RichardAboulafia.com 

:: February 2010 Letter ::

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Dear Fellow Frequent Flyer Mile Accumulators,

If you’d like to be a pundit, one surefire way to start is by genuflecting toward Asia. Just say the magic words, “This is the Pacific Century.” There’s plenty of economic and demographic data to back you up, so take the idea, run with it and wait for the book deals and TV interview people to show up at your door. Asiaphilia is a boom market for pundits—Google the words “Asia,” “coming,” “rise”, “global,” and “dominance,” and you’ll get about a squazillion hits (for a superb summary and refutation of this view, see Joshua Kurlantzick’s Dazzled By Asia in The Boston Globe, February 7). The problem is that the aircraft industry listens to pundits. They influence product design decisions. As a result, in both the jetliner and military markets, something might have gone awry with product development.

I had plenty of time to think about this issue recently while on an 18 hour flight to Singapore. There’s nothing more dangerous than giving an aerospace analyst an 18 hour plane flight, a bottomless coffee cup, and a laptop. My conclusion is that everyone designing a jetliner or a fighter wants a customer like Singapore. That’s a mistake.

Take, for example, the A340-500 that I was on. Or, take the analogous Boeing 777-200LR. Both required significant development cash to pursue a marginal market (fewer than 100 planes combined). But those are mere derivatives. By contrast, any version of the A380 would bankrupt anybody operating more than a few planes on other than very long-range routes. With its giant wing, landing gear, and other structures, it too was designed to cater to the launch customer—Singapore Airlines.

The problem is that excessive and expensive capabilities get worse with the next generation of jets. Like the A380, the 787 and A350XWB are baselined for airlines that need lots of range, even if the operating economics are much worse for routes shorter than 6,000 nmi. Both offer revolutionary new materials and features, but they have big wings and big fuel tanks. In fact, in the past month, Boeing shelved the 787-3, optimized for shorter routes. Airbus also killed the smaller A350XWB-800 wing, meaning this version is stuck with the -900/1000’s extra weight and capability that most customers don’t need. I’ll bet a 1995-model 767-300ER will have better costs for many transatlantic flights than the all-new 787. Ditto for a 1995-model A330-300 relative to the all-new A350XWB. I’ll bet that when Boeing replaces or upgrades the 777, it will have a bigger wing, and will be optimized for…wait for it…long-range Pacific routes.

Who will serve the 767-300ER/A330-300/777-200ER market? In an age of production line rationalizations, the lower level of demand coming from those old fogey slow-growth economies on either side of the Atlantic might not be enough to sustain these products (the term “The Pacific Century” implies that the Atlantic is so 20th century). In fact, with the 787-3 dead and the A350XWB-800 unique wing now cancelled, will jetliner manufacturers even trouble themselves to offer products to non-Pacific markets that don’t want to pay for huge honking wings? One day, after screwing around with the disastrous ARJ21 and the dubious C919, China might decide to attack the jetliner market with a twin aisle twin engine jet optimized for 4,000-5,000 nmi routes, effectively a 21st Century A300/A310/767. That could be a serious shock to Airbus and Boeing. It would serve the pundits right—an Asian industrial power succeeding because the Western manufacturers were too busy following the pundits advice and designing planes primarily for Pacific needs.

There’s a similar dynamic underway on the combat side of the business. Eurofighter, Rafale, F-15, and most of all F-35 JSF have $60+ million (unit recurring) price tags. Yet only six export customers have ever purchased aircraft in this class. Of those six, three—Singapore, South Korea, and the UAE—joined that elite club in the last ten years. The others are Saudi Arabia, Israel, and Japan (for obvious reasons, don’t count Austria’s single Eurofighter squadron).

We don’t know F-35 export pricing yet, but it’s safe to say that this is not another $40 million F-16. The F-35 people might be making a mistake assuming that dozens of countries will follow Singapore and graduate to more expensive planes. Singapore is one of the ten countries with participation in the F-35 program (at the junior SCP level). Yet ominously, while I was there, one of my hosts, a professor at the S. Rajaratnam School of International Studies, opined that Singapore would have to wait and see about F-35 pricing, but he thought it might be too expensive. If F-35 costs grow too expensive for Singapore, what would that say about the plane’s appeal to the broader export market?

And how about the 40 customers that buy fighters costing less than $60 million? As with jetliners, who will serve the bulk of the fighter market with less demanding requirements? The F-16 continues to chug along, but Lockheed has shifted its efforts to the F-35. Dassault’s Mirage 2000 is dead, replaced by the much more expensive Rafale. While two-thirds of Mirage orders came from export customers, Rafale has yet to secure a single firm international contract after two decades of trying. The biggest lost competitions for Rafale were the three countries that joined the elite high priced fighter club—Singapore, South Korea, and the UAE. Ten years later Rafale has another chance in the UAE, but there aren’t enough other high end markets to make its prospects look bright.

For a few countries like Singapore, heavy reliance on expensive technology makes a lot of sense. Beloved national champion Singapore Airlines is domiciled on the exact opposite side of the planet from just about every market they serve, so range is at a premium. From a national defense standpoint, Singapore will always be outnumbered, and it's in a dangerous neighborhood. As with Israel, technology offers the only solution. Singapore has no natural resources, unless humidity counts. The Economist reports (October 8, 2009) serious problems with the country’s imported sand supply (for construction), and there’s a strategic sand reserve. Manpower is an issue too. In 1990, citizens comprised 86% of Singapore’s population, but thanks to immigration, this figure has dropped to 64%. Even now, unemployment is virtually nonexistent (~3%). In short, with limited resources and manpower, technology is at a premium. As a result, Singapore is a wealthy outlier in terms of aviation requirements.

My conclusion after my recent Singapore visit: they’re more than just a giant shopping mall with a seat in the UN. They’ve got a first-rate military and a first-rate airline. Both of these have a sophisticated, respected, and well-funded approach to equipment procurement. But the world’s aircraft builders shouldn’t make the mistake of thinking that Singapore is typical of the world market.

We’ve updated the Fighter Overview this month, along with the F-35, F-16, 777, B-1, Challenger 300, and S-3. If you live in my neck of the woods, enjoy the great snow melt.

Yours, ‘Til Singapore Airlines Gets Cabotage Rights In The US,
Richard Aboulafia


 

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