:: June 2007 Letter ::
Just back from the best Le Bourget ever. The industry has never seen such strong demand. All markets—jetliners, business jets, combat aircraft, rotorcraft, the aftermarket, etc.—are doing exceptionally well, hitting record highs. The biggest problems for most manufacturers concern increasing production. Boeing’s 787 looked even more successful and revolutionary. Airbus began its long path back to recovery with some badly needed A350XWB firm orders, most notably from Singapore and USAirways (the A350 still needs an ILFC and/or GE endorsement, though). People at the show were focused on the right projects. The A380 went largely unmentioned and Very Light Jets were mercifully absent. The weather was good, the air conditioning worked, and the transport union didn’t strike.
I was disappointed, of course. I’m an aircraft market critic. My raison d’etre is to stop people from investing in dumb projects, but everyone was focused on building smart planes. Dazed and confused, I wandered the cornucopia-like chalets, bewildered by all the happy people I met. As I paused to nibble listlessly on langoustines washed down with Sancerre, I wondered: How can I be a Cassandra when things are great?
Thankfully, there’s the 100-seat market and its myriad wannabe players. Their underfunded pipedreams rescued my cynicism from the deadly embrace of happy times. Paris saw news—or something like it—on the Bombardier CSeries, China’s AVIC ARJ-21, the Mitsubishi Regional Jet, and Russia’s UAC/Sukhoi Superjet 100. Four fish to shoot in just two pages.
Let’s start with the dumbest development. Just before Paris the European Bank for Reconstruction and Development (EBRD) announced a $100 million loan to help UAC build the Superjet. Let’s see if I can grasp this: a European government agency is loaning $100 million to a Russian company that’s wholly owned by Russia’s charmless government. That government recently hinted it was targeting Europe with nukes. The Russian government company will use the loan to build a product that partly competes with European aircraft. I’ve seen many dumb ideas in this industry, but this looks like a record-setter. How to explain it? Three possibilities:
1. The EBRD is clueless and/or scared, proving Lenin’s maxim that the West will sell the commies the rope it uses to hang them. The neocons were wrong to call the Europeans a bunch of cheese-eating surrender monkeys, but perhaps this is what happens when the EBRD meets vodka-drinking attack monkeys.
2. The EBRD consists of socialist party apparatchiks who secretly envy the Russian economic system. The loan is a professional courtesy.
3. The loan is a subsidy intended to help European suppliers that made poorly thought-out investments in the Superjet program. This possibility gives the EBRD more credit for smarts, and less credit for honesty. That gets my vote.
Speaking of poorly thought-out ideas, Paris also saw a mutual investment agreement between Bombardier and China’s AVIC 1. Neither of these guys spend much on new product development, but AVIC agreed to invest $400 million in the CSeries (if it’s launched), and Bombardier agreed to invest $100 million in the ARJ21-900 (if it’s launched). Perhaps the illusion of progress on these projects is better than no progress at all. The ARJ21-900, by the way, competes with Bombardier’s own newly-launched CRJ1000. I suspect when the meeting ended both sides forgot to sign their post-dated checks.
As a long-time CSeries skeptic, I’m going to reverse myself. Partly. The latest CSeries design is far more impressive than the original proposal. That first iteration was stuck in a ‘70s time warp, offering airlines little more than out-of-the-box obsolescence. The latest version actually has some promise—composites, new engines, etc. But Bombardier continues to spend embarrassingly small sums on new product development—an average of 1% of sales for the past 15 years, with no signs of growth. Launching the CSeries would require them to quadruple that investment level, even with government help. In this context, that AVIC agreement makes no difference, particularly since AVIC 1 has never designed and built a jetliner fuselage.
Finally, there’s the 70/90-seat Mitsubishi RJ, the latest in a long line of proposed Japanese RJs. Press and analyst reports were all over this handsome plastic model and the brochures that came with it. The business case clearly represents a fantastic value proposition…as long as the Japanese taxpayer delivers a dump truck full of cash every so often. The project depends on $330 million (just for starters) in up-front government funding. This means that while it might become a competitive product, it really shouldn’t be confused with a value-added business proposition. On the other hand, since it draws on Mitsubishi’s 787 composite technology, it actually offers something new.
You can’t blame Mitsubishi. Why spend your own money when history indicates there’s no great reward? Look at the core of this market. Add up all the 80/120-seat deliveries over the past 10 years—A318s, Avro RJs, 717s, 737-500/600s, CRJ-900s, ERJ 190s. Together they represent 3% by value of the total air transport industry (jetliners and regional aircraft). Adding 70-seat jets gets you another 2%. The CSeries extends to 130 seats, but that project remains in a whole different class of weirdness.
There are signs of growth in this segment—80/120-seaters comprised just 2% of the market in 1997. Thanks to Embraer’s 190/195, they leaped to 5% in 2006. But while the ERJs and Bombardier’s CRJ 900/1000 rack up respectable orders, we aren’t seeing the level of demand needed to justify new products—they garnered 237 new orders last year. That makes for exactly two moderately healthy programs. Aside from the Mitsubishi jet, the new proposed jets offer no new technology that make the current planes obsolete or that would stimulate market growth. If the Japanese taxpayer pays to bring the Mitsubishi jet to market, I hope the world’s airlines take advantage of their largesse.
Remember: inside every silver lining, there’s a dark cloud. But Le Bourget was mostly about silver linings. Teal’s aggregate aircraft forecast calls for industry growth through 2010 at least, which will mark an impressive seven year growth spurt. This month’s reports: the Trainer Overview, covering another over-rated market. Also, the A400M, Tornado, LCA, ALH, Rooivalk, and AMX. Enjoy the prosperous times.
Yours, Until More Bad Ideas Re-Haunt The Industry,
© Richard Aboulafia 1997-2006, All rights reserved.