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:: February 2009 Letter ::

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Dear Fellow Aircraft Occasion Observers,

Second weddings are common. Second funerals are not. But we might be close to seeing one. At the end of January, Bombardier passed its objective date for converting Lufthansaís curious CSeries Letter of Interest into something tangible. It has now been eight months since the CSeries was firmly launched, and yet there are no firm orders. This is disconcerting, not just for the program, but for much broader reasons too.

First, some history. The first CSeries funeral was a joyous event. Introduced in 2004, the first CSeries was less an aircraft and more a generic and cynical effort to tap into government funding from Ottawa and Quebec. A poster child for the evils of government-funded pipedreams, the proposed plane re-defined mediocrity, with a design owing much to Fokker decades ago. It was wisely shelved in January 2006.

The second CSeries was a different creation. The program managers decided that working for a living was actually a good idea. They quit watching daytime TV and started watching for key technological enablers. They found some, most notably Pratt & Whitneyís Geared Turbofan (now the eco-friendly sounding PurePower). They also went with a composite wing, making the CSeries the first narrowbody with a composite primary structure. Composites and aluminum-lithium are 70% of the airframe. It was firmly launched at Farnborough 2008, and even though this was the first aircraft launch Iíve ever heard of without a firm order, Teal put the new plane in its ten year production forecast. It stayed there for six months. Itís out now. Like Captain Oates of Captain Scottís Antarctic expedition, it may be out for some time.

The CSeries isnít dead. But there are obvious reasons why itís taking off like a senile chicken. Oil was pushing $150/bbl per month last July, but is now about $40. This has drastically changed the risk/reward equation for any airline looking at new technology. Thereís less of a pressing need to invest in fuel efficient equipment. Falling traffic makes airlines even more cautious. Bombardierís pitiful IR&D spending record and a foolish and/or desperate CSeries production plan compound these problems, but theyíre secondary factors compared with the big issues.

A second CSeries funeral would be chilling for an industry thatís already skittish, but it could be part of a big wave of chilliness. A struggling Hawker Beechcraft has shelved its Hawker 450. It may shelve its Premier II as well. Cessna, while healthy, may find it needs to slow down its Columbus program due to parent company Textronís severe cash problem. Textronís near-disastrous financial situation will also likely affect new civil helicopter development at Bell. The Mitsubishi RJ has morphed from an ambitious 787-related technojet to yet another 70-seat metal tube. As for the big guys, Airbus and Boeing are postponing their new narrowbody studies, with talk of 2020 service entries. Most of all, the A350XWB development budget is the biggest cause for concern as Airbus enters an industry downturn.

Itís easy to see how new products get hurt by a downturn. As production rates soften (or in the case of business jets, as rates implode) OEMs work to cut any variable costs they can. This includes engineering and business development personnel and new product CAPEX. Given the horrors of the business jet market, this process is not just about profitability. Improving EBITDA is always nice, but for Textron or Hawker Beechcraft or any company dealing with debt and credit issues in a downturn, maintaining EBITDA can become a matter of survival.

These cuts might be short-sighted. After all, this industry can recover fast. Companies that cut their budgets too deeply had a very hard time keeping up with previous market recoveries. But what if the OEMs have lost faith? Perhaps theyíre thinking that weíre entering a prolonged era of anemic growth. The worst case scenario is ugly: a decade (or longer) of economic stagnation, with relatively inexpensive fuel compounding slack demand as a reason to not invest in future technologies and products. If thatís the case customers will simply make do with smaller numbers of current production model planes.

Thatís probably not the future. Betting against six decades of strong global economic growth is risky and foolish. Yet right now the IMF forecast for world GDP growth this year is 0.5%. By many accounts, this is a placeholder, and the real number will be lower. Itís quite likely that 2009 will be the first year since World War Two that the world sees zero or negative growth.

The new aircraft outlook could be worse. The defense budget is still holding up nicely. But what if it doesnít? Military R&D didnít really benefit from the great DoD FY 2001-2010 budget upturn, yet it could be crunched first in a downturn. Killing labor-intensive current production aircraft would be tough during hard times, so here too the new stuff would get hit first. Already the VH-71 looks vulnerable (the program managers didnít make funding easier by creating a helicopter that could fight a nuclear war from the top of Mount Everest). The last great budget crunch killed the P-3ís successor, the P-7. The P-8 looks good right now, but a new budget crunch could invoke the Curse Of The P-3 Replacement. Across the Atlantic, the troubled A400M might die the worst European aircraft death since the 1960s.

Zero growth and a defense budget crunch, in short, mean possible carnage for new aircraft and new aircraft technology. Our industry thrives on innovation, particularly with products that offer better economics to move people. If the CSeries dies again, the second funeral wouldnít be at all like the first. It would be an occasion for genuine concern and perhaps even mourning.

Fewer new planes means that Teal will need to publish fewer program reports, a sad consolation indeed. Februaryís updates include the F-16, 777, S-3, B-1, and Challenger 300. Weíve also updated the Fighter and Special Mission market overviews. Have a good month.

Yours Until My Second Bar Mitzvah,
Richard Aboulafia
 

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