European plane-maker Airbus, a unit of the European Aeronautics, Defence & Space Co. N.V., has enjoyed a record year of 2011 buoyed by an order bonanza at its re-engined A320neo (new engine option) aircraft programme, which accounted for 1,226 of the 1,419 net orders recorded in the year, after taking into account customer cancellations from the tally of 1,608 gross orders, including the exclusion of bankrupt carrier American Airlines’ (AA) order for 130 A321neos and the first A350-1000 order cancellation from Middle Eastern carrier Etihad Airways that saw its order for the biggest A350 variant being reduced from 25 to 19.
Notwithstanding this, 2011 could not have been a better year for Airbus. On a gross basis, Airbus’ 1,608 gross orders gave it a 64% market share in terms of units against Boeing’s 921 gross orders whereas Airbus had a 56% of market share in 2011 with its gross orders worth US$168.8 billion against Boeing’s gross orders whose values stand at US$133.1 billion. On a net basis, Airbus still maintained the same market share with 1,419 orders against Boeing’s 805 orders, though Airbus’ lead over Boeing narrowed when it comes to market share figures measured in terms of revenues, with Airbus claiming a 54% market share against Boeing’s 46% share, reflecting the different aircraft mix in orders recorded by Airbus and Boeing, with the Chicago-based arch-rival receiving a record number of 200 orders for its lucrative 777 widebody jetliners.
Needless to say, the star of the year was the re-engined A320neo (new engine option) aircraft, which Airbus chief operating officer (COO) customers John Leahy declared “no programme in the history of aviation has ever sold that many, that fast”.
“Airbus’ record order intake is the result of our strategic decision for A320neo. With this innovation we established a new industry standard, appreciated by our customers and followed by the competition,” Airbus president and chief executive Tom Enders said.
However, with the availability of the highly popular A320neo aircraft fast becoming scarce, of which delivery slots for the re-engined aircraft could not be secured for an earlier date than 2018 or 2019, the amount of orders for the A320neo is widely expected to slow this year.
Instead, the focus of this year at the European plane-maker will fall on the developments at its mid-sized widebody A350 XWB (Extra Wide Body) programme, notwithstanding the management change at the top of its parent company EADS, of which the current Airbus chief executive Tom Enders is expected to take over the role of chief executive at the European aerospace and defence giant from current EADS chief executive Louis Gallois.
2012 a challenging year for the A350 programme
Having announced a delay of up to 6 months on the aircraft’s entry into service (EIS) from late-2013 to the first half of 2014, this year will be a crucial one for the Airbus mid-sized widebody designed to compete with the Boeing 787 Dreamliner and the larger 777 (“A350 faces further challenges but business case remains sound“, 1st Dec, 11), of which the final assembly of the first A350-900 flight test example will start in March 2012 whereas first flight will take place in the second quarter of 2013.
Supply chain, a significant factor behind the more than three years of delays at the Boeing 787 Dreamliner, holds the key for whether Airbus will be able to meet the new programme schedule.
In announcing the €200 million (US$270 million) 2011 third-quarter charge, EADS chief financial officer (CFO) Hans Peter Ring attributed the 3 to 6 months delay in the A350-900’s EIS to a “shortage of parts” caused by a supplier funding issue which is a result of the European sovereign debt crisis.
“All suppliers are in big difficulties. It is difficult for medium-sized companies to get access to funding. We’ve helped some of them with buying non-recurring investments – this is possible we can help in an emergency,” Peter Ring was quoted by flightglobal Pro back then.
However, Airbus seems to have learned its lesson from the A380 as well as the Boeing 787 Dreamliner. Instead of allowing unfinished or incomplete parts to continue to flow into the final assembly line (FAL), which the aerospace industry dubbed as “travelled work”, Airbus is placing the programme maturity ahead of meeting deadlines.
“We learned our lessons from the A380, and from Boeing Co.,” Airbus chief operating officer Fabrice Bregier said in a Dow Jones Newswires interview a day after the Airbus annual press conference.
“We’re not experiencing too many problems with larger composite parts from big suppliers, but we, and they, are relying on smaller suppliers who are finding themselves producing more complex parts than they have in the past,” Bregier said.
Notwithstanding Airbus’ improvement in its programme management, Airbus chief executive Tom Enders admitted the A350 XWB programme “ran into some serious problems” which prompted the world’s largest aircraft manufacturer to announce the 3 to 6 months delay, adding without ensuring the programme maturity on the A350, “you’re setting yourself up for disaster”.
Worse still, Aspire Aviation‘s sources at Airbus described the shortage of small parts manufactured by tier 2 suppliers as an “ongoing problem” and the additional margin of several more months built in the 6-month delay, is “being chipped away”.
Further compounding matters is the overweight issue on all three variants of the A350 XWB family. The A350-800, Aspire Aviation‘s sources say, has the most serious overweight issue amongst all three members whereas the A350-1000 is around 5 tonnes (11,023 lbs) overweight. With the 5 tonnes overweight issue, the improvements announced at last June’s Paris Air Show, which saw the thrust of the Rolls-Royce Trent XWB engine powering the A350-1000 being increased from 93,000 lbs to 97,000 lbs and the range of the aircraft being increased by 400 nautical miles (nm) to 8,400 nm or its payload being increased by 4.5 tonnes over the same range, will only enable the A350-1000 to meet the aircraft’s original payload/range specification, including a range of around 8,000 nm.
Interestingly, the A350-900 is the aircraft variant least affected by the overweight issue since the -900 is the optimised platform and engineering resources are being further diverted to the -900 development from other variants, these sources say.
As a result, Airbus faces a choice of announcing further delays in the A350-900’s entry into service (EIS) in order to maintain the A350’s programme maturity or accepting an increased level of travelled work and design changes flowing into Toulouse’s final assembly line (FAL). Given the indications by Airbus officials on the airframer’s intention to keep the amount of travelled work at a manageable level and ensure the programme is at a sufficiently mature level before ramping up production, Aspire Aviation believes another A350 delay in 2012 is more than likely.
“This programme will likely be a challenge for several years. Feedback we have received from customers is that the A350 is considerably overweight at this stage. The programme has also become more complex with the need to develop a second engine core to provide sufficient thrust for the A350-1000. Some customers, particularly in the Middle East, have complained that the current design of the A350-1000 is not large enough for their requirements, which is making a potential stretched 777 variant increasingly attractive,” New York-based Bernstein Research said in a January 19th note to clients.
Bernstein Research does not expect the first A350-900 to be delivered until mid-2015, with 29 deliveries in that year, whereas Credit Suisse expects 10 and 25 -900 deliveries in 2014 and 2015, respectively, according to a January 17th note to clients.
Meanwhile, the A350 XWB sales in 2012 are likely to continue to be subdued, mainly owing to concerns on the development and execution of the A350 programme and airlines waiting for Boeing’s competitive response towards the 350-seat A350-1000. The A350 programme received 10 orders in 2011, which was negated by 41 cancellations, including the cancellation for 6 A350-1000s from Abu Dhabi-based Etihad Airways, leaving a backlog of 555 aircraft. This would be a positive factor for Boeing and its lucrative 777 programme, which is expected to have yet another strong year with healthy sales in 2012. Although the 777 delivery slots are not available until early 2015, the short-term demand for the 777 will continue to be strong between now and the 2017 entry into service (EIS) of the A350-1000 whereas an upgraded 777, provisionally dubbed the 777-8X and 777-9X, will secure the “big twin” programme’s longer-term future.
In contrast to Airbus chief operating officers (COO) customers John Leahy’s contention that Airbus is in discussions with three major airlines and that the primary issue is “getting them early delivery positions”, Aspire Aviation understands Hong Kong-based Cathay Pacific Airways, which ordered 6 additional A350-900s last Friday with a total order of 38 A350-900s, including 2 leased examples, is among those three major carriers being mentioned and that the A350-1000’s relatively small size compared to the 365-seat Boeing 777-300ER or its as-yet-unlaunched successor 777-9X which is going to accommodate 380 to 390 passengers, is the main issue that potential A350-1000 buyers are dissatisfied with.
With a request for proposal (RFP) for a 100,000 lbs engine sent to General Electric, Rolls-Royce and Pratt & Whitney (P&W) (“Boeing eyes 787 production improvements along with production ramp-up“, 11th Jan, 12) and a 2013 launch in addition to a 2019 entry into service (EIS), according to Aspire Aviation‘s sources, the proposed 777-9X will be a threat to the A350-1000, particularly the difference between the service entries of these two competitors is small and that the 777-9X will be able to carry considerably more revenue cargo and passengers than the A350-1000 over a similar, if not longer, distance.
The 777-9X is expected to feature a composite 787-styled wing, a new engine offered by one or two engine manufacturers, most likely the GE-9X with a 128-inch (325 cm) fan size with an extension of General Electric’s (GE) existing exclusivity on the biggest 777 variant, will deliver a 10% to 15% lower fuel burn per seat over the 365-seat 777-300ER whereas Airbus advertises its A350-1000 as being 25% more fuel efficient per seat than the 777-300ER (“Boeing 777X likely to be highly efficient derivative“, 14th Sep, 11).
Production ramp-up, programme improvement drives EADS earnings higher
Besides development at the A350 programme, production ramp-up will be another focus of the year. Airbus expects to deliver 570 aircraft this year, surpassing this year’s figure of 534, including around 30 A380 superjumbos.
Investment bank Credit Suisse forecasts Airbus to deliver 574 aircraft this year, including 442 A320 family aircraft, 103 A330s and 30 A380s which will climb and settle at 37 A380 deliveries beginning 2013, whereas its transatlantic arch-rival Boeing will deliver 600 aircraft this year.
“In 2012 we expect Airbus to deliver 574 aircraft – 4 above today’s introduced 570 aircraft target. For Boeing we forecast 600 deliveries in 2012, driven by delivery ramps on the 747 and 787, which would give Boeing a 51% share of the 2012 delivery market,” Credit Suisse said in a research note issued on 17th January.
Interestingly, New York-based Bernstein Research forecasts Airbus will still marginally maintain its leadership position in terms of number of deliveries, with Airbus delivering 582 aircraft this year versus an estimated 580 deliveries at Boeing, including a lower number of 787 deliveries from 52 to 47. Bernstein Research forecasts 31 A380s will be delivered this year, before settling on 34 annual A380 deliveries from 2013 onwards.
“We are reducing our delivery outlook for Boeing’s 787 for 2012 to 47 (down from 52), which leads to lower revenues and a reduction in our 2012 earnings number by US$0.01. From a stock perspective, we continue to prefer EADS over Boeing because of the timing of new development programmes. We see the risks as immediate and near term for Boeing’s 787. With Airbus, the greatest risk is the A350. But, we do not see that as material until the programme approaches first flight, which is not scheduled until Q2 2013,” Bernstein said in a 23rd January note to clients.
“A380 is in serious production. For us after all the troubles, 2011 was the first real serious production year for the A380,” Airbus chief executive Tom Enders commented.
A noteworthy point is the A380’s production system has made a significant improvement over the past year, with the production drawing backlog and design changes dwindling to a level typically seen in other aircraft programmes, and that the unit cost in producing an A380 has come down considerably, according to Aspire Aviation‘s sources at the European plane-maker. Should this improvement be sustained going forward, as it is likely to be the case due to the disappearance of the disruption caused by a scramble to find “Mod C” Rolls-Royce Trent 900 engines as a result of Qantas’ QF32 uncontained engine failure in November 2010, Airbus’ goal in achieving a break-even on a unit basis in 2015 seems realistic and achievable.
“We estimate that the A380 is losing about €1 billion per year, which we expect to come down steadily during the next 3 years. The production system is maturing, pricing should be better, and in 2012 we estimate that Emirates should account for roughly 40% of deliveries, improving commonality in the production process,” Bernstein said in the 19th January note, adding the A380 is “the greatest source of potential margin improvement”.
In preserving and growing the A380 backlog, Airbus chief operating officer (COO) customers John Leahy vows to sell 30 or more A380s this year and achieves a book-to-bill ratio of 1 or more.
“I’ve told Tom [Enders, Airbus' chief executive] that I’m going to sell 30 A380s this year. Thirty is a good number because we’re going to try to keep the book-to-bill ratio at at least one or better,” Leahy said.
Meanwhile, Airbus is evaluating a production ramp-up at the A330 programme beyond the target of 10 per month to 11 per month, along with the evaluation of an addition of sharklets to the A330 aircraft and increasing both the A330-200 HGW (high gross weight) and A330-300’s maximum take-off weight (MTOW) to 240 tonnes from the A330-200 HGW’s current MTOW of 238 tonnes.
“Right now we’re still several months away from a decision,” Airbus chief operating officer (COO) customers John Leahy told flightglobal, adding the study was prompted by the sharklets on the A320 flight test aircraft “getting better results than we thought” and exceeding the original fuel burn reduction target of 3.4%.
While the A330 improvement with sharklets may serve well in reducing fuel burn by around 2% with a manageable amount of reinforcement in the centre and outer wing boxes, as well as providing a shield for Airbus in light of the A350 delays and further delays in the pipeline, which helps Airbus capture part of the demand created by the need of interim capacity and minimise the loss of potential sales to the Boeing 777, a mission creep by an upgraded A330, and possibly an A330 re-engining whose concept is favoured by AirAsia chief executive Tony Fernandes will further decimate the business case of the A350-800, whose business case is already undermined by the most serious overweight issue and a “few per cent” higher block fuel burn.
While an improved or re-engined A330-200 HGW would not perfectly match the specifications offered by the shrunk model of the baseline A350-900, as the A350-800 has 270 seats whereas the improved A330-200 carries 253 passengers and the sharklets are unlikely to enable the A330-200 HGW to match the A350-800’s range of 8,500 nautical miles (nm), a re-engining move with a 15% more fuel efficient engine such as the GEnx engine being 15% more fuel efficient than a CF6-80C2 engine, could entirely change the picture and effectively kill the A350-800.
In conclusion, with the fundamentally strong demand for the A320neo, coupled with the continuous improvements in the A380’s production cost, as well as production ramp-ups across the entire product line and a weak euro will drive the earnings of European Aeronautics, Defence & Space Co (EADS), Airbus’ parent, higher, 2012 will be a critical and challenging year for the A350 programme whose development is undoubtedly going to be scrutinised closely by Wall Street analysts and the like.