“Sweet spot” for every aircraft
Analyst David H Perry (JP Morgan) explains in an interview why the C Series and E2 have taken over the title of most cost-efficient aircraft in the 100 to 130 seat category – and how Airbus and Boeing are responding to this new competition.
06.2017 | Text: Thorsten Rienth
Mr. Perry, with Bombardier's C Series in service and the E2, MS-21 and MRJ to follow, are these a threat to Airbus and Boeing?
Civil aviation is a growth market and this is what has attracted new entrants and also new products from existing players. Airbus and Boeing have very strong incumbency positions based on large installed fleets, proven support networks, long-term customer relationships, and large R&D resources. Competition will mean they need to continue to improve their products, which is what we have already seen with the A320neo and 737 Max families.
How come, Airbus and Boeing do not challenge these new aircraft by expanding their portfolio to some sort of 737-600 and A318 successors?
All aircraft families have a sweet spot in terms of efficiency for the operator. When an aircraft is stretched the efficiency can sometimes be improved. When an aircraft is shrunk below the sweet spot, the efficiency often deteriorates. This is why Airbus and Boeing are seeing more customers switch to larger variants of their narrowbody families. The C Series and E2 are specifically designed for the 100-130 seat category, and it is very hard for Airbus and Boeing aircraft to match their economics.
With all the new regional jets being powered by turbofan engines – what is the perspective for turboprop aircraft?
The turboprop market has been remarkably stable over the last decade, helped by high oil prices. Today we have lower oil prices and a new generation of more efficient regional jets, so that may pressure the turboprop market. However, Bombardier seems to be prioritising its C Series over its turboprop business, allowing ATR to have a very dominant market position in the turboprop market.
Airline profitability looks pretty good today and air travel demands are more robust than expected – but are these the most influential drivers in the airline market?
Airlines buy aircraft for growth driven by air traffic and for replacement. In 2005, the year of MTU’s Initial Public Offering, about two-thirds of aircraft were delivered for growth and one-third for replacement. In recent years the ratio was closer to 50-50 as very high oil prices led to the early retirement of less efficient older aircraft. Most forecasts for the next 20 years assume that 60% of aircraft will be delivered for growth and 40% for replacement. And yes, global airline profitability in 2015-17E is the highest it has ever mean - that certainly helps demand for new aircraft.
How do airlines cope with changes in their business - do they rather cancel effected orders or invest in more efficient aircraft?
The global airline industry consists of many different airlines with many different business models and different strategies for changing market conditions. Many of the younger airlines in both developed and developing markets have little experience of operating older aircraft and prefer to operate young, fuel efficient aircraft. On the other hand, some legacy carriers have considerable expertise operating older aircraft and are even looking to acquire or lease older used aircraft at attractive prices during the current period of low oil prices. Whatever short-term strategy an airline follows, the best long-term hedge against rising oil prices is to operate a fleet of fuel efficient aircraft.
China just flew the C919. Along with Russia they plan to set up a wide-body jet to challenge Boeing and Airbus – what does that mean for the duopoly?
From the 1960s to the 1980s the US dominated commercial aerospace. It was only in the 1990s that Airbus gained critical mass, 20 years after Airbus was founded. It seems highly likely that China will be a major aerospace manufacturer – alone, or with Russian help – in the coming century, but it may take a few more decades to get critical mass and to build a global support network.
Where do you see aviation headed in the next five to ten years?
The industry moves more slowly than other industries due to the very high safety and regulatory requirements and very high barriers to entry. The last decade has seen extremely high levels of investment in new products and manufacturers now want to generate a return on those investments. We don’t expect major new products to be developed over the next five years. However, manufacturers will be looking to drive down costs by implementing new methods such as additive manufacturing, more robotics/automation, and greater digitization of their entire enterprise. There could also be a growing battle between OEMs and suppliers, as OEMs seek to capture more of the aftermarket and services work that was previously dominated by the suppliers.