The pendulum starts to swing

There has been much talk about how Airbus needs to respond to the 787.  Earlier this week, speaking on one of our podcasts, Boeing’s Randy Tinseth said Boeing has the A350 bracketed.  Airbus has said they don’t need to respond to the 787 because the A330 can accomplish this.  When Airbus’ Chris Emerson spoke with us on his podcast, he highlighted the A330’s lighter weight and low costs as compelling for airlines – reflecting Airbus’ continued confidence in the A330.

Airlines looking at the middle twin segment have, in other words, appear to have a choice between: Airbus’ lower entry costs, combined with a well established delivery schedule and consequent low risk.  Or Boeing’s lower fuel burn and the promise of better economics going forward, albeit with a less consistent delivery schedule and operational glitches carrying more risk.  Airlines have to evaluate these choices and it appears the A330’s great run may be slowing.  With every 787 hiccup, Airbus sold more A330s.  Indeed the joke has been that the 787 was the A330’s greatest sales tool.  Airbus used the 787 ‘s EIS troubles to continuously improve its A330.  Today’s A330 is nothing like the early version. Vastly more capable, today’s A330 has become a successful long haul aircraft whereas it was conceived as a large regional aircraft.

It may be that Airbus has to consider doing even more for the A330.  Sales have started to soften. (The following two charts are through October 2013) . Even as sales have softened, note the distinct interest in the larger A330.  In 2011 the A330-300 accounted for 73% of passenger version orders.  Through October 2013 the A330-300 accounts for 81% of orders.

For Boeing the 787 program seems to at last be settling into a rhythm. Production is accelerating and new models are coming on stream.  Orders are coming in again.  Whereas in 2011 the -9 accounted for 87% of orders, through October 2013, the -9 accounts for 24% but the -10 accounts for 59% of orders. Again we see a distinct swing towards the larger model.

The charts are pretty clear – the pendulum seems to be swinging away from the A330.  The A330 is a tremendous cash generator for Airbus.  Protecting that franchise has to be a critical issue for Airbus.  Even as Airbus is able to discount the A330 to the point of economic indifference with the 787 in sales campaigns, there are limits.  Airbus will not sell the A330 to only cover marginal costs.  One might think after sales support services are lucrative enough, but that is not the way to provide sufficient cash for R&D.  OEMs must sell at a profit to fund continuous innovation. This industry requires continuous innovation – the 737, 747, 777, A320 and A330 are proof of that.

Which means that as the 787 picks up sales momentum, Airbus must react.  What are some options?

Option 1: A350 – there is the -800 version of the A350 which fits into the A330 space.  But airlines appear to be more interested in the larger models.  Many observers suspect Airbus would rather not build the -800 despite statements to the contrary.  Can Airbus protect its market share using the A350?  Perhaps, but probably not soon enough. The -800 is  going to come after the -900 and -1000 are flying.  That may be too late.

Option 2: A330neo – We published our views on this before; readers can download a copy  from the top right hand corner of the site.  Airbus could, possibly, use many of the ideas from the original A350 along with new technologies developed since then to create a much better A330.  Its not like Airbus has not seen the benefits of the “neo” idea.  Moreover, Air Asia is known to be asking for an A330neo.  For many airlines the known quantity (low risk) of the A330 makes it compelling.  In an industry striving for lower risk, low cost, consistent performance, the A330 is hard to beat.  Developing the A330neo has to be one of the lower cost options Airbus might consider.

Option 3: Something completely new is also an option. But given the capital going into A350 and A320neo, Airbus would likely treat this as the least attractive option.  Bear in mind the A400M program is under water.  As is the A380 program, and that needs a refresh in light of the 777X’s early market acceptance.  We don’t think Airbus has the capital for a new program just now and EU shareholder nations are probably not keen to fund loans for one.

In conclusion, given the A380 update that customers (Emirates specifically) want means Airbus is already figuring ways to transfer and deploy knowledge from neo and A350.  That same thinking can be used for A330.  The A330 has demonstrated itself to be a remarkably effective program to tweak and improve.  What the A330 needs is a step change – new engines for example, perhaps an updated wing with sharklets and lighter materials.  These are relatively low risk solutions that could prolong the program’s economic effectiveness at far lower investment than Boeing has put into the 787.

Moreover, OEMs are mindful of the airline industry’s relentless pursuit of lower costs.  While new designs are sexy and full of promise, airlines are wary of the attendant risk.  Derivative airplanes may be the better way to go because they can offer better economics at lower risk.  If Boeing can do this with the 777X, and the market obviously likes it, then Airbus should consider it for the A330 too.

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