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:: August 2000 Newsletter ::

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Dear Fellow Value Added Synergizers,

Greetings, and welcome to this supplement. August features another update of the commercial jet overview, reflecting that market’s surprising strength and durability. This impressive strength is especially seen in Airbus’s narrowbody family, which has also been updated (and re-named, to include the A318). BAE (formerly BAe—I wonder how much that cost) looks set to go ahead with the RJX incarnation of the 146, but we think it has a rather limited future. BAE is also struggling along with Nimrod, but we think they’ll pull through. I have updated the two Russian jetliners, but this is a very depressing process. The AH-1 has just won the 145-helicopter Turkish competition, but uncertainties about this order prevent us from greatly increasing our forecast.

More routine updates this month cover the SJ30, F-117, A-4, AS.350, AB.139, and others. There is also a revised military inventory appendix. And, I have withdrawn the A-7 and A/T-37 from the book, but please keep the final copies, if you like.

The theme for this month’s letter is “Decisions.” Sure, that’s a pretty lame theme. But on the other hand, there are a lot of decisions now being made, or soon to be made, that will impact the aircraft industry. Let’s look at three of them.

First Decision: big jets. We could see a very serious decision on this front by October. Singapore has announced that it will acquire a small number (up to 16) of either the 747-X or A3XX. Singapore unquestionably represents the biggest single up-front customer for any new big aircraft, and many airlines follow its procurement decisions. If the airline goes with the A3XX, Airbus has merely scored a tactical and necessary victory. But if it goes with Boeing, the A3XX is in trouble (and possibly dead).

Airbus’s guy in Singapore can only win small or lose big. Or, as Churchill said of Admiral Jellicoe, commander of the British fleet in World War One, he is the only man who can lose the war in an afternoon. Right now, we’re betting on the A3XX in Singapore, but again, this does not mean the program will go ahead.

The next A3XX-related decision, by the way, will come after the industrial launch, possibly later this year. If the Airbus board (i.e., EADS) approves an industrial go-ahead, and if EADS stock doesn’t hit single digits, the plane could be facing a very promising future. But remember: markets are a dialogue between those who provide capital and those who want capital. Looking at EADS stock, it seems like the market is sending a message: go no further, or you’re in serious trouble. (If you want to follow along, check out eads-nv.com. You can also get a nifty screensaver.)

Next Decision: scope clause agreements. Negotiations between airlines and their pilots unions over the tricky regional jet operations issue have taken a turn for the better, particularly at United. While nothing is set in stone, it looks as though many restrictions will be removed on 50-seat jet operations, at the expense of any real progress with 70/90-seat operations. This guarantees continued success for the ERJ-145 and CRJ-200, but unless further progress is made, the Fairchild Dornier 728/928JET and Embraer ERJ-170/190 are still at risk.

If the latter two families collapse (there is still a chance), the victors will be the existing large regionals, the CRJ-700/900 and BAE RJ/RJX (see our report on the latter plane in this month’s supplement). However, we are betting that the European and Asian markets keep the two new families alive until further scope clause progress is made. If nothing else, restricting 50+ seat jet operations to the mainline carriers might result in one or more mainline carriers “breaking the code” and operating some 70/90-seat regional jets. Once again, the likely successor to the DC-9 and 737-200 will be smaller planes, no matter who operates them.

The other result of this 50-seat jet victory is that while 30/35-seat jets are still relevant, 40-seat regional jet versions are totally unnecessary. Accordingly, Fairchild Dornier has dropped its 428JET project, which looked rather costly anyway. Embraer is still persisting with its ERJ-140, but there are no customers yet, and given excellent sales of the ERJ-135 and –145, the –140 looks a bit pointless. Bombardier is still going to produce a 40-seat version of its CRJ, but this is just a matter of interior reconfiguration.

The Third Decision, inevitably, is the election. The really depressing thing about this decision, from the standpoint of aircraft, is that the decision is irrelevant—I’m merely bringing the subject up to highlight continued weakness and risk to the military market. There is no discernible difference between the two sides. Bush and Cheney would probably provide more cash for military readiness, but they would also be more likely to pound sand down the missile defense rat hole, which would only deprive aircraft of resources. In terms of actual procurement, both sides are identical, with still no fiscal hope for the Joint Strike Fighter (as currently scheduled) or Comanche.

Clearly, defense has ceased to be a big political issue among voters, and despite ample cash, no politicians have announced plans to spend anything more. However, there was something rather amusing about seeing Cheney at the Republican convention in front of a V-22, the very plane he tried hard to kill early this decade. Remember Dukakis and his tank ride?

On that happy note, on to next month. We will update the military transport overview, and the C-17. September is also France month, with updates of the Rafale, ATR, Tiger, Mirage F1, and A400M. Other updates will include the 767 and Ching Kuo. Also, two supplements away, in October, we will update the business jet overview, reflecting the continued strength of that segment. Call or e-mail me if you would like an advance copy of the numbers for that market. And enjoy your autumn.

Call Me If You Need Help With Any Decisions,

Richard Aboulafia
 

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