July 2008 Letter

Dear Fellow Anglophone Aerophiles,

Few cartoon characters match Wile E. Coyote for metaphors. The failed carnivore runs off cliffs or paddles over waterfalls, going straight into mid air until he realizes that there’s nothing beneath him, and he falls into some rocks. Or he looks up and sees an anvil, casting a growing shadow around him as he holds up a small umbrella that says “Yikes!” Many Farnborough attendees this year had that mid air, pre-fall, pre-anvil feeling. I can’t say that feeling is completely unjustified, although some show attendees used the term “cautious optimism.” Translation: “We hope the anvil isn’t that big.”

The show headlines had a full-speed-ahead-out-in-mid-air feeling. Order volume was great—almost 500 in a week. That means a minimum of 1,500 this year, and quite possibly more, with a book-to-bill ratio of around 1.5-2:1. That sets yet another backlog record, nearly 8,000 jets for Airbus and Boeing alone.

The first problem is that these orders accelerate a growing trend—the great sucking sound of Mideast players inhaling capacity and business. Just as the world was starting to accommodate a prosperous, fast growth Emirates, two state-supported Emirates wannabes (and other smaller players) are copying the formula. As described in my December 2007 letter these new Mideast airlines seek to expand at the expense of legacy Western and Asian carriers. They’re also suppressing prices—a few months back I flew transatlantic business class on an Emirates wannabe for $3,000 (the Arab breakfast is remarkable). Even if the new players don’t succeed, they’ve got the cash to take the planes and lease them out. In other words, these orders are fratricidal for the existing backlog.

In addition to concerns over the Mid East order implications, it was tough to escape all the background noise at Farnborough. It wasn’t the flying display. It wasn’t the crowds (for all the supersized double-wide chalets, human habitation was kind of lacking). It was the sound of the world’s economic machinery grinding to a halt. The mortgage mess, collapsing financial institutions, volatile oil prices, and unpleasant economic numbers competed with those jetliner orders for daily headlines. At home, US flag carriers began torching cash. Capital started drying up. Politicians began questioning free trade, which is essential for a healthy world aerospace industry. Worst of all, America’s inexplicably beloved quasi-national beer company was being sold to Belgians.

Also, airlines were attacked by something that kills brain cells. In an effort to blame bad news on convenient and easily vanquished enemies, they lashed out at random targets. Some demanded government action against fuel speculators. They might as well demand action against bad weather, but Senator Joseph Lieberman quickly and stupidly promised action. Michael O’Leary blamed Ryanair capacity cuts on airport fees (“they’re killing aviation”). So, demand isn’t hurt by the weak economy and high fuel prices; it’s hurt by airport fees. Some politicians and former industry executives began calling for re-regulation, the holy grail of economic stupidity. Bankruptcy regulations make industry exits problematic. Airlines also suffer from very tightly regulated cross-border capital flows, very tightly regulated merger and consolidation procedures, very tightly regulated airport slot allocation, and very tightly regulated national market restrictions, and the answer to the industry’s problems is…more regulation?

The real problems for the industry are far more basic and tough to combat—slack demand and high costs, especially oil. Back in the ‘70s, this was known as stagflation, and there’s not a lot anyone can do about it. We know that capacity cuts are the only way for the airlines to get the pricing power they need to survive. That means fleets shrink in many markets. We just don’t know how many airlines will still be able to afford new efficient jets while they’re retiring their older ones. We also don’t know how the legacy carriers’ international route profits will be hit by rapidly increasing Mideast airline capacity.

Although Bombardier’s CSeries launch was kind of buried in all of the order news and market concerns, it was the most intriguing aspect of the show, with far broader implications. It started weak, launched with a Lufthansa LoITHL (Letter of Intent To Have Lunch), and a firm agreement to produce the fuselage somewhere in China by a company that’s extremely qualified, notwithstanding a total lack of experience with fuselages. But this is not the retro-technology CSeries originally proposed. In addition to composite wings, the second CSeries is also the first large jetliner to offer a new generation turbofan, Pratt’s GTF (now PurePower).

This could go two ways. In the coming months the CSeries could find a receptive market, with a firm Lufthansa order, additional customers, and maybe even an ILFC endorsement. Airbus and Boeing would then need to consider a new or re-engined A320-X/737-X with either PurePower, or CFM’s new Leap-X, also introduced at Farnborough. After all, losing the entire A319/737-700 market, and perhaps some of the A320/737-800 market, is not a palatable outcome for the two majors.

Alternatively, in three months Bombardier could be left with a Lufthansa pseudo-commitment and no other firm orders. In that case, Airbus and Boeing can relax and resume stamping out today’s A320/737. But this is the most notable feature of the aero-scape in the second half of 2008.

The background noise at Farnborough wasn’t all bad; some of it was a better than usual flying program. Highlights included the F-22 (very impressive, but since DoD seems to be dismantling the Air Force, the program could end next year). the A380 (commercially irrelevant, but a great spectacle), and most of all a restored Avro Vulcan (best air show flight demonstration since…the last time a Vulcan flew at an air show).

The delta winged bomber cast a giant shadow, thankfully not resembling an anvil. That’s a good note to end on. Oil prices could fall. The economy could recover. We don’t know. But at Farnborough, it was a strange mix of great orders and terrible vibes. Let’s hope we all fit under that small umbrella.

July’s aircraft binder reports include an updated Jetliner market overview, a new CSeries report, and updates of the 747, 767, C-27, Nimrod, Hawker 800/4000, F-4, Dash 8, ERJ 170/190, MD 500/600, and EC 145/UH-72 reports. Have a good month.

Yours, Until Etihad’s 250th A380 Delivery,
Richard Aboulafia