RichardAboulafia.com 

:: December 2016 Letter ::

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Dear Fellow Brexit, Turkey Coup, Mideast Horror, and, oh, right…US Election…Survivors,

Last year’s December letter presented the companies and aircraft that experienced a strange mix of very good and very bad fortune in 2015. This year was a lot less ambiguous; so, I’m going back to my winners and losers year-end letter format. In keeping with one theme of the year, I will divide these into “Yuge!” and “Sad!”:

Yuge! #1: Boeing Military Aircraft. An amazing year. Qatar become a new F-15 customer with 36 firm orders and possibly 36 more. The Super Hornet got 28 orders from Kuwait, while Canada decided to order 18. Canada will still consider the F-35 for the remainder of its fighter requirement, but since the RCAF probably won’t operate two fighter types, this could mean 47 more Super Hornets. It also looks like the Navy has the desire and budget to keep buying 10-15 Super Hornets annually, probably through FY 2020 at least. The P-8 is in great shape too, with a UK order for nine, while Norway announced plans to order five. The KC-46 largely stayed out of the headlines, which, by the standards of this program, is a respectable accomplishment. Only downside: the final C-17 delivery, in February.

Yuge! #2: Defense Markets in General. They’re going up worldwide, particularly as old alliances fragment, tensions increase, and fear prevails. Global spending rose in 2016, for the second straight year (2015 saw the first worldwide increase since 2011). And the Trump administration promises great things for defense. The only downside: having to suffer through the occasional Trump tweet, aimed at pandering to the base and convincing them that he’s not just going to throw tens of billions of dollars at defense contractors (which he will). Investors will acclimatize to these tweets once they realize the upward trajectory of defense company share prices. The US’s allies are spending more too, as they fear abandonment by the US and its Putin-friendly president and his national security advisor. Despite weak economic outlooks, resource-rich states are prioritizing defense too.

Yuge! #3: A321neo. Through November, it has 1,376 orders versus around 250-350 737MAX9s (Boeing doesn’t break them out). Turns out, the 321neo is a great 757 replacement, and just a great plane, period. This puts Airbus in the Middle-of-Market driver’s seat, putting the burden on Boeing to do an all-new jet in this space. Boeing is also contemplating a 737MAX10 with Rube Goldberg-esque landing gear.

Sad! #1: The Twin Aisle Market (and jets). After a remarkable 15.7% annual growth rate from 2011-2015, output has plateaued. Until 2012, no twin aisle had been built at rates of 100 planes per year. Since then, we’ve seen both the A330 and 787 rise above that level, and the 777 peaked at 99, and the A350XWB will exceed 100 in a few years too. But overcapacity, particularly in the Mideast, has led to a serious orders drop this year. Earlier this month Boeing announced a second 777 rate cut in 2017 (from seven to five per month). Looking at orders, there will be further 777 rate cuts in 2018 and 2019. The company also deferred plans to go to 14 787s per month. Meanwhile, Airbus’s A330neo order book seems to have stalled out. Which leads us to…

Sad! #2: The A380. I’ve always been the most pessimistic forecaster on Airbus’s WhaleJet, yet reality has consistently proven me too optimistic. Teal’s forecast calls for the last delivery in 2019; reading the tea leaves and looking at the numbers, this too may be overly optimistic.

Sad! #3: Large Civil Rotorcraft. Weak oil prices have led to multiple operator bankruptcies, leading to surplus helos and minimal demand. Civil S-92, AW139/189, and Super Puma deliveries look set to fall by 40% in 2016, unless we have a miraculous fourth quarter. Unless we see a recovery, there could be a lot of pain among the producers – Airbus’s H175 is off to a slow start, while Bell’s 525 looks set to arrive at an inauspicious moment.

Not everything was black and white. A brief list of 2016’s noteworthy planes in the middle:

1. 787. Performing well, but the order book does not support any further rate hikes, and the current rate may be unsustainable beyond 2019. Recurring costs finally turned cash positive, but only after about 500 deliveries. That leaves 800 jets in the accounting block to pay back $29 billion in deferred costs, or $36 million per jet. That does not sound achievable.
2. F-16. This record-setting program may close in late 2017, the first Western export fighter line to close since Tornado died in 1997. But it’s in a strong position in India, a possible 100+ fighter order. If Trump changes the US’s China policy, a Taiwan sale is possible too.
3. Scorpion. Still no launch order. But in 2016 Textron announced plans to build a batch on spec. That’s right – military aircraft white tails are now a thing. Boeing’s C-17 white tails were easily sold, but it had a large user base. This is another story completely.
4. CSeries. Tiny numbers delivered, and concerns about Bombardier’s financial wherewithal to do the ramp, particularly due to large business jet market weakness. Still waiting for more Canadian government assistance. But the plane itself looks excellent.
5. F-35. Solid orders, sluggish deliveries, generally positive performance. As predicted in my last month’s letter, it got a Trump tweet, again best ignored. More seriously, in November DoD unilaterally imposed a Lot 9 LRIP contract, after failing to reach agreement on price. LockMart may need to re-think both price expectations and government relations on this.

So, that’s 2016 in aircraft. The big theme: the military side looks great, while the civil markets have either peaked or are falling. That depressing reality sums up the world. And it’s virtually certain that both trends will accelerate over the next four years.

Finally, I would like to note the passing of my old friend John Newhouse, earlier this month. The Sporty Game, published in 1982, remains the single best book about the aviation industry. I got to know him as he began writing Boeing Versus Airbus, published in 2007 and also essential. But just about everything John wrote during his career, which began in the 1950s, is superb (particularly War and Peace in the Nuclear Age). My thoughts are with his wife and family.

December Aircraft Binder updates include the F/A-18, AW109/119/169, CH-47, Tucano, AH-64, and FalconJet reports. Please note: we’re still running a bit late with these due to a new publication system; my apologies for that. And all the best for the holidays.

Yours, ‘Til 2017 Brings Us Something Less Horrible,
Richard Aboulafia
 

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