Archive For The “ATR” Category

Thinking through pending industry consolidation – watch for the China factor

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News that Boeing and Embraer have been talking sent a shock wave to the industry just as the holidays were about to begin.  The implications are tremendous and far-reaching.  After the news emerged, additional news indicated that the Brazilian president initially nixed the idea and refused to consider selling the states’ golden share. Since then that also seems to have softened.

The Brazilian reaction was factored into a recent podcast and was expected by us.  But we are also mindful of the fragile state of the Brazilian economy.  Moreover, we don’t think Embraer’s management is totally against the idea of doing a deal with Boeing on the right terms.  Failure to do a deal means that both Boeing and Embraer could be left vulnerable.  This is the critical issue – what is the risk of remaining alone? For Embraer, it is competing with the E190-E2 and E195-E2 against “Airbus” C Series.  The result is more competent marketing at the top end, with a larger support network and resources that Embraer can’t match.  For Boeing, there is little or no risk to their existing business, except that with the CS in hand, Airbus could focus on an A322 /A323 which would be a true 757 replacement that could impact the business case for the 797.  When combined with the A330neo, this would surround the potential market for the 797 and might force Boeing into a 737 replacement cycle faster than they would otherwise want.  This industry has always been a game of leap-frog, and the C Series is an aircraft poised to jump.  Boeing needs the E2 to match or cede the bottom of the market to others.  The key question for Boeing is how well they believe customers will remain loyal as they procure larger aircraft.

So, for now, do not discount a deal or some arrangement between Boeing and Embraer.

Here are some thoughts on what the creeping consolidation could mean for the global aerospace industry. There appear to be three driving issues to consider that encourage consolidation:

  1. Supply chain – the OEMs are seeing a world of consolidation in the supply chain. They do not want the tail to wag the dog.  OEMs (especially Airbus and Boeing) want their undisputed control back.
  2. Labor pool – We face not only a pilot shortage.  There is also an aerospace skills shortage.  Having control over a deep and wide, but limited, skill pool is essential to succeed in an increasingly technically challenging in industry.  Embraer, unlike the other OEMs, has excelled at bringing in new aircraft programs on-time and on-budget, and one of the reasons is having its own University specializing in aerospace information technologies.
  3. Industry bubble – Cyclical conditions are normal –  every segment has ups and downs.  To avoid these swings hurting too much, an OEM wants to be able to offer airlines and lessors everything from 30 seats and up.  If there is a bubble in any segment, that impact is offset by other segments.

The following matrix summarizes our thoughts about this transaction and the impact for key players. Click to make it larger.

Game theory kicks in right away.

Embraer is Brazil’s national champion.   Can the state get its head around a deal with Boeing?  Can the government come around to seeing this deal like a national soccer player getting a contract to play for a big team overseas?  After all, Boeing calling is a tremendous compliment.  Boeing can do more to get the KC-390 into the USAF than anyone else.  Boeing can do more to sell the E2 program than Embraer alone.  Boeing might be able to significantly impact the US airline scope clause – perhaps via lobbying efforts in Congress.  In short, Boeing is a fabulous partner for Embraer and Brazil.

Because there are so many favorable outcomes from a Boeing tie-up with Embraer. Airbus must revisit its halfway relationship with Bombardier.  Bombardier’s aerospace assets offer a lot to Airbus. Having the Q400 in-house means 100% control over the world turboprop market (with ATR).  Could this get through EU and US competition regulations? Having the CRJ program does not bring much in technology terms. But if Boeing gets the scope clause eased, it will be Airbus that helps Bombardier develop its own version of an E175-E2 or MRJ.  Bombardier has a big group of CRJ customers to work with.

Just like Embraer’s business jets fitting within the Boeing BBJ program, Bombardier’s business jets might fit with the Airbus ACJ program. There are no overlaps for either of the big OEMs.  Airbus will also be able to take on Gulfstream head-on with the Bombardier Global range.   But is this a market they are interested in?  There is no evidence that Airbus would like to build out the business jet segment, although the ACJ atop the Global could be interesting.   The Bombardier railway assets are a consideration: there is always the chance to sell this to the EU railway firms.  Anything to keep the Chinese at bay.

China cannot be dismissed yet.  China’s aerospace firms (AVIC and COMAC) must see these deals for what they are.  A Western wall starting at 30 seats all the way up to 600 seats.  Any western lessor and airline will turn to the Airbus and Boeing options first.  It won’t be the price that drives their final decisions because operational reliability is key.  China does not offer that level of operational reliability yet.  Buying a firm like Bombardier lock, stock and barrel, does enable rapid leaps up the learning curve.  Buying Bombardier now is literally a once-in-a-lifetime opportunity.

Buying Russia’s aerospace technology is good but may come with annoying Russian state conditions.  Bombardier is China’s best option.  And its price is within reach, especially when one takes a long-term view.

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Turboprop review through 3Q17

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Turboprops have had a good year in 2017.  We take a look at the market and provide some insights to be found in the data.

The turboprop market is big but not as exciting, perhaps, as the single-aisle market.  We can see that the number of parked aircraft has risen from about 9% of the fleet to over 16%.  Does this indicate something odd going on?

Reviewing the parked aircraft we find that they average over 20 years old.  Because of OEM changes, there is another pattern: parked aircraft reflect the state of the OEM’s fleet.  BAe, Embraer, Fairchild/Dornier,  Fokker, and SAAB are all out of this market. Moreover, the number of parked aircraft vary by world region.

Looking at the more recent history, we can see how the departure from the market has impacted the in-service fleet.  Turboprops, despite being workhorses, don’t die easily.  In 2015 the in-service fleet average age was  19.7 years and as of 3Q17, the in-service fleet averaged 19 years.

Taking a look at the in-service fleet as of 3Q17, we find the following.

Asia/Pacific and the EU are the primary markets for turboprops.  North America (combining Canada and the USA) creates the third biggest market. The CIS and the Middle East do not look like promising places to trade.   (Which begs a question about the GE and UEC deal, doesn’t it?) Africa and Latin America look promising though.

These could be exciting times for OEMs though.  The table lists in-service aircraft.  The light blue columns show models no longer in production.  Eventually, even these need to be parked and replaced.

Is there any surprise that Embraer is pondering a comeback?  Looking at the wide range of aircraft sizes that fall into this market, it would seem the focus on 90-seaters may not be the best place to look.  There are literally hundreds (about 43% of the market) of 30-50 seaters that need replacing, and you do not need to make as tough a business case as you do with 90-seaters.

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FedEx Express buys new ATR 72-600F freighters

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ATR announced today that FedEx Express, the world’s largest express transportation company, and ATR signed a contract for the firm purchase of 30 ATR 72-600s plus 20 options. These aircraft will be the first new ATRs to be directly delivered from the factory in a freighter configuration. This new aircraft version, designated as the ATR 72-600F, has a brand new windowless fuselage and is equipped with a forward Large Cargo Door (LCD) and a rear upper hinged cargo door.

Deliveries of the ATR 72-600Fs to FedEx Express will begin in 2020. These new ATRs are also the first ATR 72-600s that will operate in a cargo configuration, as well as being the first ones equipped with an LCD directly from the factory.

The ATR 72-600F features a class E main cabin for cargo operations and will support both bulk cargo and Unit Load Device (ULD) configurations. The ATR 72-600F has a bulk capacity of 74.6 m3, and when in ULD mode, can accommodate up to seven LD3 containers, or five 88” x 108”, or nine 88” x 62” pallets. The aircraft is also equipped with new reinforced floor panels.

David L. Cunningham, President, and CEO of FedEx Express, said: “ATR aircraft have been successfully operating in FedEx service for many years. We worked with ATR to develop this new aircraft, which include special features to help us grow our business, especially in the air freight market where shipments are larger and heavier. The 72-600F will play an important role in our global network by helping us deliver fast, economical service to small and medium-sized markets.”

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Premium 249 – Airline Fleet Trends and Implications

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ATR Offers New Vibration Monitoring System

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ATR reports it has “certified  its new Vibration Monitoring System (VMS) which will allow airlines to constantly monitor and fine tune propeller vibration. This innovation, which will be available on all new aircraft from March 2018, improves both aircraft reliability and passenger comfort. It will also be available to retrofit on in service aircraft, via Service Bulletin. 

The new VMS will be permanently installed on the aircraft and replaces the previous temporary ground tooling systems used to monitor engine vibration. This equipment, which will be supplied by Meggitt Sensing Systems, removes the need for airlines to organise regular ground testing or put maintenance personnel on revenue flights, therefore improving maintenance efficiency.

VMS measures vibration at engine level in real time, via an acceleration sensor, or accelerometer, placed on each engine very close to the propeller. The vibration analysis performed throughout the flight within the Vibration Monitoring Control Unit will be stored for easy access after flight by Maintenance personnel through the MCDU (Multifunctional Control Display Unit). The resulting VMS report is then included in the Aircraft Condition Monitoring System, with precise directives to airline maintenance crews on how to balance the propellers.

Reducing propeller vibration improves the comfort for everyone on board by minimising vibration and engine noise in the cabin. It also improves the reliability of engine components and of the aircraft as a whole, and ultimately reducing Direct Maintenance Costs.”

The bane of flying a turboprop for many is the expected noise and vibration.  During last year’s ATR72 visit to the US, we can testify there is hardly any vibration and cabin noise is remarkably low.  Further reducing vibration is a benefit for an already comfortable ride. Today’s turboprops are a world away from what many expect.

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The repercussions of 220%

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The DoC findings in the Boeing v. Bombardier anti-dumping dispute were a shock. Not the decision, which was expected, but with the level of countervailing duties applied — 220% is breathtakingly large and absurd.   Global aerospace is a system with sensitive points just about everywhere.  Boeing has used a clumsy tool to unleash a new level of chaos into this system.  Let’s take a look at some of the obvious impacts. While this is not a definitive list, as time progresses, the list will grow and the impacts will become more clear.

United States

Boeing – Apparently a victory.  But maybe not.  Any aircraft maker selling to a US airline now has to wonder whether Boeing will unleash the same bludgeon on them.  Even ATR, who makes turboprops, must be wary – who says that Boeing won’t want to one day access this market?

Boeing wants a “fair playing field” – but it has not played on the sub-150 seat field in over a decade.  An interview with Scott Carson at Boeing in 2008, when the C Series was launched by Dominic Gates at the Seattle Times is apropos – This market is not attractive but a source of a potential threat and that may cause harm, but in actuality hasn’t.  Boeing’s real motivation is fear – that the C Series might be stretched and compete with its 50-year old 737 that has become economically obsolete at under 150 seats, the 787 debacle, combined with cash needs for 777X and 7M7, leave it under pressure to fund a new technology narrow-body replacement for another decade.

UTC – is a company already on Boeing’s radar as a growing threat.  Now that threat level has risen because of the UTC acquisition of Rockwell Collins.  UTC has a lot riding on the success of the C Series.  Don’t forget many senior Bombardier managers are ex-UTC, and that UTC accounts for the lion’s share of the 55% US-sourced parts on the C Series.  Will this slap-down force UTC to toe the line with the next generation of Partnering for Success at Boeing, or result in a backlash?

Aerospace workers – Deloitte undertook a study of the US aerospace market and identified about 385,000 people. Boeing employs 60,000 people in the US.  Not all are in commercial aerospace.  But if we took all 60,000, that represents 16% of the total.  Renton (the 737 FAL) has about 10,000 which is under 3%.  Let’s be generous and say for every Renton employee there two more in the supply chain,  and we get to 8% of the US aerospace workforce related to 737.  The DoC decision essentially says if you work for Boeing’s 737 program you matter, but if you don’t, who cares?  Are the ~30,000 potential US people associated with the 737 more important to protect than the ~22,000 US people working on the C Series?

This particularly hits vendors who are supplying newer technologies to the C Series, as this is a much more advanced aircraft than the 737.  The C Series is a high-tech aircraft, with high-tech suppliers, while the 737 uses older materials, older manufacturing techniques, and lacks the advanced features of the C Series virtually across the board when the aircraft are compared system by system.  Will Bombardier begin to transfer its supply chain outside the US?  That potential also exists if Canada decides retaliation is appropriate.

Airlines – US airlines are going to see this decision in a very poor light.  Their need for competitive sourcing has been squashed.  If they don’t buy from Boeing they may fall under the bludgeon too.  Any aircraft OEM other than Boeing may be hammered the same way.  So far three airlines have publicly been named as supporting Bombardier. One, a significant Boeing customer, has not yet been named.

JetBlue’s CEO letter to the DoC explains the scenario perfectly. “Just as competition between Airbus and Boeing has driven innovation and competition in larger civil aircraft, JetBlue and the flying public will benefit from competition between the Bombardier C Series and the Embraer E190 for smaller civil aircraft. The C Series is somewhat comparable and competitive with our Embraer E190, not with the larger Boeing and Airbus aircraft as alleged in the petitions. In fact, Boeing makes no comparable aircraft to the C Series (by number of seats or seat configuration). Imposing tariffs on the C Series would potentially benefit Embraer, not Boeing or the U.S. aerospace industry, and tariffs would burden Americans with higher airfares, less innovative aircraft and reduced competition.”  That’s right – Boeing does not win this fight with any new orders.  They have potentially handed a win to Embraer. What a crazy outcome from unleashing forces beyond its control!

Delta Air Lines – a key antagonist in this dust-up, Delta will be working on its own reaction to this decision.  Do they walk away from the C Series?  Maybe, but that means going to Embraer which now has no incentive to mark down pricing.  All Embraer has to do is price slightly below C Series+ 220%.  Will Delta turn to Boeing for a solution? No, Boeing does not have one.  Nor does Airbus.  Only Embraer and Bombardier have a 100-seat solution and this is going to annoy Delta greatly.  Might Delta retaliate against Boeing in other ways?  We’d think so.  As it is, there is not a great relationship between the two companies. This DoC decision takes it to a new low.  This may cost Boeing future business far in excess of the C Series, and we might expect all Airbus orders at 150+ seats from Delta for the foreseeable future.

US travelers – Absent efficient aircraft, smaller communities are seeing air service dry up.  Delta and its C Series were going to open new markets and offer travelers something special. (see yesterday’s news from APEX about the Delta C Series cabin IFE) Not now.

The DoC decision may ensure that US air travelers will either have to “enjoy” Boeing’s 17-inch seat or not have any service at all, versus the CSeries 18.5-19 inch width seats. Fares will increase due to less efficient aircraft being used.  And the environment will suffer from larger carbon footprints and noisier aircraft for those around airports, as the C Series is very “green”.  It appears the DoC did not factor any of these considerations into its decision.  Air travelers in the US are clearly negatively impacted by the DoC decision. The precedent is such that US consumers, in general, might one day soon be impacted in other ways should other US companies decide to use the same precedent to protect them from more technologically advanced foreign competition.


Bombardier – Apparently a loser. But maybe not.  Yesterday, before the anticipated bad news from DoC, the stock price shot up on news of potential C Series business in China.  Moreover, Bombardier is not without options.  The DoC decision will be challenged.  It is going to be very tough for the DoC and Boeing to prove any damages.  (Boeing has already lost the case among most industry analysts. These are people who know and understand the issues.) The US is a crucial market for C Series but there is a bigger market outside the US that matters a lot more.  The C Series program is shocked but not frozen.  Bombardier has options which it wisely is not talking about yet.

Canadian government – The federal government and province of Quebec have already made their views clear.  They will fight Boeing over the decision.  They can’t fight with the DoC, only challenge them.  This is the problem that Boeing created – it has unleashed forces it cannot control.  State actors are now going to move forward and it is not clear where this ends.  But it will be messy.  Boeing is going to be frozen out of business with Canada and that price is likely to be far in excess of anything the C Series is costing them – which is actually $0 to date.  Boeing says the C Series might one day become a threat – maybe, but Boeing will be paying in advance for this perceived threat.

Quebec citizens – The citizens of Quebec own 49% of the C Series program and may need to wait a bit longer to receive a positive return on their investment in the aerospace sector and Montréal aerospace hub.

Other World Regions and Players

The UK – The British will be annoyed about the DoC decision as it threatens Irish workers. The present UK government depends on an Irish party to stay in power.  The British Prime Minister, given a choice between staying in power and sticking it to Boeing, has no tough decision.  Boeing gets it in the neck.  How? That is not clear yet. But there is the P-8 program and the Chinook program.   The UK might also lean on IAG, owner of British Airways, to “do the right thing”.  Which means more Airbus (helpful with Brexit angst) and perhaps even some C Series.  The reaction from Britain and Canada could spread commonwealth-wide.

Airbus – while at first glance they might not be impacted, take another look.  If Delta decided to order aircraft (say the A350-1000) and secures a great price, will the DoC be brought to play by Boeing?  Once unleashed, this bludgeon doesn’t go away.  Anything Boeing doesn’t like could bring it back into play.  The DoC decision is awful even for Airbus because there is a manifest threat.

This threat is far more dangerous than the WTO, which has no teeth.  Airbus will be fuming over this DoC decision, although behind the scenes thankful that Bombardier’s competitive thrust may be slowed.  The phone lines between Toulouse, Hamburg, and Brussels will be busy.  Fortunately, Airbus does have a final assembly line in Mobile Alabama for narrow-body aircraft and can avoid a similar situation as “made in the USA.”

EU – For the same reasons that the UK and Airbus should be worried, so too for the rest of the EU.  Boeing is potentially creating a walled community in the USA.  Any other US company can now see what Boeing has done and request the same protection.  Consequently, it should come as no surprise to see the EU review this matter.  The EU has already been tough with US companies like Google and Apple.  More will be forthcoming.  Boeing does not get a win in the EU from this. Nor does the US consumer, who might in the future have to pay more for anything a US company doesn’t like – like an EU-sourced car for example.

Brazil – the only winner we see now is Brazil and Embraer. The path is clear, US prices on the E2 can be increased markedly.  Embraer is now much better placed to keep JetBlue and can price accordingly.   The 220% number gives Embraer an unprecedented amount of pricing leeway.  Note this does not give Boeing anything because it has no competing product. In other words, no win for Boeing at all.

Bottom Line
We cannot see this how this DoC decision is a win for Boeing.  Boeing will not make one additional US sale in the under 150-seat market because it’s only potential offering, the MAX7, has fewer total orders worldwide (64) than the Delta C Series order (75), having been rejected by airlines as not meeting their needs.

The market does not see the Boeing MAX7 as competitive and compelling.  This isn’t just our view.  Read what Boeing’s Ray Conner had to say about this.

Moreover, the follow-on repercussions of the DoC decision will not leave Boeing unscathed. Not only does it not protect Boeing, it will cause harm to the company.  Anyone doing business with Boeing in the US must now step back and reconsider their options.  Unleashing the DoC may turn out to be a monumental error.

The problem is that nobody can put this genie back in the bottle.  All that is going to happen now is every antagonist will be reaching for their own genie.  The outcome will be additional market chaos.  Somebody in the US government. higher up from the DoC, should step in and stop this madness.  But politics and economic populism trump logic, and a lot of people in the US supply chain are going to get hurt.  What a terrible decision this has turned out to be.

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