons Delta skipped a decision last year is that officials want to see the CSeries flying first. Having inherited a 787 order with the merger of Northwest Airlines and having been soured by delays to that program, Delta officials are gun-shy of new technology meeting promised deadlines. (Having said that, CSeries was said to have been favored over the E-195 in last year’s evaluation.)
EMB has announced it will re-engine the E-190/195, so this could be an interesting new twist in the Delta competition.
As for CSeries, we look for more small-to-modest orders as BBD seeks to expand its customer base to around 20 by EIS. Gary Scott, former president of BBD Aerospace, forecast 300 orders by EIS; BBD now has 250 orders and commitments but 80 of these are iffy with the downward financial travails of Frontier Airlines and its parent, Republic Airways Holdings, as Frontier bleeds to death in Denver and Milwaukee in the face of competition from Southwest, United and Delta.
We don’t look for the “big deal” this year—even as Delta runs a competition, we think the decision will come in 2013. But we do expect that smattering of smaller orders and a continued widening of the customer base.
CRJ program
This is a tough sell today. Its narrow cabin can’t compete with E-Jet and US labor-scope laws limit sales of the CRJ-1000 100-seat aircraft and even the CRJ-900. But we think there is a market in developing areas (think Russia, China, Africa) where comfort vis-à-vis E-Jet isn’t a high priority but low costs are. The CRJ is lighter than the E-170/175/190 and operating costs tend to be lower. BBD’s sales force also seems to have been more focused on CSeries (understandably) but under the new sales chief, Chet Fuller, BBD has reorganized sales and we hope for better performance this year.
Q400 program
Like CRJ, we believe the Q400 sales have been a victim of lack-of-focus in favor of CSeries. As with CRJ, we believe Fuller’s reorganization should help sales.
ATR cleaned BBD’s clock in turboprop sales last year. Part of the problem is that ATR has a family of turboprops spanning a range of seat categories. Q400NextGen, with different systems than the Q200 and Q400 legacy (not to mention the old “Dash-8” series) is now a stand-alone product at the higher end of the seat range. Q400 remains a solid, efficient airplane that for its mission design out-performs ATR–but is this too much airplane for most mission requirements? Let’s hope Fuller’s reorganization produces results.
Embraer
E-Jet program
Embraer continues to do well selling its E-Jets, with the E-190/195 (100-122 passengers) outselling the E-170/175 (70-90 passengers) by comfortable margins. If nothing else, this validates the existence of the 100-149 seat market on its own. Then take into account that EMB is considering a stretch of the E-195 to 133 seats in conjunction with the re-engine/re-wing of the jet.
EMB is outselling the CSeries because the E-Jet is flying and it has delivery positions available in the near term. CSeries is already sold out to 2016 and first flight isn’t scheduled till the end of this year with EIS 12 months later.
EMB took a pass on proceeding with an all-new jet following Boeing’s decision to re-engine the 737. While EMB also said that the 737 MAX means too much competition from the Big Two in the 100-149 seat market, so far the MAX commitments have been for the 737-8/9 and not the 737-7. Only a few A319neos have been sold. We argue EMB and BBD have the more efficient airplanes in this segment, as opposed to what seems to be the prevailing wisdom that this segment is the Bermuda Triangle of airplanes.
2012 should see EMB make some definitive decisions regarding its re-engine design, including the engine supplier. We think this will be the CF34NG, but we shall see.
ATR
The re-vamped -600 versions of the ATR-42 and ATR-72 have sold quite well, and ATR outsold the Q400 dramatically in 2011. We expect a solid performance from ATR in 2012 as well, although its backlog is beginning to fill up for near term deliveries. The -600, with avionics, engine and interior improvements, is a nice upgrade over the previous -500 models, and has been recognized as such by the marketplace. This airplane is now quite competitive with the Q400, and it comes down to marketing and price, and ATR is seeking to double its backlog.
Mitsubushi
The Mitsubishi RJ is quietly emerging as a credible aircraft, after an EIS delay from 2014-2015, and should be a viable competitor to the Embraer 170-175-190-195 series, even after re-engining. Using the PW GTF engine, the MRJ has solid numbers, and now it is up to Japan to be able to deliver on time after the shock of the Fukushima nuclear plant disaster that devastated the supply chain for many Japanese companies relying on suppliers in the region. We expect the MRJ to continue strong development during 2012, and gain a major order from a regional carrier in the US, as the MRJ sales team is rapidly learning how to better compete in aircraft campaigns.
CFM International
With a re-vamping of the LEAP engine for additional fuel efficiency, and selection as the exclusive engine on the 737MAX, CFM has secured market share leadership for narrow-body aircraft for the next generation. While competitive with the PW GTF on the A320neo family, the exclusivity for 737MAX will provide significant volume as LEAP replaces CFM-56 on both programs. While the competition from PW‘s GTF will be tougher than the V2500, CFM should remain well positioned for the coming decade.
Pratt and Whitney
Introducing the GTF has brought PW back into the narrow-body game, and the engine will be extremely competitive with LEAP. The key to the PW1000G (GTF) may not be felt for a decade, which is its growth potential for fuel savings. By optimizing the speed of the fan (slower) and other engine sections (faster), PW has been able to achieve significant fuel savings with fewer engine stages and lower operating temperatures than LEAP, which should translate to maintenance cost benefits. But this also translates to growth potential. PW believes it can improve fuel efficiency by an average of 1% per year over the next decade, bringing it from 16% to 26% over today’s engines. CFM’s LEAP, by contrast, appears constrained, as additional stages would be difficult to add to improve performance. If PW can generate a 5% plus competitive differential in fuel burn over the next decade, look for their market share to grow. Boeing will certainly consider the GTF for the New Small Airplane in the next decade. PW needs that advantage to regain its once dominant share in the JT8D era, and may have the technology with which to accomplish it without the noise, speed reduction, and size issues associated with open rotor alternatives.
Of course, next up on PW’s R&D board is a wide-body version of the GTF, which with larger fan sizes, could maximize the impact of the geared architecture. But with GE exclusive on 777-300ER and 777-200LR/F and RR exclusive on A350, PW may need to wait for the next program – perhaps the 777 upgrade/replacement.
Rolls Royce
Meanwhile, Rolls Royce, which did not field a competitive offering for narrow-bodies and sold its share in IAE to PW, has a strong position in wide-body engines, including a market share lead in 787, A330 and exclusivity on A350, and almost an even share on A380. The Trent series of engines has proven fuel efficient and reliable, and Rolls Royce will continue to be a formidable player in the wide body market.
Emerging Programs
Russia is still struggling with its aerospace sector, which was consolidated into United Aircraft by the Putin government, with historic names as Tupolev, Ilyushin, Sukhoi, Antonov, MiG and others as divisions. The Sukhoi Superjet has had a difficult start gaining traction in the west, despite western systems and engines from a CFM joint venture. The Irkut MS-21, in development, will use the PW GTF engine and on paper appears to be a very efficient and aerodynamic design — the question is whether it can be developed on time, on budget, and meet its performance targets.
COMAC and its C919 are projected to be delayed by many analysts, who doubt China’s capabilities to build a competitive world class aircraft after the delays and certification difficulties with the ARJ-21 regional jet. Nonetheless, with Western suppliers as subsystem integrators, it is possible that China will succeed with a competent, if not world-beating aircraft, that will be well suited to their domestic markets and carriers within their African sphere of influence, as minerals can be traded for aircraft.
SUMMARY
There you have it, 2012 in a nutshell. It looks to be a very interesting year, with key developments in the MAX, CSeries, and A350 programs, continued development of new engine technologies, and progress for new entrants in the marketplace. Stay tuned to AirInsight for further details as the year progresses.
Rolls Royce has a market share lead on 787? According to this recap, GE has a wide lead.
http://en.wikipedia.org/wiki/List_of_Boeing_787_orders
However, I do agree that the world won’t end in 2012.
I pretty much agree with most of the statements/predictions, except the last bit about emissions trading. Never mind that it makes sense to apply the system to anybody flying into and out of the EU, because if applied to select airlines only (as the US and China demand) it would constitute an unfair disadvantage for EU airlines, who would be at a disadvantage to begin with, as domestic EU flights, which non-EU airlines have little part in, would be subject to the scheme, too. Also don’t forget there is currently not even any jet fuel tax in the EU, except in the Netherlands as far as I know.
In any case – one can argue about whether or not the emissions trading scheme makes sense, and I do agree that the usual games will be played with regard to it, i.e. some Chinese orders will be put on hold, etc.
However, these two statements I do not agree with:
“Brussels hasn’t awakened to reality yet, and likely won’t until the Euro collapses, and the British celebration haunts the continent.”
I do not for one second believe that:
a) The Emissions Trading scheme and its repercussions will have a significant impact on whether or not the Eurozone (or the dollar, for that matter) recovers. Whatever could conceivably come of this – orders on halt, punitive tariffs, etc. – would have to be in some sort of proportion to the effect that the scheme could have. Simply put: the US or China won’t put a 50% punitive tax on all goods imported from the EU. Thus, the effects will be pretty limited in their overall impact on Eurozone recovery.
b) The United Kingdom would not break out into celebrations if the Euro collapses. Well, some punters and tabloids will, but the UK economy won’t. 50% of UK exports go to Europe, 40% to the Eurozone, and a good portion of the financial sectors business (which amounts to 10% of UK GDP) is with the Eurozone. With a currency collapsing on its doorsteps the UK will find it much harder to solve its own problems and get through a pretty difficult worldwide environment. So it’s in my eyes foolish to assume that there would be any real cause for celebration in the UK should the Euro collapse. Beyond the schadenfreude that would certainly ensue in various circles (not just in the UK), of course.