:: December 2014 Letter ::


Dear Fellow Year-End List Enthusiasts,

Sure, I could write yet another letter about the A380. My favorite target was back in the news for all the wrong reasons this month. Airbus spent its investors’ conference grappling with the A380’s grim commercial situation, with one executive implying that the plane could die in a few years and another promising that it would be rejuvenated with new engines. There’s so much to say about this. But that’s just one aircraft in Teal Group’s coverage universe. Let’s spread the wealth, and look at the highlights and lowlights of the year. First, the planes that had a great 2014:

F-35. Love it or loathe it (there’s not much middle ground), JSF is doing fine. Amidst all the fierce debate, somehow over 130 production aircraft have been delivered. Congressional Appropriators added four planes in FY 15, raising the year’s total to 38 planes. International demand is also growing, with assembly lines in Italy and Japan now firmly contracted. While output over the next three years won’t rise much, we forecast annual production to finally get above 100 planes by 2019.

F/A/E/EA-18G. The Navy and Boeing are doing great keeping the Super Hornet series going, and the Navy doesn’t seem to want alternatives such as the F-35C or UCLASS. Congressional Appropriators added 15 Growlers in FY 15, giving the line another year of life. Also, Chief of Naval Operations Admiral Jonathan Greenert told Reuters’ Andrea Shalal that the Navy was considering further buys. “Before we close the books and call it quits on Growlers, we want to make sure we’ve got the electronic attack right,” he said. Teal Group is adding another year to our forecast (on top of the FY15 buy), delaying line closure until late 2018.

Gripen NG. By paying attention to the part of the market neglected by the US primes, Saab is starting to reap dividends, with a strategic win in Brazil this year. One notch down on the market, Korea’s KAI is also doing well with its FA-50. Fighters are a price-sensitive market, and it pays to think in terms of price points. To look at it from another direction, since Lockheed Martin is totally focused on the F-35, the F-16 had another bad year.

A320neo. A successful first flight and more strong sales made 2014 a great year for a promising series. It’s maintaining an impressive lead over Boeing’s 737MAX. Also, Airbus introduced the new A321neo LR, which is most of the way towards 757 performance with much better economics. The market for a 757-class jet remains extremely strong. This could force Boeing to rethink its single aisle strategy, and perhaps to even re-think its no-new-jet-until-2030 mantra. That, of course, might entail Boeing re-thinking its 25% dividend increase and $12 billion share buyback, announced this month. In other words, Boeing’s prioritization of shareholders over new jetliner development is a strong argument for airlines to buy A321neo LRs.

A330neo. Airbus and Boeing have one thing in common: they’d rather this aircraft didn’t exist. Any successful re-engined jet makes the engine guys look like they’re in charge, and makes the airframers look like they just don’t have that much to offer. Besides, using new engines to rejuvenate a 25-year old platform makes the high-tech new-generation (A350XWB and 787) look less like game-changers. The A330neo also kills the A350-800. But with several hundred out-of-the box orders, plus key endorsements from Delta and Air AsiaX, there’s no doubt the A330neo was a great idea waiting to happen.

Now, the planes that had a really bad 2014:

Scorpion. Textron/AirLand’s curious response to a problem that does not exist spent its second year in limbo, with no orders at all. By year end, the company was mentioning sales leads from the UAE Air Force Aerobatics Team (nothing impresses air show crowds like a business jet derivative doing loiter passes) and the Nigerian Air Force (“We got an email from the Chief Admiral of their air force! He wants to deposit progress payments in our checking account!”).

CSeries. On top of its ongoing commercial drought, the CSeries suffered an engine failure and a 100-day grounding this year. If you’re hyper-optimistic, you might believe Bombardier’s contention that it will enter service in the second half of 2015. In reality, this next generation jetliner will arrive well after the A320neo, which is terrible because much of its appeal rested on being first to market. Also, because of this carnivorously expensive project, 2014 was another year of personnel carnage at BBD.

KC-46. Boeing has well over a decade’s experience trying to turn the 767 into a tanker, and half a century’s experience as a tanker prime. I’d have thought they’d learn from the difficult Japan and Italy KC-767 programs. How hard can it be? But at year’s end, Boeing’s cost overrun (eaten by the company under the terms of a fixed-price development contract) was up to $1.5 billion. The first prototype was supposed to fly at the start of the year, but we’ll see if it flies before 2015. Meanwhile, Airbus’s KC-30 is cornering the export market, with 46 firm orders and eight more being negotiated. There are few undecided export customers left.

747. The plane that most deserves the title “iconic” spent another year getting bruised by market forces and internal competitive threats. The -8 production rate was cut to near-minimum levels, largely due to a weak cargo market clobbering the -8F. The 777-9X looks good enough to kill the 747-8I. The last few -8Is will be the Air Force One planes, built before decade’s end. Meanwhile, 747-400s are retiring faster than anyone thought possible.

A380. But of course. As with the US Senate torture report, in many ways it’s a sign of Airbus’s maturity that they can frankly discuss past mistakes. But they’re also trying to mollify Emirates, the only A380 customer that matters, by mooting an A380neo (I prefer A380siw, for Self-Inflicted Wound). If you remove aircraft that won’t be delivered from the order book (Virgin’s, for example), and set aside Emirates’ huge position, there’s fewer than 40 A380s on backlog. Teal Group’s new forecast calls for the A380 to die by 2021. Don’t have any illusions about that A380neo; one-customer business cases are impossibly dumb. But if it does go ahead (it just might) I’ll have a great topic for another letter.

Lastly, I’ll copy the New York Times Magazine by awarding one “Meh” (“Not hot, Not not, Just Meh.”) The 787 had a decent year in service, and it continues to perform and sell well. But that battery issue never went away. The new battery containment system prevents disasters, but it also reminds us that Boeing didn’t do any root cause analysis of the problem. Worse, in October, 787 deferred production costs exceeded $25 billion, partly due to management’s profound distaste for the people who actually produce the plane. Meh.

Teal Group aircraft reports in December cover the F/A-18, CH-47, B-2, FalconJets, AH-64, E-3/E-737, E-8/JSTARS Recap, Super Tucano, and Su-30. Have a great holiday season and a great new year.

Yours, ‘Til 2015 Gives Us The Slightly Higher Fuel Prices That Only Our Industry Wants,
Richard Aboulafia

© Richard Aboulafia 1997-2006, All rights reserved.
  ~  Last updated on January 08, 2006