Premium 2018.24 FARNBOROUGH PREVIEW

Quite often, aircraft manufacturers will debut new technology or product announcements at the Paris or Farnborough Air Shows. In recent years, we’ve seen the introduction of the neo, MAX, CSeries, 787, and A350 at various air shows and stealing most of the headlines. But 2018 is not shaping up to be one of those years, as we expect no major commercial aircraft introduction, no new engine introduction, and fewer major orders, given the existing record backlog for most programs. And while that might make Farnborough 2018 seem boring, the reality is far from it. Let’s take a look at the major potential themes that will be publicly covered at the shows, and the underlying future activity being discussed behind closed doors. Airbus The major news from Airbus will be the take-over of the CSeries program and integrating this aircraft into the Airbus product family. The major elements of this will include the potential renaming and re-launch of the program as the rumored A210 and A230, and the integration of the aircraft into Airbus sales and customer support channels. There is little question that Airbus has gained a high technology gem at virtually no cost, and has an opportunity to one-up the competition as proposed Boeing-Embraer combination appears to be stalled in negotiations. We do not expect any large orders to be announced at the show, despite several very active campaigns, given the transition in leadership from Bombardier to the Airbus managed joint venture. However, we do expect several major order later in the year from the currently active campaigns. The narrow-body programs are selling quite well, particularly the A321neo family that includes the A321LR. There have been rumors of a possible larger A322 as a larger 757 replacement, but a launch decision has not yet been reached, as today’s A321 is winning the vast majority of 757 replacement decisions. Airbus feels it has surrounded Boeing’s forthcoming small wide-body NMA or 797 with the A321LR and A330-800neo, which are slightly smaller and slightly larger than Boeing’s target seating. Utilizing derivative aircraft, Airbus can compete with the 797 on price, and erode potential margins for that aircraft, making the business case more difficult for Boeing. Boeing is leading the wide-body category with its 787-9 and -10, although the A350 family has done well. The A350-1000 wide-body has now entered service, and as the newest model will likely be featured at the show. The A330neo programs, however, have not fared as well in the market and it is likely that Airbus will feature a fly-in of a flight test vehicle to boost interest in this program. With the broad A330 customer base, we believe the A330neo will be successful, but with many of the existing aircraft quite young, the market may take a while to develop. The A380 remains a program that is viewed as too large for many airlines and remains a slow seller. While it is always fun to watch at an air show, the key to the future of this program is in the hands of Emirates, its major customer. Behind the scenes, Airbus is evaluating the A322 (sometimes A321+), discussing initial concepts for the next generation of narrow-body aircraft with key customers, and examining the potential for an offering between the A350-1000 and A380 in the wide-body market. Boeing While Boeing’s NMA has attracted a lot of attention and speculation, with engine proposals just submitted by the big three, a launch decision has not yet been made. The business case for this aircraft is difficult because airlines don’t want to pay a lot per seat for an aircraft in the 200-250 seat range, and competition from the A321 at the small end and the A330-800 at the high end limits Boeing’s pricing flexibility. The key to the business case for the NMA now appears to be services and the life-cycle margins that the aircraft can generate. We expect a launch of the new program at Paris in 2019. The 737MAX program is driven by the MAX8, and the MAX10 has not taken off as has the A321neo. Boeing still is too embarrassed to report orders for the MAX series by model, a strange break with their historic practices. Nonetheless, not saying anything about poor selling models doesn’t make the facts go away - the MAX 8 is carrying Boeing in the narrow-body segment. Boeing is widening its lead in wide-bodies, with the 787-9 and 787-10 selling quite well. These two models are quite different than the first 787-8 models, and have been well accepted by the market. The 777X program, however, appears to be in the same situation as the A330neo, not selling particularly well nor generating much interest outside of the Middle East. With strong orders from the region, and few from elsewhere, this appears to be headed to be a niche aircraft, as the more efficient 787-10 is cannibalizing its market, despite being slightly smaller. With the 787, Boeing dealt a major blow to larger aircraft, as similar or better seat-mile economics can be achieved in a smaller package, eliminating the risk associated with filling an aircraft. That has revolutionized the wide-body market, which has chosen the 787 and A350 as best sellers rather than the 747 and A380. Behind the scenes, Boeing is discussing the 797, the new FSA narrow-body, and the potential for a 757 replacement as a part of a new narrow-body family. Bombardier With the CSeries moving to an Airbus-controlled joint venture, Bombardier is focusing on its CRJ and Q400 models, each of which has recently had a resurgence. The CRJ900 has become quite popular with some regional airlines as the lowest cost model in its seating range, despite a less comfortable interior. The new Atomsphère interior was recently launched with an order for 20 aircraft by Delta. With an order from American for 15 aircraft the month before, the backlog for the CRJ is returning to healthier levels. The key difference from a passenger perspective is wider overhead bins that can eliminate the need to gate check rollerboard bags. The Q400 has also had a recent resurgence, particularly in Africa. The aircraft has speed and range advantages over its major competitor, and can provide unique capabilities for certain routes. Bombardier’s focus on the CRJ and Q400 lines appears to be paying off in the short-term, and management is confident, particularly given the scope clause situation in the United States, that the resurgence can continue. Behind the scenes, Bombardier is pushing the CRJ-900 as the lowest-cost solution for US regionals. Embraer Embraer has launched the E2 family, but its progress seems overshadowed by the discussions of a joint venture with Boeing. While negotiations are on-going, our sources indicate that the intensity of the discussions has waned, and a Boeing executive recently publicly stated that a commercial tie-up with Embraer was, essentially, nice but not necessary. The cultural differences between the two companies in our opinion do not make this combination a good fit, and we expect the discussions to quietly fade away if not concluded soon. Unfortunately, in the interim, airlines have been holding off on ordering the E2 Jets waiting to see whether they will be dealing with Boeing or Embraer. In recent years, the E175 has been the best selling model in the EJets series, as this model fit the scope clause in the US major airlines labor contract. The E175-E2, however, is too heavy for those contracts and will likely not be able to enter the US market until 2024 at the earliest unless flown by a major airline, with higher pilot costs. As a result, we believe Embraer will need to continue to offer the existing E175, which has been a very effective competitor to the CRJ900, in the US market. During our recent visit to Saõ Jose dos Campos, Embraer pointed out that their new assembly process included a hybrid line that could produce either the existing E175 or E2 models at the same time. Given the scope clause situation in the US, this appears to be a wise and necessary decision. The E2 Jets are strong performers, beating their initial numbers, and will likely sell well as existing EJet customers add to their fleets. But with virtually all EJets still relatively young airplanes, we’re a few years away from a replacement market for existing E190 and E195 models. The Engine Manufacturers Each of the engine manufacturers has had difficulties in the last year meeting commitments to OEMs, resulting in delays or the grounding of aircraft. Pratt & Whitney’s issues with the GTF have been well documented, and the company is now producing engines to satisfy Airbus future production requirements and catch-up on parked aircraft by the end of the year. CFM international, a GE/Safran JV, has also fallen behind on Airbus engines, and is also planning to catch-up by year-end. Rolls Royce has had difficulties with the Boeing 787 engines, and several airlines have needed to secure interim lift to maintain schedule integrity. An announcement on progress is likely at Farnborough, as new problems have emerged with “B” as well as “C” models of the Trent 1000. The focus for the engine OEMs is delivering on commitments, as all have faltered to some extent during 2018. The benefits of the new technology engines are quite clear, but appear to have been achieved to some degree by pushing the limits of technology, and suffering the result of bringing “bleeding edge” technologies into production. The “unknown unknowns” remain as the risks associated with these engines, which appear to be maturing quite rapidly. The Bottom Line With few blockbuster announcements, the show may appear “boring” to an outside observer. But within the industry, these shows, in between announcements, are the ones at which new technologies are being discussed and developed behind the scenes. We’re undergoing major technology changes in materials and manufacturing technologies that will have profound impacts for the future, but likely won’t be visible for a few years until the airplanes they enable are announced. The technology revolution that led to the 787 and GTF is continuing at an accelerating pace, and while its impact may not be immediately visible, is nonetheless quite real. Farnborough 2018 maybe nicknamed the year of underlying technologies, quietly developed throughout the supply chain.

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