January 2002 Newsletter

Dear Fellow Observers Of The Aircraft Market Condition,

Many times over the past years, clients have written, called, or e-mailed in order to inquire, politely, what I was thinking. Indeed, “what the hell were you thinking?” is a very common phrase that I seem to hear a lot. This month, I’d like to provide an advance guide to the important aircraft market issues I’ll be thinking about as we move forward this year.

Airbus’s A400M. This long-lived (well, long-undead) project has assumed a political importance that transcends its military necessity. The surreal contract signed in December meant nothing, but German Chancellor Schroeder committed to a full buy of 73. German Parliamentary budget approval was supposed to happen in late January, but this has slipped, and it looks like they’re playing an odd little game. Unless the Germans buy their full share (which is actually more than they need or can afford), the project dies (it really is all up to the Germans—Airbus has done all it can to make a 180-aircraft program feasible). And unless it strengthens its strategic lift capability, Continental Europe will need to rethink its ambitions to be a strong military power. Alternatively, they’ll need to break down and finally buy some C-130Js or C-17s. By some accounts, A400M’s death could permanently hobble Franco-German defense relations, putting a question mark whether EADS really is the final stage of Europe’s industrial restructuring. Last Word: This remains the most embarrassing project in the industry (okay, let’s leave out the Alliance regional jets for the moment). It looks really, really bad for the A400M. Either find a way to rescue it, or buy off-the-shelf lift. Or forget any dreams about military relevance.

Jetliners as special mission planes and political footballs. It’s not just those 767 tankers. The idea of off-the-shelf jetliners for non-fighter military missions has emerged in a big way again (remember the C-17/747F pseudo-flyoff a few years ago?). Jetliners, it is said, could be used for the MMA P-3 replacement requirement, and as ISR platforms, combining AWACS, JSTARS, SIGINT, and other recon functions. The appeal of an instant off-the-shelf platform, with theoretically limited development costs, is strong (but easy to over-rate, in some cases). Meanwhile, EADS/Airbus has criticized the 767 deal, both fairly (what happened to competition and a two-way street?) and unfairly (that lease proposal, which doesn’t seem to be a bad idea). Last Word: The 767 tanker deal will go through. Could be a dry hole for EADS, but their competitive pressure could hurt Boeing’s profits on the deal, and could lead to future competitions with Airbus planes (and US company involvement). New USAF ISR jetliners will have to wait a few more years at least, and we still think jetliners are very unlikely choices for the maritime patrol mission (they’re unsuitable for the mission, and have huge non-recurring costs). And please forget that whole “smart tanker” concept.

Korea’s F-X program. This is a tremendously important program. So important, in fact, that the Koreans see fit to remind us of its importance by deferring it, multiple times and requesting additional “best and final” offers. Turns out, the last batch of BAFOs were unaffordable, raising the question of when and how the Koreans decided they could actually afford a fleet of heavyweight twinjets. Korea will make a decision in mid 2002, pending the arrival of new BAFOs. (F-X has not done the acronym BAFO any favors. And in his brilliant new book about the A-12 debacle, Jim Stevenson discusses the concept of BARFOs—Best And Really Final Offers). Notionally, Boeing’s F-15K is still in the lead. But the program could easily just collapse—the country is developing its own light fighter, and has other projects to procure attack helicopters, AWACS, and a SAM system. If F-X died, so would the F-15, and Boeing’s dreams of up to $8 billion in business for the next five years. Korea could just stick with F-16s (although, bizarrely, Boeing’s own F/A-18E/F might have a good chance too). Last Word: We have a bad feeling about this, and have zeroed the F-15 in our forecast. Maybe the Koreans are trying to delay the deal until the F-15 line closes for good? That way, they could save money and their own national pride.

Airbus and Boeing, bankers to the world. As the recession continues to bite into airline finances, the two planemakers will have to make a tough choice: finance more transactions, or watch deliveries drop like a rock. Airbus is insisting that deliveries will stay above 300 annually. Given that their biggest customers include US Airways, United, America West, and Northwest, this can only happen if they help finance many planes. Boeing was already coming to regard finance as a source of fun and profit, but there’s always a danger of going too far (remember British Aerospace in the early ‘90s). Last Word: Both primes are going to need to be careful about where they pick their battles. That 717 order book, for example, spells nothing but financial exposure for Boeing.

Bizjets. Y’know, a clear view of the business aviation market is tough to find. There are few independent forecasters or data providers, and the operator’s finances are often buried in someone else’s balance sheet. So, the lead time for a market downturn is relatively short. We do know, however, that there is a serious buildup of available planes out there, always a clear sign of a soft market. Meanwhile, we haven’t seen the full impact of fractional ownership on manufacturer profitability. UAL’s Avolar (sounds like a margarine, doesn’t it?) confuses things further. Then there’s the safety issue—changes are coming there, which could affect private aviation’s competitiveness. That 15 year old with a Cessna didn’t do this industry any favors. Last Word: The market is definitely declining (more for some than others), and backlogs will prove softer than anticipated. We still see new deliveries staying above $8 billion annually until the economy recovers. We don’t see a huge industry shakeout, but at least one big manufacturer will be gone four years from now.

So, that’s what I’ll be thinking about. Of course, there are numerous other big issues—F-35 international signups, the second wave of A380 orders, Boeing’s anticipated jetliner proposals—but I’ll keep this letter to its usual two pages. Anyway, welcome to another supplement. Like all past January updates, it includes the latest World Aircraft Overview, a comprehensive guide to the state of the industry. The words aren’t particularly new, but the numbers are, and we’ve added ten years of history to that chart on page one. This makes a previously meaningless chart slightly meaningful.

Next month, we’ll update the Fighter and Special Mission overviews, along with the F-16, A318/319/320/321, A330, 777, B-1, and others. I hope you are all having an excellent 2002. Let me know if you need anything.

Yours, ‘Til I Stop Using “SLEPed” As An Adverb,

Richard Aboulafia