Premium #128 – Farnborough Expectations

Next week is the biggest air show of the year. The industry looks forward to it because so much news is announced that it sets the tone for the rest of the year. Big picture: There are no blockbuster announcements expected at the show in terms of new programs or new aircraft. We expect the show to be the usual stage to highlight orders. With A350 set to enter service soon and the 787-9 in service, Airbus vs Boeing will focus on their new programs. We expect each to tout their new aircraft, specifically 787 and 777X vs A350. We think the two big players are nearly fully booked for single aisle aircraft but with planned production increases, there is likely to be room for some additional orders. (AirAsia is usually a big show buyer but they seem to be slowing down and the same for Lion Air.) We could see some orders from Africa though –they have been behind the wave for some time and seem to be catching up. Perhaps a MAX order from Ethiopian is in the cards. Possibly a 787-9 order from Norwegian. Airbus – We expect focus to be on two programs – A350 and A320neo. Airbus can be expected to be pushing sales on the former, highlighting the near perfectly executed flight test program. The message will be the A350 is doing exactly what Airbus said it would do – it’s a low risk program and customers should be lining up for the aircraft. Because of the A350 flight test success, Airbus will also push the message that the same can be expected for the A320neo. John Leahy and his team like to talk about the fan size on the A320neo being much larger than that on the 737MAX; ergo better fuel burn on the neo. This drives CFM batty, they don’t want any talk about fan size because it leads to questions about how CFM can ensure the neo and MAX have the same performance. A330neo is on everyone’s mind. Airbus advised us to dial down expectations. Consequently we do not expect to hear about Delta being the launch customer. Airbus seems to be getting a lot of positive customer interest in the aircraft. John Leahy thinks the market is good for 1,000 aircraft – which means it probably can achieve even more sales than that. The A330neo is likely to be highly disruptive to the 787’s pricing. Which means Boeing will have to consider big discounts to try attract former 767 customers who now fly A330s back into the fold. An A330neo is going to be a very interesting program. We expect to hear A380 news along the lines of the growing global urbanization driving airlines towards deploying VLAs. The logic is impeccable. But orders don’t necessarily follow logical patterns. The A380 may be a decade too early – but Airbus had no choice to do the plane when they did. Boeing says the VLA market is only big enough for one vendor. Had Airbus not moved, Boeing would have kept its monopoly. Even if Airbus has to wait a decade for the A380 program to hit sales stride, it was worth it to hobble Boeing, in the view of some, and the 747-8 program appears dead in the water, with little customer interest even at bargain pricing. ATR - Last year ATR had a blockbuster show in Paris. ATR now talks about being the world’s biggest turboprop company with great pride. It has managed to accumulate a global customer base. However, the ATR trades performance for operating costs when compared to Bombardier’s Q400. Consequently its customers tend to be focused on its lower operational costs. For airlines that are not feeding a network with more distant smaller cities, the ATR is a compelling offering. Moreover, ATR has updated its cabin to make the aircraft provide a better level of passenger comfort. Being part of the Airbus family, ATR benefits from family connections. Although Airbus’ CEO recently told us an Innovation Days they are happy being partners with Finmeccanica, it isn’t always smooth sailing. A difference in views on a future 90-100 seat turboprop may yet see Airbus and Finmeccanica at loggerheads. In the meantime, ATR needs to focus on execution and delivering on their orders. We anticipate some orders at the show – for example, perennial show customer NAC may top up with under a dozen. India also offers good hunting grounds for ATR, particularly with ridiculously high fuel taxes on jets, but not turboprops. The Q400 has proven to be a good asset for Spicejet. India is likely to be a rich market for turboprops over the longer terms, as its airport development program continues. Boeing – Focus will be on the 777-8 and -9 as well as the 787-9. Boeing’s sales for wide bodies this year have been slow. Of the 444 orders to date, only eight were twin aisles. That’s only 1.8% and not particularly exciting, causing analyst concerns that a slowdown in existing 777 models production may be required before the new models reach the market. Boeing needs to get its orders for the existing 777-300ER firmed up to fill a backlog gap. (By comparison, Airbus had 49 wide body orders through May). We do not expect much news around the 747-8, despite a flutter from the recent Dubai show. The program seems to be dead and waiting for the Air Force One replacement bid in 2017 before disappearing. It seems reasonable to assume the similar capacity, but much more efficient, 777-9 will be the Boeing VLA offering going forward. Boeing is likely to further outline the improvement in wings and engines planned for the 777X at the show. The as yet unannounced Monarch Airlines MAX order will also be highlighted because it is a switch from Airbus. We expect Boeing to push the message that the MAX builds on the 737’s tremendous history combined with the superb CFM56 engine. Of course the MAX and LEAP are new and there is some leap of faith that this new combination will be as good as they say. The Monarch order came about, we are advised, because Boeing pulled out all the stops on price, and because they applied pre-delivery payments from a 787 on order to the 737MAX. Moreover Monarch follows the conversion at Air Canada, so Boeing is to be expected to stay hyper aggressive in the narrow-body market. Bombardier – CSeries has gone through a tough time. But for the recent engine problem we were convinced the airplane would come to the show. We hope Bombardier and P&W can pull off a miracle, but it appears unlikely. The aircraft is impressive – airline people we have spoken with all say so. But like everyone in the business (i.e. Airbus & Boeing) flight test programs are designed to find problems. That is their purpose. Many seem to have forgotten the 787 teething troubles and the A380 and A400M difficulties. Of course the 787-9 test program went without a hitch, because of the 787-8 lessons learned. The Airbus A350 test program has been superb because of lessons learned. Both companies had to go through a nasty apprenticeship a few years ago to get there. Bombardier has not actually performed as poorly, but. we would have liked to see them be much further down the flight test program by now. But our sense is that they are acting with abundant caution. They are not as big as Airbus and Boeing, so do not have the same resources and prefer to keep their risks minimal. This translates into looking slower and weaker. If Airbus or Boeing lost an aircraft in flight test, they could overcome it. If Bombardier had such a problem, it would be more difficult to overcome. So they take smaller steps to make sure they don’t stumble. That said, we understand customers are getting closer to making decisions. The recent engine hiccup is, of course, not helpful. But if Bombardier could land an order from a big lessor, that would be a substantial boost for a program. First because it is an endorsement. Secondly because lessors create liquidity and a market for aircraft after airlines retire them. The CRJ program seems to be holding its own facing competition from the revised E-Jets. The regional jet market is bifurcating between the US and rest of the world. This presents a challenge for OEMs in this segment. The CRJ is being tweaked for better fuel burn. In fact, the fact the revised 777X engine losing its chevrons came after Bombardier already did this on the CRJ. Also, the tilted winglets now on the E-Jet were also seen on the CRJ first. Many observers do not credit Bombardier with being a leader. Moreover, the CRJ remains the lightest aircraft in its class. Given the thin margins for US regional carriers, the CRJ remains a compelling offering. The Q400 program has had a better year than it has seen for a while. Its tremendous power allow the aircraft to offer a replacement for smaller jets. Indeed airlines are increasingly seeing the benefits of high speed turboprops. In addition, Bombardier is seeing growing interest for the Q400 platform for SAR and maritime patrol. As with ATR, we watch with interest as the two turboprop makers eye the 90-100 seat markets, although the 84 seat high density Q400 comes closer to the 90 seat goal. COMAC – With the first customer ARJ-21 at last headed for delivery, COMAC has to be pleased. But we do not expect to see much interest in the aircraft outside China and its area of influence. The C919 program is also rather quiet. We hear that when pilots look at the flight deck, they will notice that it looks exactly like that of the CSeries. This is a good thing. A lesson from the ARJ-21 is that COMAC needs a partner as it learns about the commercial aerospace business. Bombardier is a great partner and also a potential global customer support source. But even with such a partner, the C919 appears to be already outdated before it enters service. The aircraft is not a threat to A320 of 737 it was once thought. Just like the ARJ program, COMAC can learn a lot from the C919 – but it needs to accelerate this learning process by working closely (and openly) with a partner. Such cooperation will give the market much more confidence in COMAC. COMAC is without doubt a comer in the industry. But as COMAC evolves, it cannot assume Chinese airlines are natural customers which can be forced to buy their products. Even with very deep pockets and a talented and willing staff, COMAC has to go through an apprenticeship. It took Airbus 25 years to be able to compete with Boeing. COMAC can only shorten that time by working with a partner – and we suspect Bombardier is the partner of choice. The talk about working with Russia on a wide body is a lot of talk for now. We suspect the SSJ deal for 100 to be built under license in China announced earlier this year is not a firm as it appears. Sukhoi has been burned by China before when it thought it had sold China 100 fighters, only to be shafted and have their design copied. COMAC has to tread carefully and build relationships that are respected. Failure to do this means apprenticeship costs stay high and longer. Embraer – The E-jet program continues to execute well. Customers are pleased with the aircraft as we have seen good orders for the E-175 in the US. We could see orders for more E-175s from US airlines because the aircraft fits within the scope clause restrictions. The E-190/95 could see customers looking to refresh fleets. For example Brazilian airlines are natural customers as that economy grows. The early E-190/95 customers faced higher costs than expected. This was due to engine maintenance, but GE subsequently solved the problems. Embraer will be pushing for E2 orders from its global customer base. These should be forthcoming because the company has built a reputation of supporting its products. Embraer got the timing on the E-Jet perfectly as equivalent sized (Fokker, BAe) OEMs left the industry. Many of the early aircraft now could be replaced with the updated E-Jet and airlines could also get good pricing on the E2. Mitsubishi – The program is now moving more quickly as Mitsubishi worked through their delay from the FAA paperwork falling behind production process. The engines are now installed on the first aircraft, and ground tests are underway. The MRJ is heavily dependent on two US regionals. However these airlines’ patience is wearing thin. The swings in fuel prices combined with a much more difficult industry post US airline consolidation mean these airlines would like to have used these aircraft in service as originally scheduled. Mitsubishi has yet to prove their aircraft can find more than three customers after years of sales campaigns. Even with launch customer deals, they have no new sales in more than a year. We expect no surprises at FAS. But the pressure has to be on for the program to obtain orders. UAC – The most successful commercial program for UAC is the SuperJet. The aircraft has apparently been doing much better than expected at Interjet in Mexico. In addition, launch customer Aeroflot has now taken delivery of its improved SSJs. The program still lacks an FAA certificate. This limits the US market for the aircraft. We understand from one US-based regional that if the aircraft had such certification, they would likely have considered it. The other program that offers great promise is the Yak-242 formerly known as MC-21. The naming seems to vary in news reports. The aircraft will offer both a Russian engine and the PW GTF. Based on a design by Sukhoi (like the SSJ) the aircraft has what appears to be a tremendous wing. It is rare to see a commercial jet without winglets. Yet the MC-21 does not have them because the wing is thought to be very efficient. (Boeing and Embraer disposed with winglets for their latest 777 and E2.) In many ways the range payload of the largest variant, the MC-21-400 looks like a potential Tu-204 and Boeing 757 replacement. But the program appears to be running very slowly. UAC shares the same lack of transparency as COMAC. This is unfortunate because the greater the transparency the more program interest. This interest helps sell aircraft. Pratt & Whitney PW will concentrate of the large number of orders it has received for the GTF program on 12 models of 5 aircraft types. While PW could upscale the GTF to 75,000 to 100,000 pounds, we do not foresee an appropriate wide-body program before 2020 for such an application. The GTF could be the ideal engine for a 757 replacement. CFM International The LEAP engine is the focus of CFM, which is exclusive on the Boeing 737MAX. This provides a strong market share advantage over PW, given their shared position on the A320 family. We believe the limited growth potential of the LEAP versus GTF may hamper future growth in the 2020 time frame, when PW introduces its “second generation” GTF with performance improvements. Nonetheless, CFMs large customer base can be leveraged with commercial terms. GE GE will be exclusive on the 777-X, and shares the Boeing 787 program with Rolls-Royce. The 777-X will be a key focus as GE touts its new technology on the GE-9X. Rolls-Royce Despite years of critical commentary regarding PW’s GTF, Rolls-Royce recently announced its own geared turbofan design. We expect this engine could even compete for a Boeing 757 replacement in the 2020 time frame. Rolls-Royce is exclusive on the A350XWB, which will soon enter service with Qatar Airways, and provide a strong market base. There is rampant speculation that Rolls-Royce will be the only engine for the A330neo, as GE has declined, and PW is currently busy with 5 different GTF applications.

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