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:: September 2000 Newsletter ::

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Dear Future Very Large Aircraft Inhabitants,

This month’s letter was going to be about aerospace privatization rip-offs. But events have obviously intervened, and now I get to write about current events—Singapore has ordered 10 firm and 15 option A3XXs. Arguably, this was the most important aircraft order in a decade. As a long time A3XX atheist (lately converted to an A3XX agnostic), I find myself suddenly forced to smell the espresso. If you’ve got a moment, I’d like to offer my humble contribution to the post-order debate:

Why This Order Is Significant. Very simply, this is the first real order for the A3XX. The ILFC order was speculative. Air France was a given. Emirates? Don’t ask. But Singapore is a seriously profit-conscious, competently run airline, with a track record of very sincere aircraft orders. And a lot of airlines in the region—Cathay, Malaysia, Qantas, etc.—tend to follow their example.

Also, this order was larger than expected, and did not include a Boeing consolation prize (e.g., a few 747-400 freighters, or 777s). That hurt, especially since Singapore unquestionably represents the largest short-term source of large aircraft demand. And this was also the end of Boeing’s last, best chance to disrupt the A3XX business case. To their very great credit, by the way, Singapore didn’t drag the process out, like all of the recent fighter competitions.

What Will Happen Next. An A3XX industrial launch decision is inevitable, probably before 2001. The development timeframe is very ambitious, but by late 2006 the odds are that A3XXs will be flying in airline colors. I still think this is a bit premature, but right now, it’s tough to argue with success.

Boeing’s Response. First, Boeing held a press conference to control the damage. This wasn’t great, but was probably better than not holding a press conference. They also posted scores of new orders to their web site, but most of these, lamentably, were for unidentified customers. This move was aimed more at calming equities markets than anything else. Finally, British Airways, with or without Boeing’s encouragement, issued a statement saying that large planes were not in its immediate future, and that it was committed to reducing capacity by 12% using Boeing 777s and other smaller, long-range planes. This was a sensible view of the world. But from a market impact standpoint it amounts to little more than a rear-guard action (by people who think like I do).

Obviously, Boeing’s highest priority is to launch the 747-X, and it had better appeal to passenger operators as well as freight (Boeing has been emphasizing the design’s freight appeal lately, and you can’t have a pure-cargo aircraft program). Boeing’s best strategy is to secure Japan, which is often followed by Korean and Taiwanese carriers. In short, attack the North Asia market, taking advantage of 747-X/777 commonality. Of course, Japan’s economy is basically in limbo, and convincing JAL or ANA to add more capacity now would be tricky.

Let’s spell out a worst-case scenario. Japan doesn’t recover in time, and this turns into a winner take all market. The A3XX corners the new large aircraft market. 747-X dies, and the last 747-400 is delivered around 2009, ending the 747 program after a magnificent 40 year run. The A3XX and Airbus’s vaunted cockpit commonality strengthens the A340-500/600’s market standing in Asia against the 777, and all other Airbus products benefit as well. Disheartened, Boeing accepts a second-place position in the jetliner market, and emphasizes space, military, and service products (all of which offer higher margins anyway).

What are the odds of this Seattle-unfriendly scenario coming to pass? Probably around 25%—Japan remains a loyal Boeing customer. But that’s enough for concern. And there are precedents—it’s not too different from the fate that befell Lockheed and McDonnell Douglas’s commercial business. Of course, there is also the chance that Boeing’s board would approve the money necessary for an all-new plane that arrives on the market a few years later. It could leapfrog the competition with a more appealing product, clobbering the A3XX the same way the 777-200 clobbered the A330-300. But that would represent a lot of development spending for a potentially limited market, and Wall Street would probably take a dim view of it.

The Down Side for Airbus. Sure, it would be churlish to darken Airbus’s great victory with a few doubting comments. But that’s me. Churlish. First, the A3XX will not cost $10.7 billion to develop. As costs rise, EADS will pay. This could provide an ongoing damper on EADS’s stock price. Next, there is sizeable up-front demand for this plane (around 80 aircraft), but after these orders are filled the program will face some bleak years, roughly akin to Boeing’s experience after 747 deliveries began, or Lockheed after L-1011 deliveries began, or McDonnell Douglas after MD-11 deliveries began. This is particularly true if a successful 747-X absorbs more than 30% of the market. These hard years for the A3XX would further impact EADS finances.

As for the public money angle, well, let’s not go there (if you want to read my comments on this, from an article in Aerospace America, please send me an e-mail). Europe’s A3XX public funding is perfectly legal. Of course, you could ask questions about a continent-wide economic system that uses public money to mask concerns about a project’s true Return on Investment. Such a system, repeated numerous times, might be the cause of a slumping and vulnerable European currency, as investors seek higher returns elsewhere. This will lead to growing pressure for more government action, as seen in the recent euro intervention.

But, let’s not go there either. In the here and now, Airbus has a new very large jet, one that will eventually have an extremely strong market standing. Boeing does not, yet. And there is a chance it might never have one. Which is why the Singapore order was extremely important.

Anyway, about the supplement behind this letter, we’re still skeptical, but more hopeful, about the A400M. The ATR series is still treading water, but an alliance with Embraer would certainly help. The C-17 looks set for a domestic plus-up, but nothing is certain. The 767 is going through some slow times, but an across-the-board product improvement effort will revitalize the series, and should give it a better shot against Airbus’s A330-200. Rafale is still in a difficult “pre-acceptance” period, which seems interminable at this point. Ayres’s Loadmaster now has a “highest risk” rating, but there’s still a production forecast. We’re removing the Saab 2000—truly a beautiful cadaver—from the book, but keep the final copy if you like.

Next month, there will be a business jet update, with new numbers available now (just e-mail me). Other updates will cover F-22, Citation, C-5, Astra/Galaxy, OH-1, and numerous smaller programs. Call with requests, and enjoy the fall foliage.

Yours, In Mea CulpaVille,

Richard Aboulafia
 

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