Richard Aboulafia Speaks

October 15th, 2007

Airbus and Singapore Airlines celebrate the delivery of the first Airbus A380-800. It’s been a long time coming, but the wait is all but over.

Ironic then, that prior to this handover, Airbus faces the embarassing prospect of more A380 woes. Reuters reports that 2008’s deliveries may not be met. It’s almost as if this big bird seems to love headlines for the wrong reasons.

One lucky customer bid just over $100,000.00 to have the pleasure of being a special guest aboard the initial delivery to Singapore Airlines and also to be the first guest to fly to Sydney aboard the A380 on its first revenue flight.

Opportunities such as that are one-off’s and rarely occur for everyone. Likewise, when the Dreamliner enters service, whoever is lucky enough to snare the first ticket aboard that All Nippon Airways flight will be part of history - flying aboard the world’s most advanced and fastest selling passenger airplane of all time.

Not surprising then, that the word itself, “guest” is a key element of the rewards and loyalty program by UAE airline, Etihad Airways, also called Etihad Guest.

For the here and now, there’s a special guest aboard here too.

Obviously the title gives it away, but I take a great honor in inviting one of my good friends, Richard Aboulafia.

Needing no introduction, Richard is the Vice President, Analysis at Teal Group.

If you’re unfamiliar with him, please click here to find out more.

Getting started, Richard has already spoken to BusinessWeek soon after Boeing announced its revised schedule for the 787 program and summarizes the project setback succinctly with the following:

Unlike most industry pretenders, Richard has a well-spirited reputation for calling things on the industry both sharply and accurately. Little wonder then, he is the de-facto industry Oracle.

The last few weeks in the industry have also revealed the first tranche of British Airways’ long awaited fleet renewal - an order billed as possibly the most important for 2007.

We started off our discussion with the news last week pertaining to the Dreamliner. After the October 10 conference call on the Boeing 787 rescheduling, Richard brought up some very noteworthy points - points not made in any other media publication or press release and shared exclusively here.

The 787 delay is different from the A380 delay in four very important ways:

Richard explains thus:

• 1. The 787 delay is purely logistical. The production challenges are daunting, but the design is said to be right on target in terms of weight and likely performance. By contrast, the A380 weight numbers were always high relative to aircraft capacity, and according to some customers–notably Emirates–it’s overweight. The A380 production numbers stay anemic for the next year probably because they have made (and are making) design modifications intended to remedy this problem. The first batch will likely be overweight, and the implementation of changes will suppress the ramp up.

• 2. The 787 has enormous broad commercial appeal in terms of both orders AND pricing. This incentivizes everyone in the supply chain, ensuring adequate investment by everyone as they look forward to reaping the benefits. A380 suppliers are merely incentivized by 25-30 planes per year and a likely total of around 300 aircraft.

• 3. There are no other important programs that require pressing attention and siphon off financial and engineering resources. Airbus needs to worry about the A350 XWB and A400M. This is particularly true because the A350 DOES have enormous broad commercial appeal–already it has more orders than the A380 has received over a much longer time period Boeing can stay focused on its single most important project.

• 4. One guy is in charge. Boeing might have needed to supervise some of its first tier suppliers a bit more closely, but they have the power to impose changes to the supply chain as they see fit. Airbus has two major power centers at the top who argue over work apportionment.

So that’s the 787 rescheduling dealt with, but what about the rest of the Airbus & Boeing product portfolio line up in the longer term?

Richard and I discussed these issues further. (For clarity, Richards responses are in italic).

1- Given that British Airways isn’t happy to order the Boeing 777-300ER in its current guise and has likely missed the “order boat” for the type, is it fair to assume that a possible 787-10ER and Y3 feature in BA’s plans along with more information on the A350-1000 as possible candidates for the replacement of the remaining 747-400 fleet when they place new orders in 2009?

Absolutely. BA will likely watch the 777NG/new design and A350-1000 battles play out, and they have the luxury of time. Their 777 fleet is pretty young, they can use their 787 slots to replace 767s and grow their route structure, and replace the oldest 747s with A380s. It’s a sound strategy.

2- I’m hearing news that the A350-1000 may yet go the way of the A340-600 and fall short on projected performance promises. In the wake of very little public information on the airplane, would you assume that Airbus may even elect to delay rushing this model into entry when little is known about what Boeing may or may not do vis a vis the 777-300ER, and instead concentrate on using the time and resources to better define A350-800/-900 and get them into service on time?

There’s a lot at stake with the -1000. The -800 looks useless against the 787-8/9. The -900 could be good against the 787-10, but we don’t have enough information yet, and in all likelihood they might be well matched (although if Boeing can get a 7500 nmi 313-seat design out of the -10, that will be tough to beat. The A350-1000 is the only potential headache for Boeing, and could force them to commit serious resources to a 777 replacement or major update.

That said, the A350-1000 might be tough to execute. Airbus should give it priority over the ineffectual -800. The biggest variable is engine performance, and that’s why they should try hard to get two competing engine providers. Funny thing–Rolls makes good engines, but the only widebodies built with Rolls as a sole source have been disappointments on the market–L-1011 and A340-500/600.

3- The A380’s costs have swelled to over $18bn and show no sign of abating. Without the freighter to help diversify the A380 portfolio, do you envisage a point where Airbus will either continue selling the type to recoup what it can or perhaps plug the product gap beneath the A380 and above the A350-1000 with a true 400 seat tri-class airplane?

Airbus really doesn’t have the financial resources to do a true 400-seat plane until 2020, at the earliest. That assumes the A350 family gobbles up all available cash and engineering until 2015, and is followed by an A320 replacement. For the next 15 years, Airbus will sell the great albatross at whatever price it can realize.

4 - Despite the 747-8I not selling as well as some people would like, the 747-8F continues to corner and dominate the new build large freighter market. Scott Carson mentioned previously that he didn’t envisage any new 747-8I orders for the remainder of 2007 - do you think that the model will come good in 2008 and who are the key clients that will get the ball rolling?

It won’t take much to make the 747-8 worthwhile. As a freighter, it’s in a class by itself. Assume 18 cargo orders annually, add just 5-8 pax, factor in pricing pressure against the A380, and it adds up to a very wise investment for Boeing. It also has lots of upside if Emirates, Cathay, or either of Japanese carriers go for it.

5- Similar to question 2, given that there is little A350-1000 information, if Boeing feels that the model is enough of a threat to the 777-300ER, is there a possibility that an all new airplane could be introduced to supplant both the 777 and 747 families, leaving the 787 to expand beneath it with the 787-10/ER?

Unquestionably. In fact, I would think they would look very closely at an all-new design spanning 340/400-seats, using 787 composite fuselage technology. The history of major upgrades is relatively mixed. Success include the 737NG and 747-400; failures include the MD-11, A340-500/600, and the original A350. More importantly, when Boeing launches an all-new plane (once a decade), it gets it right. Everyone involved knows that sales will be at least 1,000, and usually more.

6- While the 787 has got off to a stunning start for sales, the A350 is invariably going to be seen as playing “catch up”. At $16bn so far, and having seen the debacle over insider trading and burying bad news on the A380, do you fear that any such negativity for the A350 when production starts will damage and handicap the airplane, given that it is largely devoid of key blue chip clients already on the 787 waiting list? Furthermore, do you think that this budget will rise further and what impact do you see on pricing for the A350?

As we know, Boeing is in a fortunate position to be able to charge a handsome premium on the 787 for those customers wanting the airplane sooner rather than later- the A350 is still resting on a major Qatar Airways order and is not able to charge the same sort of price premium for an airplane that will be over a half decade late to market. At what point will Airbus have to abandon is desire for market share and realize that its profit that counts, not sales?

So far, there is a lot of uncertainty over the A350 in terms of final design and customer appeal. That’s what will make Emirate’s November decision very interesting. They have the power to endorse this plane and solidify its position; they also have the power to keep it a relatively marginal player in terms of customers. But despite its tremendous success, Emirates is a government creation with unlimited funding and relatively little domestic competition (so far). Most other carriers need to look much more carefully at operating costs relative to their competitors.

Airbus needs to move from a market share emphasis to a profit emphasis. Eventually, greater exposure to equities markets will force this change. Until that happens (ie, until EADS faces that greater exposure and pushes it down to Airbus) Airbus is quite logically emphasizing product development and market share. But Fairchild Dornier, Fokker, and other companies found out the hard way that reliance on a few major stakeholders for working capital could prove disastrous.

7- Skeptics voices seem to be growing louder in respect of a 787 EIS delay. In the grand scheme of things, the rather conventional A380 was delayed by two years. If the 787 is indeed delayed, the media will naturally make a “big deal” over it. From a demand point of view, do you envisage any significant delays and how will this play out with customers who have not yet ordered the airplane but are likely to do so- namely, the US legacy carriers like Delta, United and American Airlines.

I don’t see much alternative to the 787 if airlines want a new generation 250/300-seat long range aircraft. That battle has been decided in Boeing’s favor. The 310/380-seat battle is just starting. But the US majors seem to want planes in that smaller class, for perfectly valid historical reasons (ie, getting burnt with bigger planes).

8- With Open Skies heading quickly to reality in 2008, slot constraints at key European airports will mean airlines will want to keep more of their airplanes in the skies more of the time. How do you see the development of point-to-point travel using smaller airplanes going forward and whether the trend at key hubs will see a decreasing seat count per airplane rather than a shift to the A380, for which Airbus claims will beat the logjams?

Most airlines will opt for right-sizing, and for routes that avoid the most congested bubs. Despite constraints, I see no upside for the A380. BA’s situation at Heathrow should have made the A380 a theoretical slam-dunk; instead, Airbus had to very heavily discount just to sell 12 aircraft.

All in all, Richard and I found and covered a great deal of common ground among these and other issues.

Image courtesy of Wikipedia

Interestingly, while many “merchants of doom” have crossed the river Styx to cover the 787 setback in the same category as that of the A380 - it’s reassuring to see that despite these teething woes for such a radically new and revolutionary airplane - analysts like Richard call the scene in the best and most neutral light possible.

While the A380 will never accomplish major sales numbers compared to other long haul airplanes such as the 747 or 777, the logistical headache Boeing now has can be cured far more easily than the technical woes that beset the leviathan Airbus airplane.

Ironic then, that both the A380 and 787 represent those opposing market segments where one is contracting and the other continually expanding and fragmenting - yet both airplanes have been held back from timely service entry for a mixture of reasons.

I hope the above has been a valuable read - I’m sure any questions posed by respondents will equally be answered by Richard, time permitting!

My sincere and heartfelt thanks go out to both Richard and Teal Group for making this rendezvous possible. Rest assured, this is not the last - there is much more to come!

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