New Design On The Horizon?

What Will Airbus Do?

Will they, won’t they?

With Boeing’s plate rather full with the 747-8 and 787 programs, both of which are entering their production phases, has the time come for the company to finally make a move on replacing the Next Generation 737?

“I can tell you right now our customers haven’t shown a real interest in a re-engined airplane.”

Austrian Airlines Boeing 737-800 descends into London Heathrow Airport

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Those were the words from Boeing’s CFO, James Bell who was speaking at the Morgan Stanley Unplugged Conference in New York yesterday, giving further food for thought on Boeing’s continued studies on what, if anything, it will do in relation to updating, replacing or doing nothing to the 737 family.

The biggest challenge, aside from trying to fix the problems associated with the 747-8F and 787-8 programs is timing any decision on the 737 family.

With the CFM56-7BE engine due to enter service next year, Bell was quick to quash the oft-talked about double-digit fuel burn savings from newer generation engines like the LEAP-X, instead stating that “single-digits” would not be enough to satisfy customers.

“Its not flow-through efficiency. It loos more like a single digit improvement which we don’t believe is something that our customers are interested in and go into a re-engining and have a mixed fleet for just that minimal improvement and performance,” said Bell.

“We’ll know [by year end] where we are, we’ll have gotten through all of our customer discussions and we’ll have gotten through all our analysis as to, you know, exactly what improved performance we can deliver through that approach. And if it’s not enough that where a business case closes then obviously we’re just not gonna do it [re-engining],” he added.

The other big driver in the decision making process is what Airbus does. As expected, the A320 is likely to benefit from both the all-new LEAP-X engine and the GTF engine (a fourth version of which would not be produced until 2016 or 17 at the earliest).

Airbus is pinning a lot of hopes on Boeing following its lead with a re-engined A320. Based on Bell’s comments, Airbus could well be in for a huge disappointment on two fronts.

If Boeing opts to forego or even go down the clean sheet 737X route, Airbus will be lumbered with a costly re-engine program with a very short shelf life with virtually no possibility of turning profitable.

Further, the European airframer would have little choice but to follow Boeing’s lead with an all new airplane – with the A400M and A380 still sapping money and resources away from the A350XWB, itself on the verge of a major delay, funding any new replacement A320 will be extremely difficult, made harder by the WTO ruling which all but rules out further state aid. Equally interesting is where Airbus sees market value in re-engining the A320 if Boeing is reading a different script.

It is highly unlikely that the A320 would achieve double-digit fuel savings with its older, less structurally efficient wing designed thirty years ago if the current 737 (with a much newer and efficient wing) can’t do it – airlines would be more inclined to line up for something all new which offers greater all round benefits during commercial service. 

With that in mind, if Boeing elects to launch a new narrowbody, it can ill-afford to squander its competitive advantage. It has less capital exposure risk than Airbus and parent EADS and has a healthier cash balance, despite the troubles on the 787.

Could the bigger risk be not launching something new?

As the last 20-odd weeks of the year whittle down, it won’t be long before we know which way Boeing and the 737 are headed.

Although hugely disappointing news that delivery of the first Boeing 787 ‘Dreamliner’ airplane to launch customer All Nippon has now been delayed into the first quarter of 2011 will come as little surprise to long time programme followers. In fact at the Farnborough Air Show just last month Boeing was clearly hedging bets over when the first delivery would be made, a factor that surely translated to the old adage ‘a nod is as good as a wink’. Officially the latest delay is apparently being reasoned by what is called a contained engine turbine failure on a Trent 1000 engine at Rolls-Royce’s huge Derby, England based test facility. This not only resulted in complete engine failure but also seriously damaged the test equipment facility. Moreover because my understanding is that the specific engine that blew is needed for the final aspects of the flight test programme it would appear that Trent engine failure has scuppered any chance of the 787 achieving full certification in time for All Nippon to receive a first plane this year.

ZA003 seen at last months Farnborough Air Show

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Other than confirmation of the turbine blade failure and the damage done to test equipment at Derby there has been little additional comment from Boeing or Rolls-Royce as to why the specific problem might have occurred. During testing and because the engine is likely to be put through maximum stress I doubt that this is the first time a turbine blade has failed although having seen the facility in full use it is my understanding that rarely does a failure cause the amount of damage that we imagine occurred on this particular occasion. Nevertheless, even though as a result of the blade failure it is probably that some modification will be required to the Trent 1000’s already on the 787 test certification programme (with ZA006 this should soon be six airplanes) and although clearly a set back to the programme we do not see the additional Rolls-Royce engineering that is likely required being a major obstacle for the 787 programme once the test facility is fully back in action. Indeed, even had the Rolls-Royce engine problem not occurred we had severe doubts that All Nippon Airways would actually have received its first airplane before the early part of 2011.

Although most observers had built in the probability of one further delay ahead of the first customer airplane delivery markets will quite naturally take a dim view that Boeing has been forced yet again to announce a problem on the 787 programme. Meanwhile All Nippon Airways is we understand ‘champing at the bit’ to get hold of its first airplane so that flight crews can begin to accrue the hours necessary to allow for full ETOPS operation. However we do not expect that they will make a great fuss over one further delay and neither do we expect another for All Nippon ahead of the first delivery being made mid way through the first quarter of next year. However it is true that problems do still remain in the overall production programme such as quality problems with the Alenia manufactured horizontal stabilizer not to mention the aft and central sections of the plane that the Italian engineering company produces. Indeed, quality problems from far too many of the international production partners in the 787 programme have provided a major obstacle to progress of the 787 programme over the past three years. Leaving the Rolls-Royce problem aside as a likely one-off, Alenia is thus only the latest in a very long line of supply chain problems and the further emphasises the possibility that this may be yet another aspect in the 787 supply chain (see enclosed list) that Boeing may need to bring back in house.

Since quality issues and the ability of the international partners to deliver components in sufficient numbers to match the intended production programme schedule first surfaced near three years ago Boeing has been quick to take the problems back in house. To that end the Chicago based company acquired Global Aeronautica and Vought Aircraft Industries and as we have intimated above, we suspect there may yet be other acquisitions of 787 based component suppliers over the next year.
 
Whilst we are not particularly fazed by the specific delay problem that Boeing announced today we are concerned at the prospect that not all problems within the supply chain may yet have been resolved. Without doubt the 787 airplane is an absolutely massive programme by any standards imaginable and there would always bound to be problems to resolve on an airplane that after all is so very different in engineering and production terms from anything that has ever been built before. For all that we continue to view the 787 is an absolutely brilliant airplane and one that will serve the Boeing company and its shareholders very well over the next two or three decades – just as the 737 family has consistently done ever since 1970. But from a profitability point of view there is still a very long way to go yet in the 787 programme.

Meanwhile All Nippon Airways will without doubt get its first 787 airplane during the first quarter of next year in my view and I am in very little doubt that Boeing will quickly get through the remaining certification process requirements. But the bigger question to me remains that with around 850 of the truly fantastic 787 aircraft on order from customers worldwide will the company manage to meet the already much delayed delivery schedule? Right now that question is very difficult for me or anyone else to answer. Sadly, as Pat Shanahan who runs Boeing Commercial production was forced to admit not very long ago, “the 787 has tarnished [Boeing’s] reputation”. Few can argue that and yet most rightly regard Boeing as a very well run company that will in the end get it right. Neither is anyone about to admit that going about the 787 production as an international partnership such as the one that was originally envisaged was with the benefit of hindsight the right way to progress. Indeed, most would probably say that they would like to see a lot more of the component supply production being brought back in house.

To be absolutely fair about this though and accepting that not only have errors been made by all concerned and that even Boeing bit off a little more than it could chew the vast majority of the foreign production partners have been absolutely brilliant. These include Toray Industries, Mitsubishi, Fuji and Kawasaki in Japan, very many US and European based companies such as GKN, Rockwell Collins, Honeywell, Hamilton, Goodrich and GE to name but a few. Most of these have performed very well and it is a point that sometimes is not sufficiently stressed. Indeed, fair to say that despite the unfortunate problem that reasoned the specific announcement from Boeing last night so too has Rolls-Royce performed brilliantly through the 787 programme. The problem though and it is one that must be quickly resolved is that some including Alenia have certainly not performed well and as long as they leave room for doubt markets will probably refuse to embrace the fantastic programme and opportunity that the 787 truly is.                              

Howard Wheeldon – Senior Strategist, BGC Partners

Boeing officially launched the new, advanced, highly-efficient and ultra-capable 747-8 family on the 14^th November 2005. With a nod of approval from two long-time Boeing customers and access to some of the latest airplane technologies in the world, Boeing successfully launched the first stretched 747 variants and, with it, secured the 747’s dominant presence in the very large airplane market well into the 21^st-century. 

However, it wasn’t until over a year later, on December 6^th 2006, that Boeing finally secured an airline customer order for the passenger version of the -8 family, the 747-8 Intercontinental. Up until then, the 747-8 Freighter had chalked up new customers and sizeable orders, whilst the -8I lagged considerably with only 3 -8Is being sold in the form of VIP models from the Boeing Business Jet division.

In the year between program launch and first airline customer order, the -8I evolved into something quite different than originally planned. In that period of “trade-studies,” the initial -8I went through several enhancements and design changes that ultimately led to the market preferred, higher-capacity and more efficient -8I of today. Indeed, the 747-8F also received design/performance adjustments, but it remained a far more defined airplane from launch than the -8I did initially.

The initial 747-8I was stretched 3.6m compared to the 747-400, allowing for an additional 34 seats to be accommodated in a Boeing ruled three-class configuration. The 74.3m long airplane would have offered between 8% to 9% lower seat per mile costs over the -400, 16% lower fuel burn per seat and a 21% increase in revenue cargo potential. Most importantly, Boeing guaranteed a range of 8,000nm (14,800km) with 450 passengers in a Boeing ruled tri-class configuration.

However, as the months pressed on after the formal -8I launch, the all important first -8I customer order continued to elude Boeing. One significant development that unfolded was that the initial -8I’s range was boosted to 15,380km (8,300nm) from 14,800km (8,000nm) due to better-than-expected efficiencies obtained from the aerodynamically all-new, aft-loaded, super-critical wing design that the new -8 family utilised. As the new wing was also deeper in cross-section than the -400’s, Boeing was able to increase fuel capacity by a further 14,000lts than originally planned on both variants as well.

The 8,300nm range -8I variant attracted interest, most noticeably from Emirates, but other airlines were keen to trade range into payload and to have the -8I optimised to the same length as the -8F at 76.3m long.

At the 2006 Farnborough Airshow, Boeing revealed that there was indeed a mixed consensus from the airlines as to which -8I variant they preferred. The longer -8I variant offered compelling economics and helped differentiate the new 747 further from the 777-300ER, but some airlines were happy with the longer-range -8I.

“The good thing is that six months ago, before we launched the 747-8, we weren’t having those discussions and once we launched we got their attention,” said Randy Tinseth, then the 747-8’s marketing, support and in-service vice-president.

Airlines were clearly keen to tweak the new 747, and this ultimately led to the delay for Boeing in securing a launch order for the -8I. Apart from offering better economics and seating capacity/flexibility over the 74.3m long -8I, the “super-stretched” -8I offered another very attractive attribute; increased commonality with the freighter model.

Boeing had already decided that the -8I and -8F would have the exact same wing (internally, externally and structurally), therefore having the same fuselage length for both variants meant less complex, and thus lower cost, production line. Further, with a standard fuselage length, the market appeal for an eventual -8BCF was significantly boosted, as airplane re-sale and residual value would remain higher.

The “long-awaited” 747-8I launch customer, Lufthansa, even commented on the passenger to freighter conversion prospects of the -8I.

“We could operate the 747-8I for 20 or 30 years and then use them as freighters,” said Lufthansa’s CEO Wolfgang Mayrhuber, adding that “the -8I will retain their value.”

The longer fuselage also significantly boosted the lower cargo hold’s revenue cargo carrying ability. The -8I’s total cargo capacity volume is a healthy 5,705 cubic feet (161.5 cubic meters). Once passenger baggage has been accounted for, the remaining cargo hold capacity – therefore revenue freight potential – is 3,895 cubic feet (110.3 cubic meters).

“We originally believed that the 20% size increase [over the 747-400] for the passenger model was what the market wanted, but some airlines have asked us to look into adopting the 5.6m fuselage stretch from the freighter, and weren’t worried about losing a little range,” said Randy Baseler, then Boeing’s vice-president of marketing for Boeing Commercial Airplanes at the 2006 Farnborough Airshow.

“Three-class seating would increase to 467 passengers, but range will fall by around 200-300nm [370-560km] to around 8,000nm,” said Baseler at the time, adding, “Whoever stands up first and says ‘we’ll buy the aircraft’ will decide the size when we firm up the programme.”

A few months later Lufthansa launched the airplane, although it nearly was beaten to the post by another potential customer. The longer fuselage length certainly answered many of the airlines’ wishes for a radically improved 747-400. It almost seemed as if it were a ‘no-brainer’ to opt for the 76.3m long -8I.

After several high-profile meetings and marketing forums with various stalwart 747-400 operators, Boeing finally offered a far more customer focused, refined and market preferred 400-seat to 500-seat airplane. On October 16^th 2006, Boeing officially adopted the longer fuselage length of 76.3m for the -8I variant; the -8I was now fully optimised.

Ironically, the -8I is essentially a “21^st-century version” of the shelved 747-500X proposal. The -500X would’ve flown much farther than today’s -8I, but it wouldn’t have been as economical to operate. The secret to the -500X’s huge range potential lay with its all-new, 40% up-scaled super-critical 777 wing design, therefore allowing for a far greater fuel capacity. Virtually a decade, to the day, since the -500X proposal came within a whisper of being launched at the 1996 Farnborough Airshow (along with the leviathan -600X), Boeing had finally “re-launched” the 747-500X in the form of the -8I, and the results couldn’t have been any better. With a 16% improvement in fuel efficiency compared to the venerable 747-400, as well as 1% lower trip costs, coupled with greatly increased performance abilities and increased weights, the -8I design boasts efficiency levels that are on-par with all-new airplane designs.

Not bad for a derivative airplane!

Whilst a few blue-chip potential -8I customers, such as Emirates, bemoaned Boeing’s decision to opt for the larger -8I variant as it suffered the usual “range-penalty”, it was ultimately the larger -8I that caught the markets’ attention. Even Emirates, after months of public evaluation of the larger -8I, proclaimed the new 747 an “excellent aircraft.”

But, even after Lufthansa’s sizeable launch order for the -8I, Boeing did not secure another major -8I customer until Korean Air ordered 5 units on December 4^th, 2009 – almost three years after Lufthansa’s order.

Although Nigerian-based Arik Air signed a Memorandum of Understanding with Boeing for the purchase of four -8Is, and at least two other customers seemed to be poised to order 10 747-8Is each, it was ultimately Boeing Business Jets that kept the steady trickle of -8I orders rolling in for the -8I between Lufthansa’s and Korean Air’s orders.

Armed with encouraging flight-test data from the -8F so far, a recovering global economy and a 747-400 replacement cycle that’s beginning in earnest, Boeing is targeting to sell a number of additional Intercontinentals to new customers in the coming months. With  endorsements for the -8I from two major global airlines, Boeing is keen to add additional orders and to help return the 747 program to profitability.

Perhaps Boeing’s decision to increase the production rate of the 747 indicates, like the 777, that further orders are near? Earlier this year, Boeing’s CEO Jim McNerney indicated that Boeing was hopeful of additional orders to be placed in the second half of 2010.

“I think you’re going to see some thaw in this market this year toward the second half of this year, I think you’ll see some [747-8I] orders that are in the midst of discussions right now.”

Whilst McNerney did indicate that the -8F was seeing added interest and that it could lead the ‘order-rejuvenation’ in 2010, the -8I was also re-entering the limelight with many airlines that previously showed little interest and instead ‘hunkered down’ during the recession.

“We’ve kept a lot of passenger discussions warm on [the -8I] side, but no one is buying $250 million machines. We’re hopeful that some things could pop up. We had a nice order at the end of last year from Korean Air to join Lufthansa as launch customer on the passenger side. So while we’ve always had faith in this airplane, the recession has not helped its marketing,” added McNerney.

At Lufthansa’s recent financial results earnings call, Lufthansa’s CFO, Stephan Gemkow, commented that Lufthansa is “committed to take the 747-8I”, adding that he thinks “it’s the most beautiful aircraft which has been designed so far.”

Either way, Boeing’s claim that the 747-8 “is the right size for the large airplane market, lowering risk for airlines in a highly variable operating environment,” would seem appropriate. It remains to be seen whether that market returns sooner rather than later.

Click Image To Enlarge

Christopher Cook

Commercial Pilot, Johannesburg RSA

All Images Courtesy Of Boeing / Newairplane.com

Boeing has had to learn the hard (and expensive) way that farming out too much of the advanced work statement on the 787 to global partners has not worked as well as it had hoped when the program kicked off back in 2004. Despite having bought out the Global Aeronautica stakes from Alenia and Vought, the company is still having build quality issues that should not be occurring three years after assembly of the 787 first began. 

“Well, there have been a couple of what I would characterize as workmanship issues there that we just worked through…where the workmanship was not what we wanted it to be, and we do what we always do, which is to work with our suppliers to resolve them. And that’s been the case with Alenia,” said Boeing CEO, Jim McNerney during the second quarter earnings call. 

“I don’t mean to single out Alenia…As far as I know, we have largely worked through what is going on with Alenia,” he added. 

Boeing 787-8, ZA003 on static display at the Farnborough Air Show 2010

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Acquiring the Alenia operation may be considered a risky move, however, leaving it longer will continue to compound that risk as Boeing looks to ramp up rates towards 10-per-month by 2013 and also bring the 787-9 to the production line too.

Boeing has to consider its options just as it did when it had to move for the Global Aeronautica buys.

Does it stick with Alenia and continue to suffer build quality issues that hinder the production ramp up, hurt deliveries and fall foul of customer obligations and part with yet more compensation? Or does it bite the bullet and make yet another expensive purchase and bring the work back under its control and remove the ongoing risks? 

The reality is that Boeing has little choice but to eventually buy out the Alenia operation and bring direct oversight and management control to the 787 production set up. By moving the Alenia’s production system to Charleston (where there is ample real estate for expansion) for example, not only does Boeing solidify its aerospace expansion outside of Everett, but it also allows the company to further self-develop its own expertise, knowledge and experience of producing large composite aerostructures that will be vitally important for when the time comes to replace the 737, 747 and 777 families. 

Even if Boeing had to invest in new autoclaves, it would be a worthwhile endeavour. It could theoretically procure bigger autoclaves within which it could bake bigger monolithic structures that would form the basis of any eventual 777 successor and dispense with the need to ship them Everett and build such airplanes in Charleston with a workforce accustomed to working solely with composites.

The downside here is that such an acquisition would almost certainly push the 787 program towards a loss position (or perhaps depress whatever profitability, if any, is left), but by keeping the work in house, leveraging the production capabilities and economies of scale through improved output will push costs down over time.

Deliveries later down the line will command much higher margins than the preceding units as the 787 matures into a more versatile machine as continued learning and LEAN initiatives improve build quality.

Boeing needs to now isolate and remove the last major headache that the 787 is suffering – and that can only occur if it brings back the work currently with Alenia – if after such a purchase there are still outstanding quality issues, questions will be asked as to whether the training regime is robust enough to cope with building the airplane – and that’s something difficult to put a price on.

If the airline manages to successfully negotiate staffing requirements with its unions on the bigger jet, what does that mean for Boeing in the long run?

More importantly, if Southwest Airlines can come to an agreement with unions before December 1st, it allows the airline to buy any replacement 737 which has more seats than its current 737-700 fleet with virtually no headaches and thats the prize the airline wants, not least because it has been wanting a new airplane for a number of years now.

Looking at the majority of low cost carriers in every geographic region of the world, with the notable exception of Lion Air and its fleet of 737-900ERs, virtually every such operator bases its fleet around the 737-800. By default, seat counts are much higher than in contrast to Southwest Airlines’ current 737 variants.

Boeing 737-800 during final assembly in Renton, WA

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The 737-800 by far and away remains the most popular version in production today and with new CFM56-7BE engines due to arrive next year, its appeal and value will rise yet further.
 
A strategic win aside, validation of the 737-800 at Southwest Airlines would certainly convince Boeing that many low cost airlines are continuing to scale up their airplane sizes and that would certainly give pause for thought when sizing a possible all new replacement. Given Jim McNerney’s recent remarks during the second quarter earnings call, dusting off the 737RS (Replacement Studies) has provided more impetus towards opting for a clean sheet solution ahead of a re-engined model.

The problem with a re-engined 737 is only when the Pratt & Whitney PurePower GTF engine is thrown into the mix. Given the lack of confidence buyers have in it and the unproven claims of lowering maintenance costs by 20%, Boeing isn’t convinced either and see little merit beyond offering the rival CFM International LEAP-X engine if it does opt to re-engine the 737 – not least because the latter can be installed without any wing changes and because the costs of doing so are now much less than first envisaged.

Yet despite the obvious business case for re-engining using LEAP-X, Boeing favours a new design and through its Advanced 737 Product Development Team (in the 737X) and is more likely to size an eventual successor based on the newest market entrant - the COMAC C919 which seats between 168-198 passengers.

Electing to go down the new 737X route, but starting at a size bigger than the current 737-700, would leave the likes of the failed Bombardier CSeries in no-mans land and a strategic seat gap that it could never hope to plug. 
 
The CSeries cannot be stretched without sacrificing range. Even if a bigger wing is developed, new higher thrust rated engines are needed, new landing gear and systems are needed and that all bumps up costs and production time. More than six long years after its initial launch with a comical backlog (which Airbus and Boeing combined could complete in less than two months) to show for its efforts and so-called “market traction”, any new 737 would spur Airbus to follow in its footsteps as well.
 
Is Southwest’s evaluation going to be the game changing moment for the narrowbody industry?
 
Whether it does or doesn’t isn’t as nearly as important as the direction in which the whole re-engine/replacement argument is heading.

Airbus remains firm in its belief that if it launches the A320 re-engine program then Boeing will follow suit, yet at every opportunity through 2010, Boeing has continued to talk down the prospect and instead talk up replacement models. Why hasn’t Boeing launched a re-engined 737 with the LEAP-X engine to get ahead of Airbus?

The costs of adding a new engine only as an option to the existing model line up makes little sense when these newer generation engines are clearly optimised for newer airplanes – fuel burn reduction may not be the same as on the C919 and then there is the other question of whether airlines would bother paying a premium.

Compounding the conundrum even further is CFM International. Delivering the CFM56-7BE with a 1.5% fuel burn cut, along with a 1% reduction from the current 737 fuselage enhancements could continue to eat into the double-digit fuel burn savings from newer engines – the CFM56-7BE will become the standard production engine for the Next Generation 737 and customers will benefit without even having parted with any money for the privilege.

Even if Southwest Airlines doesn’t order the 737-800, that doesn’t take away the importance for Boeing and its desire to launch something all new because the more and more you look at the competitive landscape, it makes sense to deliver something new because the technology that can be leveraged from the 787 is one that needs to be exploited if Boeing wants to capture significant orders. In its current guise, the 737 is not going to be around forever.
 
The risk of order churn to the current 737 line up will always be there, but if Boeing increases rates again on the 737, closing the business case for a replacement model becomes easier because the company has been so lukewarm about the merits of the re-engine strategy while airlines continue to expedite their current deliveries at a faster rate.
 
By the same token, Airbus will have to think very hard about sinking billions into revamping the A320 with just new engines if Boeing leapfrogs their ambitions with something new. 
 
They did it with the 777 over the A330/A340 and they did it with the 787 when Airbus dangled it’s the A330-derived A350 in front of displeased customers.
 
There is more chance than not that Boeing will do it for a third time with the 737 against the A320.

Cathay Pacific achieved a 16.5% profit margin on an underlying operating profit of HK$4.96 billion. Achieving a profit margin surpassing 10% is itself a black swan event for the global airline industry and it is indeed an extraordinary feat when the Hong Kong-based carrier nevertheless posted a HK$4.7 billion profit last year, a time when the global airlines were bleeding red ink everywhere. Revenue rose 33.7% to HK$41.337 billion from HK$30.921 billion and passenger yields, as measured by Revenue per RPK earnt, rose by 17.5% and cargo yields rose 36.1%.

Meanwhile, Cathay Pacific has signed a non-binding Letter of Intent (LoI) for 30 A350-900s and intends to purchase an additional 6 777-300ERs to support its expansion and partly replace its ageing fleet.

“[The A350-900 will replace] some of the older 747-400s and A340-300s, but not all as the orders are also for fleet growth,” said Cathay Pacific’s Carolyn Leung.

Cathay Pacific Airbus A350-900 Rendering

Image courtesy of Airbus

The US$7.82 billion A350 deal at list prices is viewed by many people as a devastating blow to Chicago-based Boeing.

Indeed, given the US$4.5 million commitment fee paid to Airbus, Cathay Pacific will firm this LoI up while the 787-9 stands a slim chance to win over Cathay Pacific. However, Cathay’s order is a significant testament to Boeing’s point-to-point, frequency based strategy, in which it will deploy those 30 A350-900s to secondary cities in Europe and the US where demand is insufficient to fill larger planes, chief executive Tony Tyler said in a Bloomberg interview.

Separately, Tyler also made clear that the airline is not looking to order the A380-800 either, which Airbus argued “hub-to-hub” is “big point-to-big point”, only to have it refuted by Cathay Pacific due to its insufficient Revenue Cargo Volume from which the carrier derives significant revenue.

According to airline sources, new destinations being looked at and evaluated include Munich, Madrid and Chicago.

“The major Chinese airlines watch Cathay very closely, as well they should. This is a big win for Airbus and the A350,” Airbus Chief Operating Officer (COO) John Leahy stated.

Most importantly, Cathay Pacific has been able to secure significant discounts from Airbus for the A350-900s, with which they can “maintain the balance” between Airbus and Boeing.

In doing so, the airline is preserving its bargaining power over any future aircraft purchases. This bargaining power is considered to be critical in Cathay’s procurement process and was the determining factor in this contest.

Notwithstanding this primary factor, given the larger size of the 314-seat A350-900, it nonetheless fits Cathay’s network better than the 787-9 does since the A340-300s and 747-400s that it replaces accommodate 283 and 379 passengers respectively.

“In our network, it [A350-900] just works better. The availability of the aircraft is good for us as well,” Cathay Pacific chief executive Tony Tyler explained.

Cathay Pacific has flexibility to switch to other variants in the A350XWB family but considers the A350-900 to be complementary to the 777-300ERs.

“Yes [the LoI carries flexibility to switch to other A350 variants],” Cathay Pacific spokeswoman Carolyn Leung reaffirmed.

“The A350-900 will be the backbone of our long-haul, mid-size fleet, complementing the wide-body, ultra long-haul 777-300ERs,” she added.

Despite the A350-900 being more fuel efficient, notwithstanding the current weight and development issues on the early build versions, the 777-300ER can still carry more payload – the 777-300ER has a Maximum Takeoff Weight (MTOW) of 775,000lbs, whereas the A350-900 only has 590,800lbs. This complementary strategy was reaffirmed by the biggest 777-300ER customer – Emirates’ chief executive, Tim Clark.

“They [Boeing executives] think it’ll take out the 777-300ER. People like me are saying ‘It’s not going to do that. And as your largest customer, don’t worry about it,’” Emirates chief executive Tim Clark commented.

Looking Ahead Despite there will be an increase in capital expenditure in the next few years due to the construction of HK$5.5 billion cargo terminal, this project will lower the cargo handling cost and provide substantial savings over the longer term as Cathay Pacific Cargo continues to be one of the biggest cargo carriers in the world.

Similarly, Cathay’s strong balance sheet which has just seen its net borrowings decreasing 24.6% and net debt-to-equity ratio decreasing to 0.40 times, its latest purchase of the A350-900 and 777-300ER that is worth HK$75 billion will ensure that Cathay will have significantly lower operating cost of its future fleet.

What’s more, there seems to be an unstoppable wave of recovery at Cathay Pacific, with solid forward bookings.

“We can look forward to the next six months with some confidence,” Cathay Pacific chief executive Tony Tyler said.

“Forward bookings are looking very good for the rest of the summer. Cargo is looking good for the rest of the year,” he added.

On the other hand, should Cathay decide to launch the Premium Economy Class later this year, as its chief executive Tony Tyler recently told Bloomberg that “there are pretty strong arguments for it”, the airline is unquestionably well-positioned to tap into this new opportunity and win business from competing carriers.

There has been a widening gap between the segments of Business Class and Economy Class, launching a Premium Economy Class will enable Cathay Pacific to maximise its revenue streams through discriminatory pricing of the Revenue Management System (RMS).

“No decision is made yet,” Leung cautioned.

In conclusion, Cathay is indeed a booming business and as the lyrics of its theme song go, “I can fly, I can fly, I can spread my wings out wide and touch the sky…”

- Daniel Tsang

Most Favoured Solutions Balanced Between LEAP-X Engine & Clean Sheet Design

“We’re Ready To Go” Says CFM International

737RS Plans Dusted Off Once Again

No Room For GTF Engine

While the odds on favourite outcome for Boeing’s eventual year-end decision on the 737 update is likely to be a deferral, the economic and cost benefits of re-engining the airplane have become much more harder to justify as the jet maker looks to bring back its 737RS studies to the fore.

Discussions have continued to take place around re-engining, with CFM International stating just prior to the Farnborough Air Show with Chaker Chahrour, Executive VP at CFM that “we’re ready to go [with LEAP-X] on the 737 when Boeing wants to.”

“It [the LEAP-X1C] fits with no problem and without changes [to the current 737 family],” added LEAP-X program director, Francois Bastin when he spoke with me in detail on the subject.

CFM56-7 Engine Seen Aboard Departing FlyDubai Boeing 737-800

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But not everyone is convinced of the merits of going down the re-engine route, particularly if service entry is around 2016 with potential A320/737 replacements supposedly making their debut in 2025 – leaving less than a decade to recoup billions of dollars of investment that could be better spent on an all new design. Any effort to re-engine would not supplant the current propulsion units today – they would be a customer option – thus making the potential returns on a program lasting less than a decade even harder to justify.

“Re-engining the highly successful 737 family would alienate the majority of existing customers of the world’s best-selling commercial airliner ever. And re-engining with what? The shaky, unproven, 40-year-old-technology Pratt & Whitney GTF or the all-new CFM LEAP-X competitor? The smart money says neither — If it ain’t broke, don’t fix it, mister,” says Arran Aerospace Founder & MD, Doug McVitie.

If Boeing does go the re-engine route, it is clear that the LEAP-X engine is the preferred solution due to ease of installation. Boeing’s VP Marketing, Randy Tinseth told me that the rivals like the not-so-popular CSeries had struggled due to a number of risk factors – one of them namely being the engine and is part of the reason why Boeing prefers to stick with CFM International if they opt to re-engine the 737.

“Customers believe there’s risk. We’re evaluating that engine [the GTF] but there is technology risk behind that engine,” said Tinseth.

“We are looking at re-engining the airplane, as the CFM team has said and it is technically feasible with what they’ve proposed but at the same time we’re looking at the possibility of a new aircraft. Our objective is to make a decision based on what our customers want, but we have time to make that decision. If and when the technology [suite] and customer requirements line up [in the next several years], I think we’ll have the right mix for a new airplane and if that doesn’t work, we have the path of continuous improvement that we’ve always been on,” added Tinseth.

While Airbus is confident that if it elects to press ahead with an A320 re-engine effort, Boeing would follow suit but there is much more merit to Airbus following Boeing’s lead if the 737 were to be replaced – the business case for re-engining the A320 would be non-existent.

At this point, expediting the A30X trade studies to replace the A320 would take a greater degree of urgency despite Airbus stating that mid-next decade being is the preferred window in which to launch such a product. As Airbus works through the near term challenges on the A350XWB program, there is less chance of the 777 being radically overhauled or replaced – the 737 clearly is in play and from all the musings, it is crystallising into a decision that will come first for Boeing.

Can the new generation engines really leverage as much fuel burn advantage over their cost of installation vis a vis being installed on a clean sheet design?

As number crunchers look to identify the basis for either re-engining or replacing, the chorus from some suppliers and customers favour something all-new.

Doing nothing may not be an option, however, replacing the 737 altogether has suddenly become much more of an attractive value proposition – especially when in yesterdays second quarter earnings call, Boeing CEO Jim McNerney opined that customers had been “pushing us towards a new airplane.”

It is becoming evident that Boeing is stepping away from re-engining and looking towards an all new solution.

“The failure of any C-Series sales announcements was as clear to see as the tatty state of Airbus’ A380 air show aircraft — two examples at opposite ends of the market of where bad decisions can lead,” said Arran Aerospace founder & MD, Doug McVitie.

Image courtesy of Bombardier

I’ll let the pictures do the talking.

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While defense budget pressures could mean less headline-making opportunities, aside from the recent submissions for the equally, if not longer delayed KC-X tanker contract, much of the next week at the show may be dominated by commercial activity, heralding a much needed boost to the belief that a meaningful industry-wide recovery has indeed started.

With Emirates already making a pre-Farnborough splash at the ILA Air Show last month for a further 32 Airbus A380′s, the airline is widely believed to follow this up with new orders for both 777′s and A350XWB’s. With Dubai Aerospace Enterprise looking to defer or even cancel some of its orders, Emirates stepping in to pick up the slack will work to alleviate any production issues for both Airbus and Boeing on the basis that they are unable to place deliveries with other customers.

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Pratt & Whitney and its GTF engine is rumoured to be one big beneficiary if the rumours of a Qatar Airways order for Bombardier’s struggling CSeries emerge to be true. The Doha-based airline is also believed to either give details on its plans for an all new, low cost airline or indeed launch the entity at the show. Qatar Airways has fallen behind its Persian Gulf rivals in the chase for low cost leisure traffic as incumbents like Air Arabia, Jazeera Airways, FlyDubai and others make their mark in the region.

CFM International will provide updates on the CFM56-7BE engine, due to deliver a 2% cut in fuel burn for the existing 737 Next Generation family while also outlining its progress on the second and third core test demonstrators for the LEAP-X1C engine which debuts on the COMAC C919 family in 2014.

Where Etihad Airways made headlines two years ago with its record orders for an array of Airbus and Boeing jets, this year it seems likely that Emirates and Qatar Airways will do the same. 

As is customary at England’s most popular air show, Airbus will dominate the visuals with plenty of jets from the A318 right up to the A380 – for the public, they’ll unfortunately miss the 787 on display until July 20th, instead having a Qatar Airways 777-300ER to view in its place.

The Dubai Air Show only mustered a fraction of business seen in 2007 and last summers Paris Air Show was just as muted in contrast to that same year. Will this years Farnborough Air Show mark the turning point for the industry as the usual suspects come to place big orders?

Only time will tell – but what is clear, irrespective of what’s going on in the marketplace, the Middle East region continues its explosive growth and is being followed with a raft of new orders to sap up the seemingly insatiable demand that grows each month.

Air France-KLM and Lufthansa have already noted their fears about Emirates’ imposing dominance and the threat it poses to their home markets – but with so many orders being leveraged as a political tool for aerospace jobs at Airbus, their concerns may grow, but so will Emirates’ business.