August 2012

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Building for the narrowbody upswing

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CSeries interior.JPGIt's odd to begin a discussion about an industry upswing days after Boeing joined Airbus, Bombardier and Embraer in cutting aircraft production amid an "unprecedented" downturn. All are struggling and airlines and lessors are making it clear that battening down the hatches and shrinking capacity, not growing it, is the safest course through the storm.

Holding off on orders is a safe bet for the worlds airlines, but with 2757 orders in 2007 and over 1400 last year, it appears airlines are just tapped out more than anything. Now they wait for their aircraft to be built. Airbus and Boeing can point to their strong backlogs as evidence of the order frenzy.

Both Airbus and Boeing can claim various superlatives with the launch of 787 and A350. The job for both is getting them fully designed, built, flown, certified and delivered. Though, 787 in some ways is holding itself and its chief competitor in limbo right now.

Airbus is waiting to see what happens with 787 before they firm up A350 details while Boeing waits on the A350 before figuring out what to do with a 777 refresh. All the while, engineering resources are not committed to 737/A320 replacements, pushing entry into service past 2020.

Though, something curious happened this past quarter that deserves recognition. Bombardier earned more orders for CSeries (50) than Boeing (22) and Airbus (23) did in combined gross orders. If you make it net orders, the total between the two titans is only four.

Yes, both firm orders for CSeries were expected last year, yet even with the onset of the recession, they still materialized. Though, the demand for a new narrowbody is there, with Southwest getting antsy, Air France/KLM pining for a replacement to their A320/737s, US Airways ready for a 757 successor and SAS and Air Canada jumping in as well to discuss fleet replacement. That's five airline in the last 10 days alone.

Add those five customers to American and United calling for replacements from Airbus and Boeing and you're talking about some of the largest narrowbody customers in the world.

Though, Boeing keenly understands the virtue of launching an aircraft in a downmarket, a strategy that Bombardier and Embraer are taking to heart. Both 777 and 787 were forged out of the recessions of the early 90s and post-9/11, respectively.

By most estimates, the next upswing for the global economy should be in full effect by 2013, right when CSeries will be coming online. For Airbus and Boeing, A320 and 737 will still be prominently in the picture. Is a mid-life refresh enough to hold the market until 2020?

Embraer, which has already said they wouldn't be pressured into the larger narrowbody market, is laying the groundwork for future plans. Embraer President and CEO Frederico Fleury Curado said the manufacturer will make a decision in the next 18-24 months regarding entry into the 150-seat market, going head-to-head-to-head-to-head with Bombardier, Airbus and Boeing.

The case against CSeries made by Airbus and Boeing centers on the abandonment of commonality and airplane support long built up by a combined 70+ years in the narrowbody market and the extended presence of A320/737 family aircraft in airline fleets.

Though, for Embraer, Air France, KLM, Air Canada, US Airways and United all operate E-Jets, many in mainline service, would their experience here nullify that argument?

While Boeing and Airbus are laser focused on the long-range twin market, their smaller Canadian and Brazilian counterparts are moving in to fill the void. Though, not long too long ago Boeing was planning for a 2012-2015 entry into service for its narrowbody replacement. Yet, for Airbus and Boeing, CSeries is still perceived as a fly buzzing around the head of the giants.

"The only way airlines can get that leverage back is if the Bombardier CSeries becomes a big success," says Richard Aboulafia.

For Boeing and Airbus, what's the tipping point? That psychological and strategic tripwire that signals a genuine threat to their duopoly? Malcolm Gladwell might say 150 orders. What about a certain blue-chip customer putting a stamp of approval on a new aircraft type?

Boeing and Airbus have become accustomed to looking to their left and right to see the competitive landscape. What about a glance in the rear view mirror?

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