Posts Tagged “COMAC”
We assembled this table from their announcements in Singapore to see how comparable their views are.
- As usual, the definitions are not quite the same. Bombardier excludes “Greater China”.
- The seat segments top out at the same number, but it’s not clear where Embraer starts their segment though one might expect at 76 to include the E175.
- Embraer sees a market 47% larger than Bombardier. But, if Bombardier were to include China their number would be higher. China is clearly a focus for Bombardier as they frequently talk about CAAC’s Rule 96.
- As a consequence of excluding China, we can see why Bombardier uses 16% as opposed to Embraer’s 29%.
- Note Bombardier forecasts a larger market in 20 years than does Embraer.
- Both Bombardier and Embraer see potential across the region connecting communities to hubs and other smaller communities.
- Bombardier is slightly more specific in its forecast.
As of 3Q17, there were 7,674 aircraft in service across the Asia/Pacific region. Breaking out the fleet into regional and single aisles we get this table.
Both Bombardier and Embraer are correct in seeing lots of fleet renewal opportunities. If we grant each company a preference in the renewal of their own fleets, we see there were only 43 regional jets to chase. Useful, but not exciting. Among single ailses, we have much more opportunity. This is principally because of the aging small Airbus and Boeing jets.
Airbus had 244 A319s that might be a shoo-in for the C Series if Airbus muscles customers to stay “on-side” when they come up for replacement. Boeing had 20 717s that Delta had not snatched. There were 737 Classics ripe for replacement. The 700NGs, like the A319s, were too new to replace. There were 28 MD-80s aging fast that need replacement plus 63 Fokkers. The Embraer fleet was very young at under five years on average.
All told there appeared to be ~5,000 single aisles and under 200 regional jets to pitch for over the next 20 years. If we throw in a growth factor – Asia is growing faster than any other air travel market – those numbers are bound to be much higher. That makes the Bombardier and Embraer forecasts look plausible.
The largest growth markets are going to be China and India. Both suffer from state imposed limits that curtail OEM ambitions. India lacks runways and other infrastructure. But that could be fixed over 20 years. China as a tightly controlled commercial aviation industry and its evolving Rule 96 limits new airline growth.
In summary, in the next five years, we see opportunities for about 150 single aisles and 41 regional jets. The Asian air travel market has grown fast and its fleet tends to be young. While the twenty-year forecast looks reasonable, replacements are going to be backloaded.
Bombardier and Embraer need to focus on new startups and adding smaller aircraft to current airline fleets. Current airlines need light aircraft to reach out across thin routes (as stated by Bombardier above) to feed their networks. Fortunately, Bombardier and Embraer do not need to fear any outside (i.e. local) competition for at least a decade.
News from Singapore suggests that the C919 might be delayed again. Tracking, using Flightradar24, of the flight test aircraft show that B-001A last had activity on December 19 and there is nothing on B-001C. The second C919, B-001C had its first flight of 2018 on January 14th. The aircraft took off from Shanghai Pudong International Airport at 7:38 a.m. and landed at 10:33 after a flight of two hours and 55 minutes. A Bloomberg article points out that this flight test program is much slower than Western programs and even slower than one might have expected from an aircraft from COMAC.
Given the ARJ-21’s very long gestation, one could be skeptical of China’s aerospace ambitions. But those ambitions continue to mushroom. COMAC has an engine RFP out for the C929. The C929 is approximately sized like the A330-900.
Even if the first orders for the C929 come at the Zhuhai Airshow in November from Chinese and Russian customers, deliveries are slated for the 2027 era. Which, based on current experience, might mean more like 2030.
The C919 is long on promise. Lu Zheng, COMAC’s deputy general manager of sales and marketing, told reporters at the Singapore Airshow that they expected Chinese certification to take three to four years. “It should not have any impact” on the delivery time to the jet’s launch customer, China Eastern Airlines, he said. “We’re striving for 2021.”
COMAC has 700 orders for the C919. By the time it starts deliveries in 2021, it is likely to be substantially outdated by the current Airbus and Boeing products. Bear in mind that if Airbus and Boeing’s projects planned around the C Series and E2, respectively, are in full bloom by then the goal posts will have been moved significantly. Chinese airlines with captive C919 orders might be reluctant to take the C919 unless it has also seen improvements that keep it competitive.
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:
- 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.
- 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.
- 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.
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.