Shaping decisions on next generation developments

Andrew Gollan, analyst aerospace and defense with the renowned German private bank, Berenberg, about aircraft in the middle of the market, value increase in the aftermarket, success factors and other industry chatter.

06.2017 | Text: Eleonore Fähling

Eleonore Fähling has been on the AEROREPORT editorial team since 2014 and in charge of the MTU employee magazine since 1999. As an aerospace journalist, she specializes in aviation history and market topics.

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Mr. Gollan, the most discussed topic in aerospace industry at the time seems to be whether Boeing will come up with a new mid-sized aircraft as a 757 type replacement. What do you expect, and what could that mean for the narrow-body and wide-body markets, respectively?

Andrew Gollan: Boeing is in a difficult position. Airbus has had runaway success in the higher value, large end of the narrow-body market with its A321 models. The current and future re-engined A321 variants have not only “won out” against Boeing’s competing narrow-body aircraft, the 737-900 and 737 MAX-9/-10. They also offer many of the operational capabilities of Boeing’s 757, which is an aging platform, and one which Boeing’s current portfolio does not effectively address. The primary difficulty for Boeing is defining the mid-size market opportunity that, by definition, implies an aircraft that brushes up against the highly lucrative narrow-body market and the lower end of the wide-body market, potentially risking cannibalisation in each. On balance, I currently think that Boeing will launch a new aircraft programme by the end of the decade because the prospect of doing nothing and losing more market share in its core product areas will be untenable. To be competitive, such an aircraft would need to be produced at a cost low enough and comparable to that of existing narrow-bodies, although it is unlikely to materially impact the narrow-body landscape we see today. It could however, partly shape decisions on the next generation developments in this sector in the next decade. In the wide-body sector, a new mid-sized aircraft could represent a credible replacement for the aging fleet of smaller 767s, but also challenge the lower end of Airbus’s A330 portfolio.

What could be new features in such an aircraft covering a range of 2,000 to 5,000 nautical miles and offering 150 to 250 seats, and what could be markets for that aircraft?

Gollan: If Boeing decides to launch a new clean-sheet design aircraft, it is more likely to be at the upper end of the scale, in the 200-250 seats range. Maybe even larger given the ‘densification’ trend and up-scaling of capacity by airlines. There is a distinct possibility that such a new aircraft will be twin-aisle. This may be slightly less attractive in terms of absolute fuel efficiency and emissions, compared to single-aisles. But overall it has operating advantages when considering factors such as turnaround times and unit cost per passenger. Such an aircraft could drive new market segments, such as low-cost trans-Atlantic, and present an attractive offering for high capacity shorter-haul routes.

If Boeing decides to put up a new mid-size program, how would Airbus respond?

Gollan: Given Airbus’ strong market share with the A321ceo/neo, and the long time it would take Boeing to develop a new aircraft, Airbus will be in no hurry to respond to the launch of a new mid-size aircraft programme. That said, for a relatively modest development cost and timeframe, Airbus could consider a stretch of the A321,an A322 maybe, to encroach further into this middle-of-the-market space. Indeed, recent industry chatter has been around an A321neo-plus and an A321neo-plusplus.

What trends do you see in the aftermarket sector?

Gollan: A number of new value propositions are shaping the aftermarket sector, where offerings are becoming more sophisticated, and where scale and intellectual property are becoming more important. The use of ever larger amounts of data is an enabler for higher value aftermarket services such as asset/fleet management and maintenance scheduling. Long-term contracting and the risk-transfer to OEMs are also linked to these trends. Naturally, the OEMs and larger players in the sector have an advantage in this respect over smaller independent operators, which do not have control over data access. Indeed, the airframers, while, historically less involved in services activities, now have clear strategies to compete far more aggressively in the space.

The duopoly in the commercial market of Boeing and Airbus is being challenged by smaller, upcoming manufacturers. Embraer for example is presenting their next generation of E-Jets here in Paris; Russian and Chinese manufacturers announce new developments. Will the industry really change?

Gollan: There is no doubt the landscape is slowly changing with the introduction of these new aircraft, backed by governments with a strong will to evolve their indigenous aerospace industries with products able to compete globally. While we see little prospect of Embraer launching an aircraft to compete directly with Airbus and Boeing, the Chinese and Russians are pressing hard, and with orders already secured that would otherwise have fallen to Airbus and Boeing, these new players are already impacting the market. For many years, however, we expect only very modest penetration in markets outside their domestic customers. Airbus and Boeing narrow-body aircraft are established, mature and deliver operating characteristics at an extremely high level. In addition, it will take many, many years for the new players to mature their production processes and be able to produce at volumes necessary to meet demand, even in their domestic markets. Finally, when this is achieved, Airbus and Boeing are likely to be in the stage of next generation aircraft which, from a performance perspective, will offer far superior operating characteristics to these latest ‘new’ products. Nevertheless, Chinese and Russians are coming and will make it happen.

Andrew Gollan, Anlayst Aerospace & Defense, Berenberg Bank Hover over the image for a bigger view

Andrew Gollan, Anlayst Aerospace & Defense, Berenberg Bank


Andrew Gollan, Anlayst Aerospace & Defense, Berenberg Bank

What makes successful companies in the aerospace business successful?

Gollan: Operational excellence, technology and innovation. The aerospace industry sits at the forefront of technology. Successful companies must continually innovate and target their investments in new products and solutions. In addition, in a complex global supply chain, all players require and expect surety of delivery and unquestionable levels of safety. To remain competitive this can only be achieved through operational excellence.

What has changed in the aerospace business during the last five years? Which parameters indicated or drove the changes?

Gollan: We are seeing significant shifts in the demand, supply and product cycles play out in aerospace, which are not mutually exclusive. Strong demand for new aircraft over the last decade or so has been driven by growth in developing aviation markets and by the increasing need to replace aging fleets in more mature markets. At the same time the aerospace industry has been investing heavily in an unprecedented product refresh cycle, which in part has stimulated demand. Meanwhile, we would say the OEMs have controlled supply well with steady increases in production and hence balancing capacity with demand.

All of these cycle dynamics are influencing aerospace companies. In recent years we have seen profit margins and cash generation depressed due to product investment. Development efforts are now slowly receding, which not only manifests in lower R&D and capital expenditure, but also an inherent reduction of technical risks associated with new products. With huge backlogs, comprising primarily of new products, the focus has shifted to execution, namely, managing risks associated with the introduction of multiple new products and plans to aggressively ramp-up volumes. As volumes have continued to rise we have seen further consolidation of the supply chain, a trend encouraged by the OEMs to reduce supply chain complexity, lower risk and increase competitiveness. The pricing environment has intensified too, as the OEMs look to improve their returns in a high volume but lower margin environment from new products.

Air transport growth rates have been stable and the signs are all set on further growth in the next years. What industry trends do you expect?

Gollan: Air travel is ultimately driven by economic growth and, while clearly there will be regional differences, we expect the global economy to be relatively benign in the coming years and hence for the demand picture to remain reasonably stable and healthy.

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