Archive For December 28, 2012

Allegiant backs off Cebu Pacific A319 deal

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Allegiant Travel Company just announced its proposed transaction to acquire ten A319s from Cebu Pacific Air has been terminated as a result of the parties’ failure to satisfy certain conditions to proceeding with the transaction. The potential transaction was made public on July 30, 2012 after the signing of the letter of intent.

“We are disappointed that we were not able to finalize this agreement on which we spent a substantial amount of time and effort,” said Andrew C. Levy, Allegiant President. “Unfortunately we were unable to come to terms on some of the economic provisions of the transaction and as we have demonstrated in the past, we will not purchase aircraft just for the sake of growth. Our disciplined approach in asset purchases is a core competency that we will not compromise.  We continue to have fleet flexibility in 2013 even without the Cebu A319s. Seven of the nine A320 aircraft, which we announced the intention to acquire on December 19 2012, are expected to be delivered in 2013 and we now plan to introduce these aircraft into service at a faster pace so as to offset the capacity that had been planned with the Cebu A319s,” concluded Levy.

Allegiant is now expecting 2013 total CAPEX to be between $170 and $180 million. The company has signed operating leases for nine A319 aircraft with GECAS and purchase agreements for nine A320 aircraft formerly operated by Iberia. Allegiant says it will remain active in the market for the purchase or lease of additional Airbus aircraft.

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Bombardier ends 2012 on a high note

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It is unusual to get so much news from the company. Two releases in two days.  Yesterday we heard that a new customer based in “the Americas” signed an LoI for 12+18 CS100s.  Also mentioned is that wing join on the first the CS300 has stared too.  Today the announcement is that airBaltic has firmed its LoI for 10+10 CS300s.

A good ending for 2012 it seems.


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Comparing Very Large Aircraft: The A380 and 747-8

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In the wake of Airbus “Pinocchio” advertisement critical of economic claims by Boeing, AirInsight has decided to take an independent look at the economics of these to aircraft and compare the aircraft.

While both aircraft are the largest in their respective fleets, we don’t see them as direct competitors, as they are in much different seat classes.  This is like comparing an A319 with a 737-900ER, or an 737-700 with the A321.  While both are in the same class – narrow-body trunk liners – they would not normally compete against each other in an airline competition.

In estimating operating economics, each manufacturer will utilize a different set of economic assumptions, normally those that optimize the performance of their aircraft against the competitor.  And because cost per available seat mile (CASM) is such an important metric for airline fleet planners, the manufacturers often play with seating configurations as well to provide an advantage for their aircraft.  Comparing A380 and 747-8 have substantial differences between the two manufacturers in their methodologies, which lead to markedly different results.

One of the key elements of our analysis was an independent look at seating configuration.  Each manufacturer provides a seat comparison using three-class service.  But unless you read beneath the headlines and examine the seat-pitch assumptions behind the claims, you may miss a key lesson in how the manufacturers “stretch” the truth in their economic analyses.  In this case, Boeing claims the 747-8 to accommodate 467 in its economic analyses versus 565 for the A380, and Airbus claims the comparison should be 405 to 525 using different seat pitch assumptions.  The only current operator of both, Lufthansa, configures its aircraft with large premium cabins, and offers 362 seats in the 747-8 and 526 in the A380, and perhaps best illustrates the significant difference in seating capacity between each type for an operator offering a consistent service level.

The underlying assumptions about seat pitch are markedly different between the manufacturers:

The difference is quite remarkable, particularly for Business Class seating in an era in which lay flat seats are becoming the international standard.

Boeing’s calculation of 467 seats in three classes for the 747-8i, shown in the diagram below, assumes 26 First Class seats with 61 inch pitch, 89 Business Class seats at 39 inch pitch, and 352 Economy seats at 32 inch pitch.   Using the same seat pitch standards, except for 48 inches in Business Class, Boeing calculates 565 seats for A380 using the same assumptions, but a more generous 48 inches for Business Class.

Airbus, by contrast, calculates 525 seats for the A380, using 10 First Class seats at 81 inch pitch, 84 Business Class at 61 inch pitch, and 431 Economy at 32 inch pitch.  Applying those to the 747-8, the result would be 405 seats for the 747-8 with seven First Class at 82 inches,  74 Business at 61 inches, and 324 Economy at 32 inches.

Clearly, the Airbus assumptions are more consistent with modern seat configurations at major airlines, and a comparison of 405 to 525 is more realistic.

A differential of 62 seats does have a significant impact on seat-mile economics, and illustrates one way in which the OEM’s tend to exaggerate their economic claims.  To gain a true picture, you need to look closely at the assumptions to avoid an “apples to oranges” comparison.

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Big Twin Competition Gaining Momentum

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The large twin-engine, twin-aisle competition for the future is gaining momentum following the opening of the Airbus A350 Final Assembly Line in Toulouse last month and the customer meet October 31-November 1 hosted by Boeing to discuss the 777X concepts.

What is clear from talking with customers who attended the Boeing meeting is that the 777X is far from clear. General concepts have emerged as the favorites: a composite wing and wing box, new engines, a conventional metal fuselage and system upgrades.

The wing span remains undecided, with one concept including folding wingtips to keep the airplane within the 777’s current airport “box.” Whether Boeing elects to go with a sole source (GE) engine or a dual source (GE plus either Rolls-Royce or Pratt & Whitney) is also undecided.

Boeing is showing concepts for the 777-8X (a 350 passenger model that would replace the 777-300ER and compete directly with the A350-1000), the 777-8LX (replacing the 777LR) and 777-9X, a new-sized airplane with 407 seats that technically drops it into the Very Large Aircraft (400+ seats). The 777-200ER would be replaced by the forthcoming 787-10.

Customer reaction to the 8X and 8LX has been tepid at best. The 9X is drawing a lot of favorable attention, say people who attended the meeting.

Boeing CEO Jim McNerney on the 3Q12 earnings call said 777X EIS could be the end of this decade or early next decade. Soft ATO for the 787-10 apparently has been given, with Boeing talking to airlines about the plane. Formal ATO slipped from October to this month, according to customers we’ve talked to. Firm orders are likely to follow shortly after ATO. We believe Boeing could have around 100 orders by year-end, down from our original prediction of about 200 given the slip in ATO.

The A350-900 and A350-1000 compete with the current 777-200ER and -300ER lines. Airbus doesn’t have a version competing with the niche -200LR. The 200ER is already a “dead” airplane and the -300ER for now has the market segment to itself. The A350 is sold out to 2020 and Boeing has 335 unfilled 777 orders through September, a 40 month backlog at the current production rate of 8.3 per month, to mid-2016. Boeing has plenty of delivery slots during a period when Airbus does not.

The absence of delivery slots is why A350 sales have stalled. Boeing has used this to cast doubts on the -800 and the -1000, calling the -900 an “orphan.” This is typical Boeing hyperbole, but Airbus hasn’t done an effective job of countering the Boeing public relations campaign. This campaign also runs counter to some of Boeing’s own internal analysis, which shows the A350-1000 to be much more efficient than the -300ER. (Otherwise, why tinker with a winning product by developing the 777X?)

The A350-800 currently has more firm orders than the -1000 but it’s widely agreed that the -800 is likely to be the model in least demand in the long-term. But this doesn’t mean there isn’t a market for the aircraft. The question is whether Airbus’ R&D for it will be sufficiently inexpensive to provide a sufficient ROI.

Boeing is waiting to see what the final design for the -1000 is before proceeding with the 777X, say customers and others we’ve talked to familiar with Boeing’s thinking. Although Boeing has done a good job casting doubt over the -1000, customers and potential customers tell us this is over-stating the situation. True, questions remain over the airplane: Airbus’ focus is on getting the -900 assembled and first flight by mid-year next year. Customers expect another delay in EIS beyond that announced this year by Airbus, slipping into 2015. As a result of the redirected engineering resources, development and finalized design of the -1000 has slowed. Issues, according to our discussions with customers, primarily revolve around weight, engine thrust and field performance. Rolls-Royce has room for more thrust (but at what cost to fuel economy?), and weight at this stage of development of any airplane is always an issue. Weight-and-thrust affect field performance.

Tim Clark, president of Emirates Airlines, has waged a public campaign urging Airbus to put more range into the airplane. But his needs are unique and his requirement falls within the last 5% of airline operations, and Airbus (and Boeing) are loath to design an airplane for only 5% of the missions. Qatar Airways’ CEO Akbar Al-Baker jumped on the Emirates bandwagon, but the truth is the -1000 fulfills every mission required by this airline.

Although Boeing has engaged in a very effective public relations campaign against the A350-1000 and -800, customers (and potential customers) we talk to paint a very different picture from the critics. Concerns exist, yes, and these are typical of concerns at this stage of airplane programs. The airplane is running late and customers expect more delays.

Our conversations with suppliers and customers don’t reveal anything to match the Boeing hyperbole.

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The C919 – Quietly Gaining Traction and Building Backlog

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While many in the industry view the COMAC 919 as China’s aerospace learning vehicle that will enable it to enter the modern airliner industry, many others are less pessimistic regarding its future.  With a veritable plethora of western suppliers on the C919 program, from the CFM LEAP engines to Honeywell, Parker, Liebherr, Eaton, Monogram, Labinal and other well known names that also serve Boeing, Airbus, Bombardier and Embraer, the C919 has a top tier supply chain.

Add Bombardier’s partnership in a number of areas, including joint worldwide customer support, and the odds of success for the C919 in the near term begins to look better than it did just a couple of years ago.

Of course, the proof will be a certified airplane with strong economics, and how the Chinese minimize “weight creep” that seems to accompany every new aircraft program.  If the C919 can come in near to spec, it should have better economics than the 737NG and A320ceo, and be just shy of performance numbers for 737 Max and A320neo, but with much lower capital costs.

Back in the 1970s, there was similar skepticism whether an French-German-British consortium named Airbus would become a threat to Boeing and Douglas. Some entrenched folks in the industry guessed wrong.  We see some of the same hubris being applied to China today, doubting whether they will succeed in the short-term, while conceding that 20 years from now China will be a competitor.   Our advice is to be careful, as China’s ambition is to be world class and one of  the ABC competitors (Airbus-Boeing-COMAC). China’s aerospace industry success is firmly entrenched as a national goal.  They have the funding, they have willing and able Western partners, and now need to execute on their business plan.  While they may stumble, as Boeing and Airbus have in delivering programs on time, they have the resources to succeed.

At the recent Zhuhai Air Show, COMAC announced additional orders for C919, including its first potential order from the US by the reincarnation of Eastern Airlines, which is seeking 50 aircraft.  In addition to the new Eastern, GECAS ordered 10 more, while Hebei Airlines and Joy Air each ordered 20.

The order book to date includes 380 aircraft from 15 customers, with GECAS as the major international (non Chinese) customer.  Discussions are also underway with European LCC Ryanair and British Airways regarding the C919 in addition to the tentative deal with Eastern.  Turning Western interest into orders would be a significant coup for COMAC, and an element of national prestige for China.  If you thought Boeing and Airbus offered aggressive launch customer discounts and financing, think again.

Is there room for the C919?  China wants the C919 to capture half the home market. Boeing and Airbus are essentially sold out for narrow body aircraft deliveries through 2020.  Orders for neo and MAX continue at a record pace, and delivery slots are unavailable without production increases, which are difficult to accomplish because of the requirements placed on an already stretched supply chain.  The lead time for increasing production rates, with so many components outsourced, has stretched in recent years from a few months to between 18-24 months today at many suppliers.

Excess capacity and excess inventories have long been removed from the supply chain, and the constraints on growth for Airbus and Boeing may leave COMAC with the only available delivery slots for new aircraft above 150 seats 5-6 years from now.  Could Airbus and Boeing being too successful create a strategic opportunity for China?

Airbus and Boeing can attack Bombardier’s CSeries aggressively without much threat of retaliation from Canada, and temporarily hold down sales.  But could they utilize the same aggressive pricing against the Chinese?  The answer is no, for several reasons.  First, the Chinese airlines will be mandated to purchase the local product.  Second, the C919 will simply cost less, and COMAC will be willing to undercut Boeing and Airbus, as necessary, to succeed.  Third, with a strategic goal to penetrate western airlines, COMAC will make attractive offers in order to buy  market share.

Can COMAC pull it off?  Yes, we believe they will produce a good (perhaps not great) airplane in the C919.  Will they be on time?  Likely not, but then again neither are Airbus, Boeing, or Bombardier these days.  Will they be able to gain market share?  You bet, especially in China, but they will secure several key non Chinese orders.  Will COMAC become the ABC competitor?  With 380 orders, they are well on their way.

Bottom Line:  Those skeptical on C919 fail to recognize the subsystem integration roles being provided by Western suppliers with experience, and their experience on other programs.  Yes, China will be learning with this airplane.  But they will pull it off, and before the end of this decade will become a force to be reckoned with.


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A380 Fifth Anniversary – The Quiet Giant

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Passing through the fifth anniversary of the A380, we spoke with Mary Ellen Jones, President of Engine Alliance about the company’s view on the A380 program, the VLA market in general and how EA sees the future of VLAs.

Ms Jones shares some interesting data points. EA has generated a 99.9% sustained dispatch reliability. In July their GP7200 engine passed through 1 million flight hours.


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