Airbus and Boeing continue to battle it out in an increasingly even contest for new aircraft across the range. And despite the recent crisis, both are cautiously optimistic that this year may not be as catastrophic as feared
Six months on from the terrorist attacks, February's Asian Aerospace air show gave manufacturers a chance to take stock of where markets now stand. As expected, the usual flurry of commercial aircraft orders was largely missing this time in Singapore. Yet the overall mood at the show was surprisingly upbeat for an industry so recently ravaged by 11 September and economic slowdown. While business remains slow, confidence appears to be returning and there was cautious optimism from Airbus and Boeing that the worst of the current downturn may already be over.
Business is "slowly coming back", with each month improving, says Larry Dickenson, senior vice-president of sales at Boeing Commercial Airplanes. "I don't think we're ready to declare victory and say it's over, but it's a lot more positive than I thought," he adds. Adam Brown, vice-president of strategy at Airbus, more or less brushes aside talk of long-lasting damage to aircraft markets, saying that the manufacturer's long-range forecasts have changed little.
Cautious optimism
Although the manufacturers have not yet altered their conservative estimates for orders and deliveries in the more immediate future, they have started to see glimmers of hope. Airlines are filling seats and reinstating some suspended services as well as recalling staff. There are signs too that the underlying economic picture is improving after last year's slowdown in US growth. In fact there is suggestion that the USA may never have been in an "official" recession, a presumed state which had contributed to widespread pessimism, and that the domestic economy is recovering, albeit at a slower rate than in previous downturns. So without any further unforeseen disasters, things may be on a slow but resolute path upwards again.
The state of the world economy was already having an impact on manufacturer order books, even before the devastating events of 11 September delivered the knock-out blow. Rather than count new orders, the two major airframers were shuffling delivery dates as they gave in to pleas from plaintive carriers, suffering a sharp fall off in passenger traffic, for significant deferrals of aircraft due for delivery this year and next.
Continental Airlines, for instance, had firm orders for 87 Boeing aircraft, including 48 that were to be delivered this year. Under a rescheduling agreement it is set to take delivery of just 20 this year, with another 28 deferred until late 2003 through to mid-2008, when it also will take 39 more aircraft on order. The pattern has been repeated with most US major carriers, including American, Delta and United Airlines, and their counterpart overseas, although to a lesser degree. Even the ever-profitable low-fares Southwest Airlines, experiencing lower loads and yields, initially got Boeing to agree to defer 19 deliveries. It has since been adding these back, however, and by June will have accepted all but five of these aircraft, in order to add frequencies and new non-stop routes to its schedule. Although "still in the recovery process, we are approaching growth opportunities conservatively," says Southwest chief executive Jim Parker.
Delivery delays
The agreed delays meant a sharp scale-back in the near-term forecasts for both Airbus and Boeing. Deliveries actually peaked in 1999, with Airbus and Boeing together producing a record figure of close to 900 aircraft, and has dipped only a little since then.
In 2001, the two manufacturers put out 852 aircraft, including around 22 corporate jet types. This year they estimate that the number will fall back to a pre-boom level of 680 aircraft. Boeing is predicting that it will deliver 380 aircraft this year, down from 527 last year, while Airbus expects to make 300 deliveries, down from 325. Both forecast low deliveries again in 2003, with each delivering about 300 units. "We envisage 300 deliveries in 2002," announced Airbus chief executive Noel Forgeard at the Singapore air show. "For 2003 we will assess the situation in the second quarter [of this year], but we are cautiously optimistic about maintaining production at about the same level."
If the forecasts hold, next year would mark the first time that the European manufacturer drew level with Boeing in terms of deliveries, and it could even sneak a small lead. Even a couple of years ago, Airbus still only held a third of production. As Forgeard points out, with Airbus already level on new business and order backlog, it was only a matter of time before that fed through to output.
In fact, during 2001 Airbus pulled ahead of its rival in terms of new order intake. Excluding corporate jet types, it had 270 firm orders net of 101 cancellations. Those heavy cancellations included aircraft that were ordered by TWA, acquired last year by American Airlines, and bankrupt Swissair and Sabena. Boeing also suffered 67 cancellations, including American's abandonment of TWA's hefty acquisition plans for 717s, although the carrier agreed to take more 777s in their place. Although Boeing had fewer cancellations than its rival, it also took in less new business, which left it trailing with 255 net orders.
Inevitably Airbus has also been steadily gaining ground in terms of order backlog and last year, for the first time, it finally emerged with a lead. Including corporate jet variants, Airbus counted 1,557 orders in hand at year-end, while Boeing stood at 1,357. What is more, the sale of 85 of the massive A380 helped to push Airbus to a lead in the widebody market and helped the company's overall backlog to reach a nominal value of over $130 billion, more than $10 billion ahead of Boeing. How times have changed - as recently as the mid-1990s Boeing held two thirds of the market just about whichever way it was cut.
Markets contract
What seems clear is that this market share battle will be carried out with a much smaller market over the next year or so. The total net order intake of less than 550 aircraft in 2001 marked the lowest point since the mid-1990s, when the market started to recover from the last slump. The situation remains fluid and firm predictions about the exact nature of the recovery remain elusive. Some analysts believe the blow to the airline industry - and in turn the aircraft manufacturers - following 11 September and the subsequent "war" on terrorism may have been deeper initially than that following the Gulf War a decade ago, but that recovery will be more swift.
While the western US deserts are filled with large numbers of parked aircraft, many of them are not expected to return to the skies. Following the Gulf War-induced downturn, more than half the 1,000 or so stored aircraft came back into service. This time analysts are less sure. There are an estimated 2,000 aircraft throughout the world that are currently idle, of which only around 800 meet current noise and emission standards (see table page 60). Clearly, not all will fly again.
Although there were about 160 new widebody and single-aisle aircraft sitting idle in the warm desert sunshine at the end of January, the majority of the aluminium is made up ageing types. Most of the older Boeing 727s, early 737s and older McDonnell Douglas DC-9s/MD-80s and DC-10s are not now expected to make their way back into the mainline fleets. Continental is a case in point. In the second half of last year, the carrier grounded 25 DC-10s and 31 MD-80s; it recently decided to retire the DC-10s permanently and may well do the same with the narrowbodies. It is already well on the way to an all new three-model Boeing fleet. When United parked 75 727-200s and 24 737-200s at the end of October it said they were being retired permanently.
As these retirements take place and world traffic once more resumes its steady upward course, manufacturers are confident that demand for new deliveries will return. "There is a blip but it will come back up," says Allan McArtor, chairman of Airbus North America, pointing to the rebound in both traffic and orders after the Gulf War in 1991.
Aircraft leasing companies think so too. The downturn has taken a toll on the lessors, which have played an increasingly large role in the fortunes of the manufacturers. Robert Martin, managing director of Singapore Aircraft Leasing Enterprise (SALE), says that 80% of its portfolio has remained trouble-free, with lease payments being made on time and profitability actually up over last year. The company has, however, had to lower rental rates in order to place some available aircraft, but in those instances has limited lease terms to two years, reflecting Martin's view that the market will be better then. To back that up, SALE last month exercised an option for an additional A320, bringing its total order to 51. "Following the recent retirement by airlines of many older aircraft, we believe that demand for newer aircraft types such as the A320 family will be strong in the coming years," Martin says.
International Lease Finance (ILFC) has a similar view. ILFC vice-president Philip Scruggs says the company is limiting new leasing contracts to two- or three-year terms. "It's an unprofitable market with today's rental rates," he warns, adding that some lessors currently have a significant number of unplaced aircraft. Perhaps ironically, because of Boeing's production cuts, there have been some delays in scheduled deliveries to ILFC.
Long-haul battles
While the immediate prospects for recovery remain uncertain, the battle for market share between Boeing and Airbus remains as fierce as ever. At the Singapore air show the focus was largely on the fight in the intercontinental class, with the new breed of longer-range, higher-capacity offerings. Boeing had a lock on the field for years with its 747-400, but is now under increasing pressure to fend off rivals, including its own 777 (see table over page).
At the Asian Aerospace air show, heartland of the 747-400 operator, Boeing remained under pressure to come up with an answer to mutterings about the future of the programme. Boeing has twice now floated higher-capacity versions of the 747 but neither has flown in the market. At Singapore, it was back with the 747-400X QLR (quiet longer range) a new proposed variant emphasising noise reduction and range enhancements. Having last year quietly ditched any immediate prospects for the higher-capacity 747X stretch, Boeing apparently went back to basics. "We went out to customers last summer and said, here's a shopping list of things we could do on the 747. They said make it quieter and higher-range," says Jeff Peace, vice-president and general manager of the 747 programme.
The prime need was to make the 747 quieter, bringing it in line with other modern widebodies and able to meet increasingly stringent limits being set at European airports. The curfew restrictions at Heathrow have been set as a benchmark. "We started out primarily working on the quiet airplane and then wanted to get the economics right, so we started adding the technologies to get the performance back," says Peace. In the event, the resulting design changes made to the engine and wing offered increases in basic performance, giving a 747 that is up to 20% quieter and can go 5% farther, with 1-2% less fuel burn.
While European customers are likely to take the advantage all in noise gains, Asian airlines could go for range alone with close to 16,000km (8,650 nm) available with a reduced load of 250 seats. Boeing has already raised range a little with the 747-400ER, with a range of 14,200km. That is already in production and due for delivery to Qantas this summer. Peace says that Boeing is "driving towards" a launch of the QLR variant in June, with hopes of an in-service date in time for Asian Aerospace 2004.
Success of this new offering could be crucial to help secure the mid-term future for the famous 747 design, now under pressure from newer models, including Boeing's own 777-300. By year-end, the 747 order backlog had shrunk to 62 aircraft, including freighters, representing just over 2 years of production at current rates.
Meanwhile, Airbus is keeping up the pressure. Work on the $11 billion A380-800 project began to step up last year, with construction started at the manufacturing sites and its outline design now defined. Airbus confirms that delivery of the 555-seat superjumbo to Singapore Airlines is still on track for the first quarter of 2006. Airbus has 85 firm orders from seven airlines for the A380 and holds agreements for another 12 aircraft which it expects to firm up shortly with two customers including Federal Express. A380 customers, including Emirates, Lufthansa and Virgin Atlantic, remain loyal to the programme. Virgin, for one, is confident that the downturn will be over by the time the aircraft arrives.
Airbus also has its two new models of the four-engine A340 which are undergoing final testing ready for their entry into service this year. Between them, the ultra-long-range A340-500 and the high-capacity A340-600 cover ranges up to 16,000km and capacity up to 380 seats (see table above). At Singapore Forgeard dismissed the 747-400XQLR proposal as already "outdated by the A340-600", focusing instead on battles with the 777.
Orderbooks are not yet exactly bulging for the new A340s, with Airbus holding 62 firm orders. After losing Swissair as one of the launch customers for the A340-600, the manufacturer had to ensure that Virgin Atlantic stayed on course to launch the aircraft in June, although, Forgeard publicly denied reports of a giveaway deal. More recently, South African Airways agreed to re-equip virtually its entire fleet with 41 Airbus aircraft, including nine A340-600s. First delivery of the A340-500, which had its first flight in February, will be later this year to Air Canada.
Boeing, however, is still hard promoting its evolving twin-aisle Sonic Cruiser. Last year's initial concept release was used as "a stalking horse to find out what the airlines want," according to Dan Mooney, Boeing vice-president of product development. That has since led on to formal feedback from carriers.
Sonic cruiser feedback
A few have already made their interest clear in an aircraft travelling up to 15%faster than current types. "If Boeing produces the Sonic Cruiser, we'll be the first in the queue," says Virgin. Emirates too has sent senior managers to Seattle, but says it is still only looking. Mooney adds that Boeing has also previewed the Sonic Cruiser at a get-together with the oneworld alliance carriers, which includes British Airways, American Airlines, Cathay Pacific and Qantas.
Mooney expects that Boeing will stick with the broad idea of an aircraft that would carry 200-250 passengers up to 13,900km at just under the speed of sound, and still hopes it will meet an in-service date in 2008. Boeing has carried out a number of wind tunnel tests, which Mooney says confirmed that it has the technology to make the Sonic Cruiser work. It also has been signing up outside partners to share technology development and programme costs.
The next step forward could come later this year when Boeing plans to bring together interested carriers for group discussions about more detailed configuration requirements. With the opportunities that the Sonic Cruiser offers for differentiated service, the composition of that group could be a sensitive issue, as Boeing privately concedes.
At the other end of the market, there is equally fierce competition between the trusty Boeing 737 and its challenger the Airbus A320 family. By the end of last year, the Airbus family had a backlog of 1,100 aircraft, while Boeing's total for all its narrowbodies remained only just above the 1,000 mark.
The 737 has been gaining from its favoured status as the workhorse of the low-cost operators, led by Southwest and its 364-strong fleet. Europe's aggressive Ryanair gave the figures a further boost in January with an order for 100 737-800s. Among the reasons cited for the selection was "an exceptionally competitive offer from Boeing" and its view that the -800 had more seats and lower per-seat operating costs than the A320. Ryanair also was already successfully operating 19 of the 737NGs and had nine more on order. The new -800s will replace 21 737-200s in its fleet over the next four years. Boeing is also favourite to win a big order from low-cost easyJet, as it matches Ryanair's expansion.
However, Airbus has now broken into this low-cost territory. JetBlue Airways, the well-financed new US entrant, broke the mould by ordering new A320s to start its New York-based airline two years ago. The carrier currently operates 23 A320s and has 51 more on firm order, with additional options expected to boost its fleet further. Frontier Airlines, which started out with used 737s, has followed JetBlue's lead and is shifting over to an all-new A320-family fleet.
Airbus lost out on a potential order for 30 A320 family aircraft for Ansett of Australia when the investment group Tesna failed to consummate its takeover of the airline. Deliveries would have begin in the second half of this year, taking up some of the slack created by delivery deferments.
What has become clear, is that the two manufacturers are fighting each other across every sector of the market and are broadly even. If there are real areas of inequality then they are arguably most visible in the low market share that Airbus has in Japan and China. At Singapore, Forgeard pledged that tackling those weaknesses will be the top priority of the next five years.
Source: Airline Business
