Archive For July 30, 2012

Allegiant Selects A319: good news and bad news

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There is good news and bad news in Allegiant Air’s  selection of the Airbus A319 for Airbus.

On the positive side, Allegiant becomes a new Airbus customer using the A319 in an ultra- low cost business model, which is positive.  Airbus CEO Barry Eccleston stated that “Allegiant is hyper conscious of both cost and comfort, and the fact that they are turning to the A320 family proves that we have the aircraft the airline knows it needs to fly them successfully into the future.”

But on the negative side, Allegiant’s President Andrew Levy noted “A319 asset values have significantly declined, and now mirror the environment we saw when we first began buying MD-80s.”   Does that mean that the A319ceo is next on the list of aircraft headed for desert storage, with low residual values required to make operating economics work?  Allegiant has traditionally been a “bottom feeder” that purchases used aircraft at low prices.

Allegiant listened to pitches from OEMs for new aircraft, and after examining low lease rates in the used market and a comprehensive economic analysis concluded that buying new aircraft simply didn’t make economic sense with lease rates so low for the A319.

Allegiant cited current market conditions as driving their decision, as the quest for lower seat-mile economics have driven many A319 and 737-700 operators to A320 and 737-800 and as a result created an oversupply in the smaller aircraft market.  Combined with the new Bombardier CSeries looming as with substantially better economics than even the new A319neo and 737-7Max re-engined versions now for sale, values should fall even further as demand for the older models wanes.

Will this provide Allegiant an opportunity to move upward, with used A320 or A321 models for larger markets?  Airbus commonality has always been attractive to operators within the A320 family.  Time will tell if further seat growth will be necessary as new aircraft enter the market with better seat-mile economics.  But today, the used A319, at today’s low lease rates, offers a significant economic improvement over the MD-80, which has reached the end of its economic life.

A318 and 737-600 have already reached the end of their economic lives.  Will A319 and 737-700 soon follow as they are replaced by neo and Max?  The true answer lies in residual values, which we expect to fall to the point of economic equilibrium.  By this we mean, for example, that a used A319 will have substantially higher operating costs than a new CS300, and to make up that difference the A319 will be priced lower.

Those holding A319 and 737-700 models will soon need to recognize that the market values for these airplanes are in flux.  While the A319 has been the first to be hit, the 737-700 won’t be far behind.

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787 Engine Failure in Charleston Closes Airport – Implications?

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On Saturday, a Boeing 787 runway test with the most recently built aircraft, equipped with GEnx engines, experienced an engine failure, resulting in debris on the runway approach and causing a brush fire.   This closed the airport, resulting in the diversion of two inbound commercial flights, as with the main runway at Charleston currently shut down for repaving, the airport is operating with a single runway.

Fortunately, the failure occurred during preflight runway testing and not an actual flight.  Nonetheless, the situation was warranted as serious enough for the National Transportation Safety Board to conduct an investigation.

No one was injured in the incident, and it is not expected to delay production of the aircraft or immediately impact the program.  The more important question, however, is what caused the incident, and whether it will require modifications to the GEnx engines that are already in service with JAL and installed on a number of aircraft currently in production.  It is too early to tell whether this failure will rise to the level of the failure of a Rolls Royce engine on the Airbus A380 that resulted in a significant engine modification program.

  • The good news – the problem was discovered on the ground.
  • The bad news – another investigation of a potential problem for the 787, with yet unknown consequences.

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American Airlines’ Plans for Post-Bankruptcy Merger

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One of the reasons American Airlines is currently in Chapter 11 bankruptcy is arrogance.   American was “too proud” to declare Chapter 11 when the rest of the industry did after 9-11 and restructure, even though restructuring at that time to remain competitive would have likely resulted in their retaining an industry leadership position, rather than shrinking while others expended or consolidated.  But that arrogance is nothing new for American.  American’s culture has never been one to “play fair with partners” and we’ve watched former partnerships and joint ventures go down the tubes one after another because American always seemed to want an 80/20 rather than 50/50 deal when it worked with other airlines.

American does have a legacy of innovation, including the first computer reservation system, the first yield management systems, inventing super-saver fares, and the first frequent flyer program.  While these were now long ago, American has retained a culture of ill-placed managerial superiority while being in denial of reality, which finally came to a head with the resignation of Gerard Arpey rather than to take the company into Chapter 11 on a timely basis.  Perhaps not surprisingly, that arrogance remains even in bankruptcy, as American has submitted plans to the court to emerge as a stand alone carrier and then evaluate potential merger partners once it emerges.

The problem with that attitude is that the most logical merger is standing in front of them with a proposal that makes sense, will save jobs, and make the carrier successful again, but American’s management believes they can do better.  They certainly haven’t for shareholders, and appear to now be looking out for themselves rather than their stakeholders, employees, suppliers and DIP financiers.

US Airways has a proposal that appears to make sense, and would create a carrier with the critical mass to compete with Delta (after acquiring Northwest) and United (after acquiring Continental).   The networks of the two carriers are complimentary, with little overlap, and a conquest of US Airways for one world rather than Star would strengthen what is currently perceived as a weaker alliance.   American is currently losing key high yield business traffic to United and Delta, who offer stronger networks with greater geographic coverage. A merger with US Airways would fill those gaps, enabling American to better compete for the lifeblood of the industry, the business traveler.

American has indicated it would consider several potential merger partners apart from US Airways, listing several of the remaining independent carriers.  Alaska Airways has always preferred independence, and has a attractive west coast niche, but would not add enough volume to bring American to the critical mass of its two major competitors.  JetBlue is a low cost carriers with a different business model than American, as is Frontier, another potential partner.  Virgin America was also mentioned, but competes head to head with American on transcontinental routes with a premium service model, and regulatory approval would be unlikely.  The only real player in town  with a network that really fits well is US Airways.

Years ago, American left the northeast for Texas, and abandoned many of the local routes in the region in favor of long-haul services through its Dallas and Chicago hubs, and transcontinental and international services.  US Airways brings the smaller destinations in the northeast, and would effectively fill in the route network to be competitive with United and Delta.

A potential partner that makes good business sense is proposing marriage.  Just because American is the one being asked, rather than the one doing the asking, isn’t a good reason to reject a proposal that would be beneficial to all involved.  Perhaps it is time for American to be taken over by a management team that recognizes that American’s innovation has stalled, that its network isn’t large enough to compete for lucrative corporate contracts against United and Delta, and that the time for action is sooner rather than later.

Having identified its other potential merger partners, American now runs the risk that US Airways gets to them first, and down the road forces American’s hand by being the stronger carrier in terms of size.  It already appears to be financially and managerially.

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Perspective on the A350 Delay

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Airbus parent EADS Friday (July 27) announced a three month delay in the planned Entry-into-Service, to well into the second half of 2014 instead of mid-year.

Problems with drilling holes in the wing assembly are blamed for this delay, the third and which now aggregate 15 months.

The A350 program delay attracts attention because it comes after delays in the A380 and A400M programs at Airbus and the 787 and 747-8 programs at Boeing.  But what is given less attention is the steep learning curve both firms have gone through after these program delays. A little perspective is needed. A recent visit to Airbus’ A350 factory in Hamburg provided a timely perspective.

Although the factory and its people have been working with CRFP for 30 years, the scale of the parts on A350 is much larger. The factory tooling utilizes lasers for layups – the level of technology on A350 is an order of magnitude greater than on the A380.  Why is this?

The answer is Airbus has learned tough lessons from the A380 program.  The stress the A380 delay caused Airbus is manifest in the scars it has left managers.  It was made clear to us the A350 program would be slowed down if necessary to ensure there would be minimal traveled work.  Any part that comes in and does not meet specifications is not accepted.  Given the long supply chain and the complexity of these parts, Airbus is taking a deliberate and measured approach to the program.

It’s not just internal lessons. Think of the 787 program. The airplane is impressive. Do people consider this when they speak of it? Most of the time media speaks of the 787, they mention it is three years late, as if this is the most important factor in the entire program.  This is grossly unfair to Boeing because it has broken so much new ground in terms of technology deployment.  A350 program managers have noted the lessons from the 787 and would rather slow things down now to ensure a more stable and smoother program later.  Airbus will avoid the situation at Everett, where more nearly five dozen 787s are parked waiting for final fixes prior to delivery.  The recent gearbox problem on the 787 was also made into something far bigger than it is because it might be another delay for the 787 – which it isn’t.

Keep the three month delay in the A350 program in perspective. This delay was brought about because the program managers wanted it.  There is no problem with the design or construction plan.  The technology utilized in making large CRFP parts is more impressive than the parts themselves.  These machines are working with lasers to ensure accuracy. Parts are built to Swiss watch tolerances.  Parts that weigh tons and are very big.  The delay is appropriate and perspective helps understand that such delays could easily be expected for neo, MAX and even CSeries.  This is how aerospace construction is these days.

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Next Gen Aerospace Materials – what next?

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There is a continuing debate about what aerospace firms need to focus on with next generation aircraft.  The search for weight savings is relentless.  Whereas many think the battle has already been won by CRFP, the truth is less so. Take a look at this slide form a recent ALCOA briefing.

Feeding this debate is the fact that pure carbon fibers weigh 0.06 ounces per cubic centimeter. Aluminum weighs 0.1 ounces and and steel 0.28 ounces.  Carbon fiber weights 40% less than aluminum and 78% less than steel.  Even when one considers the carbon fiber being processed with resins and baked into structures, its weight is still 66% that of an aluminum equivalent.  It is these facts that make so many believe the debate is over. Everyone is impressed that a Formula One car driver, with a car made of CRFP, stands a good chance of withstanding a crash up to 186mph.

But as the chart shows, it is not. The two next generation airplanes from Bombardier and Mitsubishi have been careful in how they are deploying CRFP.  Airbus and Boeing are likely to use more of the materials on their re-engined airplanes but certainly will not make major changes in how these are made from current materials.

It seems the debate is far from over. Even though CRFP has been used by commercial aerospace for some 30 years it is not the panacea.  Like everything in aerospace, materials deployed are subject to tradeoff decisions.  Even though aluminum and steel are heavy, they will have a place on airplanes for a long time to come.  Firms (like ALCOA and Constellium) keep tweaking and developing new materials to reduce weight while keeping the attributes OEMs seek.

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SkyWest gives a big boost to the MRJ

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US-based SkyWest Airlines gave a big boost to the MRJ program when it announced an LOI for 100 MRJs at the recent Farnborough Air Show. Some characterize this order as a “blow” to Bombardier and Embraer. Such a view is, at the least, missing a key data point. Take a look at the fleet breakdown.

SkyWest is a very big airline – much bigger than most people realize.  The airline has 718 aircraft that perform over 4,200 flights per day.  This is not your typical regional airline.

At the recent Farnborough show we were told that the airline wanted to buy “hundreds” of MRJs.  Mitsubishi demurred – it was not going to lock up so much production with one customer.  The compromise was for 100.  Meanwhile the airline is facing the probability that its 266 CRJ200s and 249 ERJs are going to be dated by looser scope clauses and increasingly tenuous economics. These two aircraft comprise 515 airplanes or 72% of the airline’s fleet. Its 42 E120 turboprops are also dated.

Airlines like the MRJ – its economics are expected to be more than 10% better than its current E-Jet equivalent. SkyWest ordered the MRJ90 but can switch to the MRJ70.  Given the movement to larger airplanes, we don’t expect this to happen unless scope clauses aren’t sufficiently relaxed.

With these other data points to consider, it would seem that the MRJ order is not a blow to anyone.  That the MRJ is an attractive airplane is not the issue – we are confident Mitsubishi offers a technically competent airplane and combines that with compelling financial support. The order from SkyWest was a major boost for Mitsubishi.

But it is still only 100 airplanes and SkyWest has to replace many more than 100 airplanes.  We understand that an even larger LOI with another firm has been signed but this has not yet been made public.  As big as the MRJ order is, it is part of a bigger story of SkyWest’s fleet update which is going to rival that of the network airlines it serves. SkyWest is therefore likely to do what other big airlines are doing – they will buy from more than one firm to spread their fleet risk.

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