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Hawaiian’s fleet choices

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At present, it is still a rumor. But the decision process dates back at least four months.  Hawaiian has been the “last man standing” on the A330-800 with six orders.  The airline has made it plain months ago they were uncomfortable with this situation.  Nobody wants to own an orphan aircraft.  Besides, no lessor or bank would do a sale and leaseback.

The current airline position on this story is: “It is well-known that Hawaiian Airlines has been negotiating with both Boeing and Airbus for the next addition to our fleet. We have not signed an agreement with either manufacturer. We look forward to announcing the conclusion of those negotiations when it is appropriate to do so.”

Airbus advises us the airline has made no announcement and they will not comment on any rumors.  Boeing also says it does not comment on “customer discussions”.

From our perspective, it makes sense that Boeing is trying to ensure the A330neo program does not gain any traction. If Hawaiian switches away from Airbus, the A330-800 has no orders.  We can understand why Boeing might be prepared to be aggressive with the Hawaiian order.

Airbus has, so far, made the most market gains in the single-aisle side of the middle of the market segment.  For example, Hawaiian recently introduced the A321neo in its fleet which has taken over some routes traditionally using 767s.

Boeing is at a critical juncture; it is paramount that the Airbus infiltration of Hawaiian is halted.  After all, the airline was an all-Boeing fleet once. It could be that the geographic position of the Honolulu hub also drives Boeing’s effort as it will ideally suit the 797 potential capabilities to serve Asian and North American routes.  In short, the Hawaiian deal could be more influential than it looks.

The crucial issue here is this:  If Boeing is prepared to aggressively move to win the airline, is this a strong hand or a weak hand?

The A330-800 is supposed to seat 257 and have a range of 7,500NM.  The 787-9 should seat 290 and have a range of 7,635NM.  Several years ago, in an interview with CEO Mark Dunkerley, he spoke of looking at markets from Hawaii as far as the UK.  Honolulu to Heathrow is 7,237NM.  Therefore, the range is of great interest but possibly not the primary driver.

But looking at the choice, if the airline goes with the 787-9 it is listed at $281.6m and seats 290.  The A330-800 lists at $259.9m, seating 257.  The A330-900 lists at $296.4m and seats 287.  If Hawaiian is really looking for a ~290 seater, the A330-900 was likely to be a better bet than the 787-9 because almost certainly it is cheaper, regardless of list prices.  Almost certainly Hawaiian looked at converting to the A330-900 but might have demurred because it is just too big.

If Hawaiian did not want to upgrade (like other A330-800 customers) it seems reasonable to assume they may want the range, but not the extra capacity.  Ergo, what might Boeing be doing by offering the 787-9 rather than a better-sized 787-8 with 242 seats?  The 787-8 has a range of 7,635NM after all.

What seems to be going on – if the “rumors” are true – is that Boeing could be fighting hard to win Hawaiian.  Boeing is unlikely to be concerned that the A330-800 program could potentially hurt the NMA business case. Bear in mind that the NMA would be optimized for the segment, while the A330-800 is a compromise. The Airbus may be cheaper, but that does not naturally make it a winner.

It is understood that the business case for the NMA is weaker than Boeing suggests.  At PNAA a week ago, Boeing’s Randy Tinseth noted that people who question the segment potential size are not thinking outside the box.  Boeing sees a potential market for 4,000 aircraft in the segment.

Bear in mind the 797/NMA will be a family of more than one size.  And its market size (4,000 or less, depending on where you stand) is squeezed by the increasingly capable A321neo from the bottom and the A330neo at the top.  Boeing faces two pressure points: segment size and pricing.

Boeing, we think, cannot afford a “kick the can” middle of the market strategy”:  it has a growth-constrained design in the MAX10. It must, therefore, develop a new aircraft with the associated costs.  Meanwhile, Airbus is tweaking existing designs at a fraction of the cost.

If Hawaiian is really moving to Boeing, there are two considerations.  What kind of deal must Boeing offer to win them back?  And even then, the airline might end up switching away from the 787 for the 797.

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Norwegian’s 737 fleet growth

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Today the airline announced that it has taken delivery of its 100th 737-800.  This will be the final 737-800 delivery, as the airline is now taking delivery of 110 737 MAX8s. The airline’s fleet growth has been impressive.

The airline operates their 737s under several brands: Norwegian Air Argentina (1), Norwegian Air International (64 737-800 & 6 MAX8), Norwegian Air UK (1) and Norwegian Air Shuttle (52).  The company also operates several 787-8s and -9s.

As the airline proudly notes: “Norwegian is the world’s sixth largest low-cost airline and carried around 33 million passengers in 2017. The airline operates 500 routes to 150 destinations in Europe, North Africa, Middle East, Thailand, Caribbean, the U.S and South America. Norwegian has a fleet of 150 aircraft, with an average age of 3.6 years, making it one of the world’s youngest fleets.”

The rapid growth has its costs as we learned from the 2017 results which were recently announced.  The net loss was –299 million NOK in 2017, while EBITDA was 60 million NOK. Significant costs related to increased fuel prices, wet lease and passenger care affect the results. Going into 2018, Norwegian is far better positioned with stronger bookings and a better staffing situation.  The company’s 2017 revenue was ~31 billion NOK which was an increase of 19% compared to 2016. The fleet grew by 32 new aircraft which meant ASK growth of 25%. Load factor in 2017 was unchanged from 2016’s 88%.

CEO Bjørn Kjos sounds ebullient: “Norwegian is far better positioned for 2018, with stronger bookings, a growing network of intercontinental routes complimenting our vast European network and not least, a better staffing situation. Our major global expansion reaches its peak in the second half of 2018 when 32 of our 42 Dreamliners on order will have been put into service.”

Last year the airline suffered several 787 engine challenges.  But their 737 fleet has been robust.  Of course with a growing fleet, there are issues.  The biggest concern one hears about at the airline is its rapid growth.

Perhaps the operating challenges will be overcome and fleet reliability will improve.   It has to because there has been bad press. Also here.  Yet, the CEO is confident and why shouldn’t he be?  Load factors are high and are likely to remain that way because the airline’s fares are relatively low.  Norwegian has to keep its eye on the emerging LCC competition that is coming on stream.  Airlines like Primera Air for example.  Norwegian also to contend with the competition based in Iceland.  Even the established network airlines will not ignore Norwegian.

Rapid airline growth does not mean the market grows as quickly – in the short run, Norwegian is taking traffic from others.  We have seen this before with the ME3.  Unfortunately for Norwegian, older airline brands are aware of how the ME3 disrupted their revenue flow.  They will not let this happen again without a faster response.

For Norwegian to succeed it must improve its operational performance.  Low fares do not equal low expectations.   If people buy a ticket, they have a reasonable expectation of being transported from A to B with no fuss (and no frills).   Crucially as a service business, the airline seems aware of the challenges it has in terms of customer interface.  One hopes the “better staffing situation” addresses this.  Fixing flight ops and customer interface can help keep load factors high and also ensure Norwegian can sustain its disruptive ways.

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No plans for an “A350-1100”

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At the A350-1000 delivery today in Toulouse, Airbus has made it clear they are not focusing on a further stretch.  “For the time being, there are no plans. We don’t see the need,” Marisa Lucas-Ugena, head of A350 XWB Marketing, told Reuters in Toulouse.

A further stretch of the A350, beyond the -1000, is thought by some to be necessary to better compete with the 777-9.  But what does the market look like?

The first chart shows that the newer aircraft in service (3Y17) are tending towards four seating segments, from most popular to least: 250-300, >400, <250 and 301-350.  As the fleet age increases beyond 15 years we can see the fleet seating segments have changed.

To get another view of the active fleet, we cut off beyond 20 years and see the same data as in the first chart in another form.  What we see is relative fleet sizes.

If that is what the market looks like, where do the two big OEMs stand?  First Airbus.  As we can see Airbus’ strength is in the 251-300 segment.  It also has strength in the >400 seat segment.  The former is A330 territory and the latter is the A380 territory.  The growing A350-900 fleet is in the 301-350 seat segment, which has been a relative weakness for Airbus. The A350-1000 should be in the next category up with 366 seats, which has been another relatively weak spot for Airbus.

Next, we look at Boeing.  Boeing is doing well in the <250 segment with its 787-8 which is helping to recover fleet size after the running down of the 767.   The 787-9 is boosting fleet size in the next segment from 251-300 seats, where its previous strength came from the tiny 777-200LR fleet.   In the 301-350 segment, Boeing is seeing declining fleet as the 777-200ER fades.  The hope must be that the 787-10 takes over and recovers that segment.  The 351-400 seat segment is the Boeing’s sweet spot with the powerhouse 777-300ER.

Finally, putting the data together for the segments we see the following.  The most market activity is in the Airbus stronghold from 251-300 seats.  This is the segment where the 787-9 and A330neo will face off.  Airbus also offers the A350-900 in this segment.  The next big segment is between 351-400 seats where the 777-8 and the A350-1000 will face off.

The third segment is the <250 seat market, where the 787-8 operates.  Airbus is trying to push its A321 into this space and combine it with the A330neo.  The current fleet is about 640 aircraft, of which 38% are 767-300ERs.  Can Airbus make airlines a better offer using a combination of the A330neo and A321neo?  A tough call as the A330-800 has no traction.  Boeing is likely to push its NMA into this segment which leaves one wondering what happens with the 787-8?  There is a limit to how one slices a segment.

Is there a market for the “A350-1100”?  Since that aircraft will be competing with the 777-9, which is expected to seat 400-425, it is important to know there are only 346 aircraft in that segment in service.  Of those, 62% are A380s and the balance are 747s.  Boeing has 273 orders for the 777-9.   This is a niche market – but we think it is bound to grow because of airport congestion.

The 777-9 has a list price of $389m and the A380 is listed at $446m.  The 777-9 seats 77% of the A380’s capacity and is priced at 87% of its list price.  This makes the 777-9 relatively expensive; Boeing is likely to argue they can charge a premium.  The market currently looks small to add an “A350-1000”.   There is probably too much risk for Airbus. Besides, what will they use for an engine?

Airbus might be better placed to focus on the <250 seat segment as this is an 85% larger market.  This where Boeing is focusing next with its NMA.

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Big week for Airbus

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This looks like a big week for Airbus.  Early this morning in Toulouse, the first A330neo for Air Portugal was rolled out of the paint shop.

Air Portugal is the launch customer for this model.   The A330neo is a substantial upgrade from the current generation A330.  The A330neo is going to be focusing replacing the current A330s in service as they retire.

There were over 1,300 delivered, and of these only 49 are parked.  Airbus has seen a slow order pace on the A330neo, perhaps in part, because the current A330 has been such a success.  The average age of those in service is just under 12 years.  However, Airbus is also aiming at the replacement market for the 777-200ER.   There are 28 parked and 373 in service.  Of those in service, they average about 13 years old.

The table shows how carefully Airbus calibrated the A330-900 against the A330-300 and 777-200ER.  Airbus will see its A330-900 compete in this market with the 787-9.

Boeing has a far more efficient aircraft in the 787-9 compared to the 777-200ER.  For about the same capacity and range, the 787-9 at about the same size, has about 15% lower MTOW, requires 24% less thrust flies a tad faster and is only about 100 NM shorter on range.

Airbus, comparing the current and new models, has a 4% higher MTOW, a 3% improved range, a 4% better capacity in about the same size aircraft.  The A330-900 has a much better wing and a newer generation of engines.

Whereas Boeing took a big leap from the 777-200ER to the 787-9, Airbus took a more sedate step in its upgrade.  The key difference here is range and price.  Boeing wins on range for those airlines seeking that feature.  Airbus will win on price.  How many airlines are willing to pay for that extra 1,0000 NM?  Or better yet, how much premium can Boeing get for that capability?  American Airlines is doing this tradeoff.  If, as Airbus argues, the A330-900 can reach most of the markets these aircraft serve,  then the extra range of the 787-9 is doing to be discounted to more closely match the expected price of the A330-900.  Airbus, we think, will be able to make the A330-900 profitable at far fewer deliveries than Boeing can with the 787-9.

Tomorrow, Airbus will deliver its first A350-1000 to Qatar Airways.

Airbus recently took an A350-1000 on a world tour to the Singapore air show and then across Asia and the Middle East.  The tour took 24 flights, generated 87 flight hours, nearly 35,000 miles and the aircraft had over 10,000 visitors. This model of the A350XWB family aims squarely at the 777-300ER market.

The 777-300ER is an aircraft Airbus would dearly love to beat.  Just as the A330 outclassed the 767, Boeing’s 777-200ER beat the first generation A340 and then 777-300ER outclassed the updated A340.  The 777-300ER arguably even impacted the A380.  With the 777-300ER, Boeing hit a sweet spot.   There are close to 760 of these in service, and only three are parked.  The fleet averages just over seven years old.

The A350-1000 has a tough fight ahead.  Firstly, the 777-300ER is in many ways the benchmark long-haul airliner today.  Airbus can’t match it and win.  Airbus needs to beat it by a big margin to attract attention.  Airbus also has to do this quickly because Boeing has the 777X coming in 2020.

The table compares the A350-1000 with the 777-300ER and the similarly proportioned 777-8.  What we can see is that Airbus has a footprint that is very close to the Boeing models.  But by using lighter materials, Airbus has an MTOW advantage of over 12%.  Airbus also needs about 16% less thrust.  Airbus offers over 8% more range.  This appears to give Airbus a large enough margin over the 777-300ER to attract attention.

However, the market evolves and the 777-8 cannot be ignored.  The newer Boeing will have nearly 1,000NM more range (longer range seems to be a Boeing thing) and much larger wing (folding).  But the 777-8 does not offer more seating than the A350-1000.

When we look at the order book, Boeing has 53 777-8 sold compared to 169 for the A350-1000.  Of some concern to Boeing, many of the A350-1000 orders came from airlines currently operating the 777-300ER.  The 777-8 orders come from three airlines, Etihad, Qatar, and Emirates.  These three airlines are attracted to the range feature so they can connect every spot through their hubs.   While these three airlines have shown strong growth rates in the past, currently they are growing at a much slower rate.  Moreover, among the A350-1000 customers are Etihad and Qatar.  Also, Airbus has 20 orders from Cathay Pacific which has also ordered the 777-9 which is a much larger aircraft.

In summary, this is a big week for Airbus because two of its new widebodies are emerging.  Airbus has been behind Boeing in the widebody race for some time.  But it now will be able to field a lower cost option in the A330-900 to replace older A330s and 777-200ERs and also an excellent replacement for the 777-300ER in the A350-1000.  Airbus has much stronger offerings in the widebody segment looking forward.

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The GTF engine and the news – a perspective

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Should the market be concerned about P&W?

Yet another issue with the Pratt & Whitney GTF was reported last week.  Certainly, frustrating airlines and Airbus again. This time it’s the high-pressure compressor and the knife edge seal.

The pattern was detected in late January by some accounts, and by February 8, EASA issued an emergency airworthiness directive, requiring aircraft with both engines from the affected population of engines to be grounded. That number seems to be small – by P&W’s count, it was 11 aircraft. Aircraft with one engine from the affected population – 21 by P&W’s count – can continue to fly but not on ETOPS routes.  P&W started to work on the issue immediately – before the AD.  The AD came after the fourth case of an engine problem.

On any other engine on any other day, it would be have noted but not headline news outside of aviation media.  But this is the GTF, and after last year, everyone watches P&W very closely.  Deservedly so – their introduction of the first new engine architecture in 30 years warrants the kind monitoring they’ve been getting.

How are they handling this issue?

In answering this question, compare P&W’s handling of this issue with the handling of the #3 carbon seal last year.  Then the #3 carbon seal issue led to grounded aircraft, most notably in India, in summer last year. P&W was in reaction mode until the redesigned part was certified, at which point they seemed to take a more proactive approach to telling their story. It was a summer of pain – for their customers, for Airbus, and for P&W.

P&W has handled this issue differently – far more proactive, with more confidence and transparency, to their advantage. The number of engines worldwide in service affected by this HPC issue is 43 – on 32 aircraft, so the scope is significantly smaller and contained, unlike with the #3 seal issue. The mitigation plan is far more immediate than with the #3 seal, too. And most of all, P&W shared a more technical information through their official press releases than they have before.

The Leduc impact

This may be the first signs of what P&W President Bob Leduc calls his “cultural transformation” in action. Mr. Leduc came back to P&W after many years’ absence and, in his words, “didn’t recognize the place I once loved.” Decision making had been pulled up to the highest levels, people were afraid to communicate bad news, and the entire company seemed bloated and bureaucratic. It’s surprising the GTF comes from P&W, with the culture Leduc re-entered in 2016.  All trade media trying to get information out of the company over the past 24 months knows this.

Mr. Leduc realized there were issues needing attention: a majority of its engineering talent was going to retire in the next decade. Technology was reshaping the factory floor, changing the fundamental role of hourly workers. And he was facing a production ramp for the GTF and F135 programs that the company hadn’t seen since the 1980s, or arguably since the second world war.

Leadership shuffles, not just the heads of the major product lines, but throughout the organization were made. Mr. Leduc started doing more internal employee meetings, preaching the gospel of their mission, all revolving around the fact that every second of every day, someone somewhere depended on a P&W engine to get them where they needed to go.  Last year he championed a leadership course by the Thayer Leader Development Group, led by retired Army commanders who know about leading in a volatile environment.

Mr. Leduc’s work is far from done, but something seems to be catching on. He’s helped by the support from United Technologies, and the fact that while the GTF has had a series of issues, crucially none of these technical problems are related to the gear system itself. Plus, the engine is meeting and even exceeding performance promises for fuel efficiency and noise. It is only on the A320neo program that these issues have occurred.  Bombardier, Embraer, Mitsubishi, and IRKUT all seem pleased they chose the engine for their programs. Even Sukhoi is flirting with using it.  If the engine was fundamentally a risk, the OEMs other than Airbus would not be using it exclusively.

Our assessment

The GTF is sound, and the issues are irritating but ultimately solvable. We like the direction P&W is taking but they must “walk the talk.” They recommitted to meeting their 2018 production numbers, (after having met the production numbers in 2017) so time will tell, but for now, we think it’s appropriate to give them the benefit of the doubt. Remember how Boeing had an uphill battle with India-based 787s?  Boeing got through it.  So will P&W.

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Delta, Bombardier and the CS100

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As the ITC reasoning behind its decision to deny Boeing’s claim is digested, the next dominos are falling.   Delta’s statement is “Delta is pleased by the U.S. International Trade Commission’s ruling rejecting Boeing’s anticompetitive attempt to deny U.S. airlines and the U.S. traveling public access to the state-of-the-art 110-seat CS100 aircraft when Boeing offers no viable alternative. The airline looks forward to introducing the innovative CS100 to its fleet for the benefit of Delta’s employees, customers and shareowners.”  It turns out that Delta’s testimony seemed to carry the most weight for the ITC.

An aspect of the ITC reasoning that is getting some attention is the airline is now able to take deliveries of the CS100 from Mirabel and not wait for years until the Mobile FAL is operating.  Delta and Bombardier, understandably, are not saying anything about this.

The ITC result was unexpected by Bombardier like it was for almost everyone following the industry.  There was a not very secret plan for any Mirabel built CS100s to go to AeroMexico.  Bombardier and Delta must have been busy for months working on contingency plans.   Then along came the unexpected ITC ruling and those plans, in place and well thought out, became moot.

Now Delta and Bombardier have to go back and essentially undo the plans they put in place.  Delta had already planned to extend the use of their MD fleet in the event they had to wait for the Mobile FAL.  Bombardier had to figure out where to put the Delta deliveries in their production slots because the expected ITC ruling was going to mess up any delivery plans.  Details of how any aircraft were going to end up in Mexico are still secret.  As one can see several moving parts had to be stopped once the ITC made its ruling.

We expect to see a CS100 is Delta colors soon.  Both the airline and Bombardier want this.  Delta believes the CS100 is going to disrupt its competitors and they have good reason to believe this.   If passengers are given the choice of a regional jet or the more spacious CS cabin, the choice is easy.  We expect Delta to make a big fuss of this feature in every market they take the CS100.  Since most passengers have no idea which aircraft they are flying, Delta will need to undertake an education strategy.

Winning over customers to their CS100 at the start of a trip means Delta should be able to keep more traffic in its network.  This means they can use the CS100 to increase market share and in the oligopoly without touching fares.  Travelers who are price driven, rather than mileage loyalty driven, are likely to swing to the Delta product.  Finding a spacious cabin with bigger seats will be something of a revelation for US air travelers.  Once captured, these travelers might develop a liking for Delta’s product and service.

This outcome has been seen at CS300 launch customer airBaltic.   “With the introduction of brand new Bombardier CS300 aircraft, this year airBaltic has increased the number of passengers served by 21 percent. Thanks to the improved efficiency of the aircraft, this summer was the strongest in the history of airBaltic. For several months in a row, airBaltic, which turned 22 this autumn, reached record high passenger flows as well as revenue,” the airline reported.

If Delta can their first CS100s in service quickly, we expect to see American and United react by either also acquiring CS100s or E190-E2s.  Southwest may not be immune from this impact either.  Delta’s deployment of the CS100 is likely to be good for Bombardier and also for Embraer.

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