Posts Tagged “COMAC”

Premium #253 – Making Boeing Great Again

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Making Boeing Great Again should not be the goal of US trade policy. The trade action by Boeing against Bombardier appears, superficially, to fit well with President Trump’s campaign theme to Make America Great Again. President Trump campaigned against unfair trade practices that are harming U.S. workers and U.S. manufacturers. Boeing alleged that Bombardier is unfairly subsidized by Canada, which has permitted it to sell CSeries aircraft below cost in the United States, undercutting Boeing and the U.S. jobs from Boeing’s most successful aircraft, the 737.

Upon closer inspection, however, it is clear that Boeing’s actions, if successful, could harm more U.S. workers in the broader aerospace and airline industries than would potentially benefit from import tariffs designed to protect Boeing.

Moreover, because Boeing stretched the bounds of appropriate use of the trade enforcement remedies and deployed a host of arguments that are hypocritical or baseless – such as complaining about sales lost to a plane smaller than anything Boeing makes – Boeing risks igniting a trade war or other realignment in the aerospace sector, to the detriment of the US aerospace industry. If Boeing succeeds in its trade case, the only beneficiary will be Boeing itself – while everyone else loses. This strategy is not Make American Great Again — at best, it is Make Boeing Competitive Again.

Perhaps more than any other U.S. manufacturer, Boeing depends on international trade and the U.S. government’s enforcement of fair trade rules abroad. But its trade case against Bombardier now undermines Boeing’s ability to fight unfounded protectionist actions instituted in countries around the world. China, for example, could easily levy massive import duties on Boeing’s planes using the same arguments advanced in Boeing’s trade action against Bombardier. That would be a disaster for Boeing and the U.S. workers who manufacture its planes. Rather than pick on a competitor one-tenth its size, with arguments that are full of inconsistencies and contradictions, detailed below, Boeing should abandon its misguided use of the trade laws and focus on being competitive at the marketplace.

Boeing Contradicts Itself about the Relevant Market
In the trade case, Boeing claims that there is a separate and distinct market for aircraft containing 100 to 150 seats that are capable of flying 2,900 nautical miles. Unfortunately, Boeing has convinced U.S. regulators of this spurious proposition, despite widespread industry understanding that the aircraft market is a continuum, ranging from the smallest regional jets to the largest wide bodies. Airlines choose a platform of the right size for a given route to optimize their operating economics and right-sizing aircraft to avoid flying planes with empty seats.

Outside of the trade case, Boeing characterizes the market differently. In its Current Market Outlook, Boeing describes a market composed of regional aircraft, single-aisle aircraft, small to medium twin-aisle aircraft, and large twin-aisle aircraft. Reviewing Boeing’s annual forecasts in our archives back to 2005, we find that Boeing’s forecasts consistently reference the single-aisle market, not a market for aircraft with 100 to 150 seats. Indeed, it would be irrational for Boeing to describe the market that way, as its flagship 737 has grown from under 100 to about 200 seats with some models of the 737 MAX, the newest 737 variants.

On September 18, at the 18th Annual Aviation Industry Suppliers Conference (SpeedNews) in Toulouse, Drew Magill, Boeing’s Managing Director, Marketing Europe offered this slide.  Boeing describes the competitive situation, when speaking to the people who know the industry, and does not include the Bombardier C Series (or the Embraer E2).  Were Boeing to list the Bombardier or Embraer products, they would be laughed out of the room.  Nobody from the US Department of Commerce or ITC was in the audience obviously.  Boeing has two messages; one for those who know the industry and another for those who don’t.

Over the years, Boeing increased the size of its 737 to provide additional capacity and improved seat-mile economics for its airline customers. The original 737 design, which dates to 1967, had fewer than 100 seats. The 737 MAX line has been optimized around the 162-seat 737 MAX 8. The smallest model, the 737 MAX 7, had 126 seats. This model did not sell well, and last year Boeing redesigned the aircraft to add 12 additional seats – taking it to 138 seats – in an effort to make the aircraft’s economics more competitive.

Seat-mile economics are challenging for the 737 MAX 7 because it is simply too heavy for its seat capacity. The wing and fuselage were designed to accommodate the needs of the MAX 7’s larger brethren. As a result, the 737 MAX 7 is less efficient than more modern designs – such as the C Series – that are optimized around a smaller size and use the latest composite technology that is not used in the 50-year-old design of the 737. Not surprisingly with these economics, the 737 MAX 7 has not sold well. Although Boeing has 3,954 orders for 737 MAXs, only 70 are for the 737 MAX 7.

Although Boeing’s Market Outlook considers the single-aisle market to be a continuum of sizes, it has conveniently based the trade case solely around the least efficient and most unpopular model in its 737 fleet, ignoring the other 3,884 aircraft in its backlog.

Boeing Complains About a Lost Sale but Doesn’t Make a Competing Product
The trade case centers on Bombardier’s sale of CS100 that has a typical configuration of just over 100 seats. Delta is the largest operator of aircraft in this class, operating 91 of the last aircraft Boeing produced of comparable size, the 717-200, which is a rebranded version of the MD-95. Boeing last produced the 717-200 in 2006, and today offers no aircraft in the 100-seat category. As a result, Boeing did not participate in the Delta competition that led to the C Series order.

What does Boeing think Delta should do to serve routes that require 100 to 110 seats? Should Delta have been required to fly an aircraft that is too large to be profitable, simply so that it can fly Boeing? Should Delta charge consumers a higher ticket price to pay for the empty seats on these segments? Other than the C Series, only Embraer makes an aircraft – the E195 – that can serve a 110-seat route. If Delta could not buy the C Series, they would almost certainly have chosen Embraer, further highlighting that Boeing’s alleged harm from a lost sale is entirely fictitious.

Boeing’s Claims of Economic Loss is Baseless
Boeing’s claim that it is suffering an economic harm from the sale of 75 C Series aircraft to Delta is dubious, at best. As noted above, Boeing’s backlog of orders for the 737 is about 4,000 aircraft deep, and it stretches years into the future. Even if Delta decided to fly less efficient 737s with dozens of empty seats on 100-seat routes, Delta would not be able to receive delivery of these aircraft without a lenghtly wait, long after Bombardier could deliver the C Series.

On a recent call with investors, Boeing CEO Dennis Muilenburg was asked whether the company would consider entering the 100-seat market with a new aircraft or joint venture with another manufacturer. Muilenburg dismissed the idea and said, “with 4,400 aircraft in backlog, we’re very confident in the position we have and the fact that we’re oversold on our production line capacity.” Muilenburg concedes that Boeing has sold more aircraft than it can possibly produce and deliver, yet it has the gall to go before the U.S. government and claim that it is experiencing economic harm from a 75-aircraft order from Bombardier.

Boeing Practices the Same Pricing Strategy that it Denegrates
Creating an entirely new aircraft design takes a tremendous amount of upfront investment, and that investment is recouped over decades, as the aircraft is produced and sold. The first plane produced in a program, therefore, is sold dramatically below the cost of producing it. Moreover, production costs drop quickly, as the manufacturer moves down the learning curve associated with repeated production of the aircraft.

Even beyond these economic realities, new aircraft programs face additional barriers. Airlines are hesitant to be the “guinea pig” to help debug early faults. New aircraft platforms also bring greater costs to the airlines in terms of flight crew training, new ground handling equipment and procedures, the distribution of maintenance supplies throughout the airline’s network, training of technicians, and uncertainty about the long-term availability of affordable parts.

These additional costs and uncertainties for airlines limit demand for new aircraft platforms, and the reduced demand causes aircraft manufacturers to offer significant discounts to the first airlines to purchase a new platform. This practice, which is deployed by every aircraft manufacturer, is so common and well established that it is named: launch customer pricing.

Boeing’s launch of the 787 is a perfect example of this practice. The first several hundred 787s sold by Boeing were reportedly sold below the cost to make them. Analysts wonder whether Boeing will ever break even on the 787 program on a cash flow basis, and recoup its $30 billion investment.

Bombardier only recently started delivering its first C Series planes, and it is far from moving down the learning curve to a mature cost position for the aircraft. Ironically, Bombardier could not even respond to the U.S. government’s questions about the cost of producing the C Series aircraft for Delta. It has not yet built enough aircraft to know what its final cost will be. How can a manufacturer be dumping product into the United States below cost when the manufacture does not yet know the final cost of production?

Boeing Ironically Complains about Government Subsidies
Boeing states that it does not receive government subsidies. But its military division develops new technologies at government expense, and then shares those technologies with its commercial operations. Boeing also receives tax breaks and aid from the states in which it operates, and it has requested even more aid from the State of Washington to keep manufacturing jobs near Puget Sound.

Given the massive costs associated with developing new aircraft programs and the long time horizon for recouping any investment, it is impossible today for any company to develop a new aircraft program without some government support. The governments of all major aircraft manufacturers recognize this and all of them provide some form of support. Indeed, international law recognizes this reality. International trade rules do not outlaw all government subsidies – just those that are unfair. Boeing acts as if the Quebec and Canadian investments in Bombardier are de facto a violation of international law, but that is just not the case.

What Really Scares Boeing and Motivated the Trade Action
Boeing’s filings do not mention it, but we believe that Boeing’s greatest fear is that Bombardier might stretch the C Series into a larger aircraft that really does compete with Boeing’s bread and butter 737 MAX 8. Given its more modern design and advanced composite components, a stretched CSeries might actually compete against the 737 MAX 8 and take market share from Boeing’s massive backlog. In other words, the trade case is a preemptive action designed to kill the C Series program in its infancy before it has a chance to mature.

Boeing already has two aircraft under development, the 777X and 797, and it cannot afford to launch a clean-sheet design of a new aircraft in the 737’s size category. It could perhaps undertake such an initiative in the 2025 to 2030 timeframe. In that regard, Boeing may be perfectly happy with any outcome in the trade action, provided that it distracts Bombardier, discourages near-term customers to buy the C Series because of its future uncertainty, and pushes C Series deliveries a few more years into the future.

Boeing may have had a greater fear that Bombardier would join with an aerospace manufacturer in China that could use the C Series technology as a platform to build a competitor to the 737. A significant portion of Boeing’s projected revenue growth comes from sales to China. A competitor to the 737, manufactured in China, would be a significant threat to the company. That process, however, would have taken a number of years to unfold, and in trying to forestall it, Boeing miscalculated miserably. In attempting to block a long-term threat from China, Boeing drove Bombardier to a formidable competitor with the ability to unleash the C Series threat immediately.

Airbus’ decision to join with Bombardier provided the C Series a massive boost in credibility and eliminated any doubt about the programs continuing viability. The Airbus partnership came with an added benefit – Bombardier and Airbus can manufacture the C Series in Alabama, putting the C Series beyond the reach of the import tariffs that Boeing sought in the trade action.

Boeing’s Statements about Airbus’s Alabama Assembly Facility Boomerang
The Airbus-Bombardier deal on the C Series, which will close around mid-2018, effectively eliminates the effect of any import tariffs that Boeing manages to convince the U.S. government to impose on the C Series. C Series planes built in Mobile, Alabama, are U.S. products and thus not subject to import duties.

Rather than accepting that the trade laws worked as intended and promoted U.S. manufacturing and U.S. jobs – the threat to which was the premise of Boeing’s original complaint – Boeing is now suggesting that import tariffs should be applied to planes that are made in the United States.

The only problem is that Boeing has already argued the opposite and the company again faces a contradiction of its own making. In its initial complaint in the trade action, Boeing stated that Airbus aircraft built in Mobile qualify as domestic manufacturing. Discussing the Airbus A319, the only Airbus aircraft that fits in Boeing’s artificial 100- to 150-seat market category, Boeing said, “the Airbus A319 would also be included in the domestic [production category] if Airbus were to produce it at its facility in Alabama.” If building an A319 in Mobile is domestic manufacturing, it’s hard to understand why a C Series built there would not be.

The Bottom Line
Somebody in Boeing’s Chicago office apparently determined that the complaint against Bombardier would be effective in thwarting a competitor. Instead, it has backfired, resulting in Boeing being roundly criticized around the world, and creating a black eye for the United States with respect to free trade. It’s not too late for Boeing to acknowledge the complaint was ill founded and seek to regain its reputation for fair play. If it does not, AirInsight hopes that the ITC will see through Boeing’s hypocritical, contradictory, and absurd claims when it renders a final decision.

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COMAC’s C919 builds hours

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Yesterday the C919 took to the skies again.  This was the fourth test flight since the first one on May 5.  Compared to other flight test programs, especially the western variety, this is a sedate pace.  One can hope the short period between flight #3 and #4 is a sign of the times and that tests will accelerate.

The fourth test flight was about three and a quarter hours.  The flight profile was not aggressive. That said, the crew did push it a bit more compared to flight #3.

The third flight was also rather genteel.

Compare these to the MC-21 flight tests and you can see what we mean about flight test profiles.  The Mc-21 program has gone higher and faster.  The MC-21 flights have also been longer.  Both the C919 and MC-21 are clean-sheet designs from, effectively, new OEM teams.  Though some would argue the Russians have more experience, we think the MC-21 team is new and this is the first program to emerge from the combined UAC.  This, in our view, means one can compare them and the approaches being taken.

CAAC does have strict oversight of flight tests.  This could explain the cautious approach.

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CAAC and FAA sign bilateral airworthiness agreement

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An agreement between the two state aviation bodies came into effect October 17.

Under the agreement, Chinese and U.S. regulators achieved “full, reciprocal recognition” of each other’s civil aviation products, including airworthiness certification, according to the statement by CAAC.  This agreement covers the airworthiness examination and approval of design standards, production oversight, export airworthiness, technical support and other areas of cooperation, the statement says.

What does the agreement allow? This agreement would help China export domestically developed aircraft like the C919 and the ARJ-21.  FAA and EASA certification are the ideal imprimatur for COMAC.   The ARJ-21, for example, has not looked like a candidate for FAA certification.  This has limited its export potential, even at irresistible pricing.

The C919 is a different story because if (or when) it gets FAA certification via CAAC, then the potential market disruption could be significant.  Such a competitor will be of grave concern to Airbus and Boeing.  China is the great fear in the big duopoly – many people have said Boeing’s worst fear was the C Series ending up in Chinese hands.

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The shifting tectonic plates – Airbus and Bombardier

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With news of Airbus creating a JV with Bombardier, a seismic industry event has occurred.  Recall that Bombardier has previously tried (2015) to enjoin Airbus in the program, only to be rebuffed.  With the impact still creating reverberations around the industry, what do we see as possible impact points?

Airbus

  • Secures a product line from 100 seats to 550
  • Alleviates the A319neo pressure, but bears down on MAX7 and 8 considerably
  • Looks like the savior and is admired by everyone except Boeing – protecting jobs in Canada and creating more in Alabama

Airlines

  • Airlines appreciate Airbus ensuring they have an option now under 150 seats that is state of the art (until the E2 arrives, providing more choice)
  • Appreciate that the CS will now have protection from Airbus rather than market opposition
  • With Airbus providing product approval, many more airlines will consider the CS now as an option
  • This means airlines ranging from Air Asia to United and includes all the Airbus influenced airlines in the EU

Boeing

  • Its strategy against Bombardier has backfired
  • The MAX7 is a dead man walking
  • The MAX8 is now threatened for real, potentially jeopardizing the MAX program
  • NMA is now of utmost urgency as Boeing is threatened across the board
  • It’s US target customers are much more likely to buy CS now (United quite likely, American maybe and more for Delta and yes, even Southwest will give the CS another look along with JetBlue and Spirit)
  • Boeing likely loses goodwill from several airlines (transferred to Airbus/Bombardier) and certainly has lost Delta with whom it has been at loggerheads over the ME3 and Ex-Im Bank
  • Probably loses Canadian government business, and now perhaps UK and EU business as well
  • Almost certainly Boeing’s fear of Bombardier’s pricing with the Delta deal and the attempt at United could now grow far worse
  • What would it have cost Boeing to do what Airbus has done and avoided all the negatives it has faced since the start of the DoC complaint?
  • In summary, it doesn’t look like there is any good that comes out of this for Boeing as the law of unintended consequences plays out

Bombardier

  • A sigh of relief in Montreal heard around the world
  • The CS is now formally endorsed by a former vigorous foe – John Leahy’s team now must sell the aircraft they once impugned
  • Bombardier is now “bankable” by the commercial banking sector and aircraft lessors
  • A lot of risk comes off the table for key program supporters in Canadian federal and provincial government. Their investment and support proved to be the right move
  • Bombardier’s future in commercial aerospace is less clear. If Airbus takes over the CS program, as it may, the Q400 and CRJ programs require attention and Airbus is unlikely to have any interest.  Bombardier’s bizjet business is still strong though
  • The next domino to fall here could be the company’s railway assets

China

  • China could have bought the CS program and the rest of the IP associated with it for a song. Now COMAC and AVIC will not benefit, an expensive mistake
  • If Airbus adds a CS FAL in Tianjin as it plans at Mobile, then this would secure CS sales in Asia and, crucially, in China. China should push for this is a way to recover its lost opportunity
  • China is the most likely source to now move on Bombardier’s railway assets. They will surely not miss a second opportunity, would they? Bombardier needs cash and China has lots of it.  Now is the time to strike

Embraer

  • They are likely as shocked as the rest of us. This turns an equal competitor into a giant
  • Embraer now must look to Boeing to deepen their relationship beyond the KC-390 and alternative fuel research
  • Boeing needs to match Airbus and Bombardier. This means either developing a new line below 150 seats because the MAX7 won’t do it.  But that costs billions which Boeing needs for 777X and NMA.  It’s cheaper, by far, to tie up with Embraer
  • Fortunately for Embraer, the “need” is higher on the side of Boeing than it is on the side of Embraer. This might give Embraer more wiggle room in negotiations
  • That said, Embraer will not want to prolong any courtship. The market won’t wait and CS orders are going to, in all likelihood, accelerate

UTC

  • The bad news? Airbus is going to drive down engine prices
  • The good news? The GTF will be secure on the CS and the E2, powering virtually the entire sub-150 seat market which could be between 4,500 (our estimate) to 6,000 (Bombardier’s estimate). (BTW expect Airbus add the sub-150 seat segment in detail to its next forecast)
  • UTC’s role as the key vendor on the CS is now protected. Getting closer to Airbus does not hurt either. UTC wins here and helps it get stronger when facing Boeing
  • The revised GTF under development could be favored for the A321LR as well as all single-aisle Airbus aircraft

EU/UK

  • Belfast looks great now as a potential site for Airbus work as well as for Bombardier
  • Especially important, with Brexit, where one might have thought less work at the Airbus facility in Wales
  • Airbus gets a major asset here. The UK gets to claim a victory for Wales and Belfast
  • PM May can take credit as the cards fell in her favor. She now can come down harder on Boeing with less fear of repercussions.  Her Belfast allies are secure and so is she.  PM May can now also tweak The Donald to come onside because she saved British jobs and he can now claim to have saved jobs in Alabama (if not Seattle). Note Alabama is Republican and Washington State is Democrat

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Airbus and Bombardier Announce Joint Venture for CSeries

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Airbus will be the white knight to rescue the C Series through a joint venture with Bombardier, announced earlier today.  The agreement will include a second assembly line in Mobile, Alabama to produce C Series aircraft for the US market.  As additional details are released, we will provide more information as events ensue.  But there are several key implications that are quite clear:

The production of the C Series in the  US will effectively kill Boeing’s trade complaint against Bombardier, and enable Delta to take delivery of its 75 CS100 models on order from the Mobile assembly line.

The C Series also provides Airbus with an all-new narrow-body platform that has the potential to dominate the 100-150 seat market, as Boeing lacks a viable competing aircraft in this segment.  This will increase Airbus dominance in narrow-body aircraft over Boeing.

Embraer will be facing a much more formidable competitor in the combination with Airbus than Bombardier itself and may be forced to move closer to Boeing with its E2 product line, which would fill a product line gap for Boeing.  Could another joint venture be forthcoming as a result of this deal?

China has lost an opportunity to rapidly acquire a technologically advanced platform and the opportunity to spur its aerospace expertise.  The C Series would also have been complimentary to the C919 program at COMAC, are could have provided them an instant acquisition of advanced capabilities.

As this story continues to unfold, we will look behind the headlines to discuss the implications of the transaction and likely impacts on competition, the supply chain, and other industry players.

The Bottom Line:  The joint venture between Airbus and Bombardier for the C Series changes the competitive dynamics for narrow-body aircraft, and will make a 737 replacement even more critical for Boeing.  The dynamics and timing of new aircraft programs in Seattle may need to be re-aligned to the new competitive realities.

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C919 has second recorded test flight

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Last night, US east coast time, the C919 had a second recorded test flight. It was 2:46 which is more than double the first recorded flight at 1:07.  As the map shows, it did not fly too far from its Shanghai base.

In terms of its flight profile, see below. The aircraft was pretty stable altitude wise, staying about 10,000 feet, and experimented with speed.

This is a more conservative flight profile than we saw earlier this week with the MC-21.  The Russian aircraft appears to be moving through its flight test program much more quickly.

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