GLG News by Doug McVitie, MA

Implications: Airbus' plans for a narrowbody assembly-line in Tianjin, China, are running more than a year behind schedule and costing EADS far more than anticipated.

Analysis: The Airbus division of EADS makes great play about production rates, particularly on the successful, German-dominated narrowbody production line in Hamburg. Unfortunately for EADS and Airbus, this 'play' is not always too credible: "Airbus will increase its monthly production rate to 40 for its single-aisle A320 Family by the end of 2009. Currently, Airbus produces 32 A320 Family aircraft per month" (May 2007 Airbus press release).

Well no, not exactly. In fact, nowhere near it. And this exaggeration is important since production rates are the prime indicator of bookable revenue since roughly 90% of a manufacturer's income on the sale of an aircraft is payable only on delivery.

But Airbus believes a great deal in 'headline news'. It is regularly pilloried in the press for all the delays to its French-run widebody programs (A380, A350 and A400M) so it's logical in a perverse sort of way that it takes some revenge on the media with what is nothing more than 'spin'. But this sort of spin has implications.

Anyway, here's a quick look at the picture when it's not spinning:

    - in January 2008 Airbus delivered 31 A320-family aircraft

    - in the 25 months to January 2008, the A320-family production rate was 29.5/month

    - in the two years to December 2007, the A320-family production rate was 29.4/month

    - in 2007, Airbus built and delivered 367 A320-family aircraft (30.6/month)

    - in 2006, Airbus built and delivered 339 A320-family aircraft  (28.25/month)

    - full-production in China is four aircraft per month, now expected in 2011, not end-2009 as Airbus forecast less than nine months ago

Contrast this with then-Airbus ceo Louis Gallois' May 2007 statement on the increases in the narrowbody production rate:

    - by March 2008, [A320-family] output is set to reach 34

    - ...then 36 [per month] in December 2008

    - ...to 38 by mid 2009 and reaching 40 by the end of 2009.

(Note: output does not equal delivery, as the November 2007 Etihad Airways A340-600 written-off at Toulouse in an engine test that went badly wrong clearly indicates).

Like the much-vaunted yet still totally elusive Power8 cost-cutting program, there is a huge gulf between what Airbus says and what it actually does. Building 30+ aircarft per month is no mean achievement, in fact it's pretty impressive, but there is no justification for artificially inflating the numbers for short-term gain or in attempted deflection from current problems.

These delays (or 'revisions to the original schedule') have taken the Airbus China final-assembly plans further into the red since, as mentioned above, the money doesn't start to flow until the aircraft start to go. And of course, there is no guarantee that the Chinese A320 production ramp-up will not encounter the same learning-curve problems which have put paid to the vast majority of Western-originating aerospace projects in China over the past 25 years.

But as they say, Airbus is a company with great promise: "always promising this, always promising that...". And EADS continues to pay the penalty for all this 'promise'.

Implications: An independent report into DOD procurement aspects of the war in Iraq is strongly critical of alleged delays in U.S. sourcing and deployment of Mine Resistant Ambush Protected (MRAP) vehicles, credited in the past six months with a sharp drop in the U.S. casualty rate.

Analysis: U.S. casualties in the war in Iraq have declined steadily since August 2007 as the DOD stepped up deployment of better-protected MRAP vehicles. Monthly deaths and wounded totals have dropped dramatically since the introduction rate of MRAP was increased last fall resulting in political claims that "the surge is working", but a recent report suggests MRAP deployment should have taken place from 2005 when it was apparently first requested from the field.

Without detailing here the ins-and-outs of the January 22, 2008 study, written by a civilian Marine Corps official, one thing is clear and has direct implications for MRAP procurement over the next 12-18 months: it would be politically unacceptable for the DOD to reduce the continued build-up rate of MRAPs in Iraq while the casualty rate is at a four-year low and while there are questions about just how slow that build-up apparently was.

Coincidentally on January 22, 2008, the New York Times ran yet another sensational and uninformed article under the headline "Hopes for Vehicle Questioned after Iraq Blast", in which its anti-war agenda managed to compare one explosion with six months of substantial reductions in killed and injured U.S forces.

MRAP contractors have nothing to fear from the New York Times. Deployment is a DOD not a man-in-the-street issue...

Major MRAP contractors in the U.S. now are Navistar and Force Protection while General Dynamics Land Systems Canada and BAE Systems are among others with a secondary role.

Even before the latest casualty-reduction figures and despite this newly critical report, the DOD appears to have given a big boost to the global use of mine-resistant patrol vehicles, which means serious export potential on top of current priorities even after Iraq deployment targets have been met and sustained.

MRAP is so operationally and politically important to the U.S. military that Defense Secretary Robert M. Gates singled it out in his Christmas message two months ago: “To ensure that troops have the best protection available on the battlefield, MRAPs became the military’s highest acquisition priority, and thousands of these vehicles are in production and en route to theater.” 

This won't change in 2008.

Implications: The current record aerospace industry order cycle will not be sustained by strong growth from Russia and Eastern Europe, no matter what the Russians themselves might say. Potential, yes, practicality, not yet...

Analysis: One of the key factors about the current commercial-aircraft order glut is the international flavor of the market upturn. Strong economic growth and the resultant increase in demand for air travel from such diverse geographical regions as Asia & the Far East, Australasia, China, the Middle East and, to a lesser extent, Europe has since 2005 resulted in record aircraft orders for Airbus and Boeing.

Last year's totals are unlikely to be passed in 2008 nor will this year's figure be as low as Airbus is already suggesting, but whatever the final outcome, one thing is certain -- the domestic Russian market will not keep the overall uptick going. A Boeing-Airbus combined total in 2008 of 1,800-2,000 orders could set the new baseline for the next decade.

There are no 'sleeping giants' in the air transport industry today and no self-perpetuating order stimuli either. US and European markets are mature (in fact the US aircraft market is entering its dotage such is the need for re-equipment), the Far East is developing steadily on the back of strong economic growth but from an already-established position of eminence after the development spurt of the mid-1990s and the Middle East is very much the area of greatest change today).
 
Emirates, the world's most powerful airline, now has something like 54,000 seats on order -- about 145 times the capacity of the first 374-seat Boeing 747s delivered to Pan Am in 1969/70... That's market presence and strength (especially when it's concentrated across only two aircraft types, the Airbus A380 and A350). No-one else anywhere can match this.

Russia and the CIS just don't compare, they didn't last year and they won't this year either. In 2006, Airbus highlighted China and India as the regions with the highest % growth potential over the next 20 years. This won't change anytime soon either and certainly not in favor of Russia and the CIS.

The order cycle is entering an elongated-plateau phase, as airlines over the next four-five years absorb the new orders placed in the past 36 months while Boeing and Airbus will not introduce new narrowbody aircraft until 2014/2015 in the US case and probably 2017/2018 for Airbus. The next big industry-wide increase could kick in around 2012/2013 if Airbus can stimulate demand then with its A350XWB.

The old boom-bust order cycle is pretty-much history and the new long-term trend is upwards, with no avoidable catastrophic downsides. India remains a major mid-term order hope, but Russia is still Russia and won't skew the markets for the foreseeable, no matter how fast president Putin and his Party's apparatchiks spin the story.

Implications: Airbus has lost two airline customers in two weeks for its proposed A350XWB. While the orders themselves were small (13 aircraft total), they're another delay-engendered setback for EADS while Boeing is adding B787 orders despite its own compromised delivery schedule.

Analysis: A couple of weeks ago Airbus made great store about how it had built more commercial aircraft in 2007 than Boeing and had amassed another record orderbook. Well, in the past two weeks that orderbook has shrunk by 13 A350XWBs (list price $2.8 billion) as two European airlines decided not to wait for an aicraft that likely won't enter service before 2014.

Is there another fundamental problem with the much-redesigned A350, is the global financial maelstrom starting to have an effect on orders or are these cancellations symptomatic of problems with the airlines in question? A little of each is the answer, although the two airlines' circumstances are somewhat different.

Firstly, Spain's Air Europa switched its order for 10 A350XWBs to eight Boeing 787s (plus eight options). This is straightforward and is the worst type of news for Airbus and EADS -- a defection to your only competitor. Airbus had counted this business as a firm order -- it still features on its website, www.airbus.com.

Next, Italy's Eurofly has cancelled orders for three A350s, citing delays at Toulouse. Eurofly certainly has its own little financial issues at present but considering payment for these aircraft would still be years away, this cancellation is another blow to Airbus and another order that will have to be scratched from the online orderbook...

The current credit squeeze is not yet having a tangible effect on global aircraft orders although the uncertainty it is causing has on the one hand stimulated a lot of uniformed, nonsense talk about airline mergers (speaking of mergers, Addison Schonland and Timothy O'Neil-Dunne here on GLG News have perceptive insight on the U.S. airline industry and all its myriad follies) and on the other hand it has raised longer-term questions about the link between the availability of credit, levels of consumer spending and the pressures on discretionary travel.

Basically, if the finanical problems endure, airlines will suffer, but they're really only worrying just now. Nothing new there...

Almost hard to imagine after all the delays, incidents, losses, arguments, strikes, over-crowding and international rows, but the airline industry might actually soon be looking back on 2007 as the good old days...

Implications: ...but can the company cash them in the cold light of day? Doesn't look like it when even the simplest of claims ("We're the fastest!") turns out not to be what the courts would call, "the truth, the whole truth and nothing but the truth...".

Analysis: It seems the disease of making misleading aerospace claims is spreading from the top down -- next week Airbus will report record orders for 2007 which will include initial orders for numerous A350 widebodies placed as long ago as 2005. Orders can be cancelled anyway and are only a snapshot -- production and delivery is the key.

So what prompted Eclipse ceo Raburn to claim last week that the company had set a new "record" in certifying 100 jets faster than any general-aviation manufacturer had ever done? Was he justly proud of his company's achievement in building roughly 105 Eclipse 500 Very Light Jets (VLJs) in 2007 or was he just playing with words?

Production is NOT certification... Eclipse Aviation is reported (http://www.avweb.com/eletter/archives/bizav/1025-full.html#196870) only to have certified ONE 500 with the Avio NG package and none at all of the first 100 or so aircraft for flight potentially requiring anti-icing measures. The NG suite, which provides centralized control of virtually all the Eclipse 500's systems and avionics functions, only received the FAA's certificate of airworthiness at the end of last month. Eclipse plans to retrofit its 2007 production aircraft with the new equipment by the end of this year (and has to foot the retrofit bill itself).

So, what you see is not always what you get, it seems. Eclipse at times continues to attract less-than-stellar attention despite the fact the 500 VLJ is one of the most promising GA aircraft to have emerged in recent years.

Nonetheless, more completed production and less convoluted PR might be a good maxim here, for both Eclipse and no doubt for Airbus next week...

Implications: In the three months to January 2008 the U.S. more than doubled its use of unmanned aircraft in Iraq. Intelligence, not just firepower, is making a difference in that theater. The most heavily-used drone, the Raven, weighs in at only 4.2 lbs.

Analysis: Unmanned aerial vehicles (UAVs), also known as drones, today play a vital role in conflict scenarios and nowhere is this more obvious than in Iraq in 2008. Since October last year, the U.S. military has more than doubled its use of drones in Iraq to the extent that more than 100 pilots have had to be taken out of the air to "fly" the UAVs and help keep up with the battlefield demand for real-time reconnaissance and intelligence.

The DOD has two main types of UAV at its disposal in Iraq: high-end, ultra-sophisticated vehicles such as the Northrop Grumman Global Hawk, which has 36 hours of flight autonomy and can carry a wide variety of sensors according to requirement. Iraq deployment of the Global Hawk is at three units, Northrop Grumman expects to build 54 over the next seven years. Unit price varies but is substantially more than $45 million.

At the other end of the scale is the CA-based AeroVironment Inc Raven which, hard though it is to believe, is actually thrown into the air by the company or battalion GI... The Raven can fly for up to 80 minutes, there are maybe 1,400 of them in the DOD inventory today, they cost somewhere around $35,000 and they have interchangeable payloads, from optical to infrared IR.

One of the main reasons for the climb in UAV use was the roughly 30,000-personnel increase in U.S troops in Iraq in the first half of 2007. Over the next six months the steady reduction from this surge level should see even more focus on best-use of assets, with the emphasis likely to fall on force-multipliers such as the Raven, which could well account for 350,000 hours in 2008 alone.

The U.S is under pressure to put more and more UAVs into the air over Iraq to ensure the best flow of intelligence to complement the MRAP-driven ground retaliation and control currently under way. This pressure translates into what the DOD itself calls a likely 25-year surge in UAV use by the U.S. armed forces -- a highly positive indicator in both conflict and peacetime with strong implications for all the key UAV players, from Northrop Grumman right down to AeroVironment.

Implications: Delta and United have held informal merger talks in recent months and discussions are understood to be at an advanced level. With both airlines keen to progress further before the new administration takes office in two months, a merger such as this would be the decisive catalyst needed to launch the long-awaited U.S. Majors' re-equipment cycle.

Analysis:

The rationale between a merger of two airliners whose combined fleets of around 1,000 airplanes with another 100 or so on order would dwarf the remaining domestic competition (starting with American, Southwest and Northwest) is purely economies of scale to offset rising oil prices. More throw-weight with the OEMs, particularly Boeing (United’s main active fleet is about 2:1 Boeing:Airbus, Delta’s is all-Boeing), largely complementary route structures with separate bases (Chicago, Atlanta), stronger international market presence to help counter European-originating Open Skies’ initiatives from April 2008 and above all, increased profit-making leverage with the supply chain worldwide are all plus factors too.

A Delta-United merger would structurally change the domestic U.S. airline industry and almost certainly lead to further deals – there are three or four very strong candidates out there.

Implications: Trying to draw the sting out of its November 8th 3Q07 results, EADS today announced further problems with its military airlifter, the A400M, noting a provision for up to $2 billion in expenses as well as additional future potential delays and extra charges. The full-year earnings forecast for 2007 has been withdrawn.

Analysis: Airbus is all about delays these days with now the military A400M joining the commercial A380 (one delivered to date) and B787 competitor the A350 (still a year away from design freeze) in the red column of delays and over-budget entries.

Way over budget too -- EADS is now taking a further hit of up to $2 billion on the A400M, with potentially more to come according to ceo Gallois -- to be added to the combined $11 billion which is considered a conservative estimate of the cost to Airbus and EADS of the delays and continuing problems on the commercial widebodies.

These huge losses are sustainable only through continued government intervention, although how much longer that can be counted on is another matter. The French government still considers Airbus a 'strategic' company, the German government considers the widebody, ie French, part of Airbus just a huge liability.

The struggling EADS share price closed 6.5% lower on Friday than it did on the corresponding day seven years ago, a fact which would tend to support the German viewpoint (Boeing's share price is up 32.4% over the same period).

Airbus can't get the A400 right. As was the case with the A380, they still don't know the extent of the problems and therefore the total cost of fixing them. This airplane has also had a difficult time of it, having at one point even been planned with turbofan instead of turboprop engines.
 
Today's engine manufacturers, the UK's Rolls-Royce (program leaders), Germany's MTU, France's Snecma and Spain's ITP represent yet another European political compromise with its resultant delays and cost over-runs.

By the time the A400M makes its first flight sometime next year its unit cost will probably be above $165 million but its order-book, currently around 195, is unlikely to have grown. Future export customers will wait to see what all the talking has been about and that wait just got longer again today.

Implications: Spirit AeroSystems is the key supplier and integrator on the B787. The Boeing program revolves around the Wichita, KS company. Spirit's 3Q07 results beat analysts' expectations with 2008 guidance even ahead of expectations. No talk of two-year delays here or anywhere else reputable.

Analysis: Spirit AeroSystems will ship 45 Boeing 787 shipsets (primarily cockpit and forward-fuselage) to Boeing in 2008 despite the OEM's adjusting the first two years of the program by pushing back first flight and then increasing subsequent build rates. Crisis? What crisis?

Until the program is back on track following a planned 1Q08 first flight followed by a less pressured eight-month flight-test program during which the FAA will no longer be required to intervene at the same level as was previously arranged, Spirit will take an earnings hit of about $2.2 million per delivery (Boeing doesn't get paid until it delivers the finished product to the customer), compensated for by higher-than-planned 2009 deliveries and the start of the B787 ramp-up leading to full production of seven airplanes per month by January 2010.

"For now, Spirit's risks related to the 787 seem contained," according to a couple of investment analysts monitoring the program. Since Spirit and the B787 remain inseparable, this view holds far more weight than the near-hysterical cries of others on the far distant media sidelines.

One crucial supply-chain difference between the Airbus and Boeing delays: all Airbus widebody programs have been pushed to the right, repeatedly. They're not ring-fenced as Boeing has done with the B787, in that Airbus can't recover the time (or money) lost and as a result its supply chains have had to bite the bullet.

In many cases in Europe this has been a galling experience, several major-name suppliers are deeply disillusioned with Airbus having seen their revenue streams and profit margins eroded to zero while there is enough suspicion about Airbus-parent executives at EADS and insider share dealings to prompt legal investigations in France -- and enriching yourself while impoverishing your supply chain isn't exactly great business practise.

Equally, there is no pot of gold for Airbus suppliers if the A380's design and manufacturing problems are eventually overcome and if the slow-selling A350 does make it into production, whereas with Spirit AeroSystems there is a 710-airplane firm-order backlog on the B787, equivalent to about $1.58 billion in future Spirit business.

Yet Spirit AeroSystems is not content with this substantial chunk of new work and continues to be the front-runner to take over management of the former Airbus UK plant at Filton in the UK, a strategy which if successful would make Spirit central to Airbus' future carbon-composite widebody plans too.

Crisis? What crisis?

Implications: After four months of speculation since it first hinted at B787 production issues, Boeing today said it won't start deiveries of the airplane until late-2008. Apart from the usual "I told you so" 20/20-retrovision doom-merchants, nobody truly saw this one coming...

Analysis: Springing the biggest surprise of the past two years in the commercial aerospace industry, Boeing has today announced the B787 will not meet its delivery deadline of May 2008, due to "continued challenges" with the first airplanes.

This is an industry shocker, since Boeing has given no indication whatsoever that the fastener and software problems it had with the first airplane had spread to the rest of the production line. They have now.

The temptation to shunt the first airplane off the line and move straight on to #2 was possibly not strong enough to encourage Boeing to try to stick to its already-tight schedule. Now they have more time to get it right and resolve the "challenges", and considering the stakes, rushing would be the very last thing they should have considered.

But delivery is everything in aerospace so delays are bad news. The B787 orderbook is robust enough to soak this one up and industry and markets will be relieved the speculation over May 2008 is at an end, but it's ironic that just days before the 22-month-delayed Airbus A380 is finally handed over to its launch customer, Boeing too has to rework its schedule.

Implications: MRO is big business today. With air travel demand set to double by 2020, keeping planes in the air is a lucrative and fast-expanding place to be. So if you have the money...

Analysis: Goodrich's selling its Everett, Wa., Boeing-linked heavy maintenance base Goodrich Aviation Technical Services could be misinterpreted as disaffection with the sector. The opposite is the case.

Maintenance, Repair & Overhaul (MRO) is a highly skilled, high-value-added link in the air transport chain. Such is the global shortage of good quality 3rd-party MRO shops (ie independent ones not linked to an 'in-house' airline) that certain European flag-carriers have for years flown empty B747s the 6,000 or so miles to Hong Kong for heavy (FAA-mandated) D checks.

It's big business. This is what the Singapore Minister for Transport Raymond Lim had to say about it at the opening of Singapore Airlines' two new MRO hangars in December 2006:

"The global aerospace industry has performed strongly in the past few years... Last year, Asia led all regions worldwide with a 7.6 per cent increase in international passenger traffic and 3.2 per cent increase in cargo traffic.". And Singapore has only about 6% global and 25% Asian regional MRO market share -- it's big, big business.

So the fact that Australia's Macquarie will be the new owner of a U.S. heavy maintenance shop, assuming no CFIUS regulatory problems, underlines again the global reach of the MRO business and gives further credence to the industry rationales behind Dubai's aerospace and MRO moves since 2005 in buying into the U.S. market.

MRO is a heavily regulated, labor-intensive service industry. As the international airline industry grows on the back of increased travel demand (even the more obtuse, politically-motivated routes --Venezuela's state airline Conviasa launched weekly flights to Iran via Syria on Sunday...), there are MRO opportunities galore. Germany's Lufthansa Technik, the market leader, has B747 full-service (ie up to D check) MRO operations at about 38 locations worldwide, from Seattle to Auckland and Rio de Janeiro to Tokyo).

And that's for an airplane that's currently out of production...

Implications: The primary goal of investors is to profit from their share dealings. Apparently somebody forgot to point out to EADS that the primary goal of company executives is not meant to be the same thing, not while they've a difficult job to do first anyway.

Analysis: There are opinions and weasel words galore about EADS, Airbus, the A380, the A350, government subsidies, boardroom duopolies, Franco-German mistrust and so much political interference you could forget EADS/Airbus is a business not a job-creation and personal-enrichment scheme for crooks and cronies...

So, here instead are 10 questions about EADS/Airbus. The very fact they can reasonably be asked shows there's something terribly wrong with this company:

1) why is Airbus on its fifth ceo in three years?

2) are all EADS divisions such basket cases?

3) do the French and Germans know the difference between the concepts of overseeing and oversights?

4) how can you run a company properly when your paymaster is politics?

5) where does the buck stop -- Paris, Bonn or both?

6) how do you reconcile executive enhancement, possibly by illegal means, with massive shopfloor redundancies?

7) apart from the exchange rate, Japanese & Chinese export policies, the European Central Bank, massive cost over-runs, program delays and airplane-design issues, the weather and the price of fish, EADS and Airbus management have been doing ok, right?

8) Airbus builds good planes but has been badly mismanaged in recent years, so can EADS separate from it quickly enough to avoid being dragged down with it as this latest insider-trading fiasco and its long-stuck corporate share price suggest is already beginning to happen?

9) if you think the answer to all EADS/Airbus problems is more government intervention, go to Question 37; if you don't, what next?

10) and what if anything can prevent the break-up of EADS now?

Implications: Flying almost anywhere in Europe is expensive, mile-for-mile. Low-cost carriers (LCCs) have made a big difference in the past 15 years, but there's a long, long way still to go. Europe is a geographical not a political entity, nowhere more evident than when you board a plane...

Analysis: The notion that Europe is a hotbed of cheap airline travel is a fanciful one. Despite the relatively small distances involved in most western European air travel, flying ain't that cheap. Low-cost isn't always low-fare...

Micro-evidence of this is the decision by the UK's leading LCC, easyJet, to expand its French-based operations since, as the carrier said yesterday, "With a low-cost penetration of 17% at half the European average [33%], France's air transport market still suffers from a lack of affordable, direct air links and therefore offers huge opportunities for easyJet.". Indeed.

But think what those easyJet figures really mean: Europe-wide LCC penetration is just 33%, so all Ryanair's, easyJet's and Air Berlin's strong growth over recent years still only amounts to less than a third of the total market (there are numerous other smaller LCCs). And in France,  a country of 60 million and Europe's third-largest economy after Germany's and the UK's, the proportion is much smaller still at just 17% -- one in six.

European LCCs have considerable growth potential, although to many eyes the market is already filling up. It's not.

In a handful of European countries, LCCs do dominate (Ryanair has seven bases in the UK, four in Spain, three each in Germany, Ireland and Italy -- but only one each in Belgium, France and Sweden).

And that's all. Twenty-three bases in eight countries. The European Union (EU) alone has 27 members...

easyJet currently has 17 bases, and operates "...300 routes between 79 key European airports across the UK, France, Spain, Switzerland, the Netherlands, Denmark, Italy, Czech Republic, Greece, Germany, and Portugal.".

In the current year, Ryanair  says it "...will carry 50m passengers on 557 low fare routes across 26 European countries [from] 23 European bases and by the end of March 2008 [we] will operate a fleet of 163 new Boeing 737-800 aircraft with firm orders for a further 99 new aircraft (all net of planned disposals), which will be delivered over the next 5 years".

Yet the European market is only one-third LCC-served... Amazing.

And there is still plenty of growth potential in the LCC airlines themselves. Ryanair, for example, was averaging daily B737 utilization of little more than eight hours in 2005 against a comparable Southwest Airlines figure of more than 12 hours.

Protectionist European governments like France's are the scourge of LCCs such as the big three mentioned here but market forces will win out. easyJet's French expansion, relatively small though it may be in the overall European picture, is very definitely a step in the right direction. Ryanair will surely follow.

Implications: German unions are behind Airbus' current Power8 plant-sales woes and now a German regional politician has suggested an Airbus France-Germany split in order to protect German jobs. German, not French...

Analysis:

What many in Europe increasingly consider to be the start of the inevitable, two-stage break-up of EADS and Airbus took a step closer today with a call from North Rhine-Westphalia Chief Minister Christian Wulff for German subcontractors to join forces in an attempt to acquire the German-based manufacturing facilities of EADS' Airbus division.

This is the first public sign that Germany no longer considers the future of Airbus to be entirely in French hands, as indicated on GLG News by the author in May 2007(www.news.glgroup.com/cm//Analysis/PostDetail.aspx?pid=11711).

Both French and German unions are playing a strong role in deciding the future shape of Airbus, although the French admitted last week their ability to influence matters has now largely been reduced to one of "going on strike again". Germany, on the other hand, has taken control, German unions are driving a very hard bargain re job security and as if to reinforce their new power-play approach, the German government at regional level at least has found a protectionist voice.

Airbus Toulouse will not decide the future of Airbus as an EADS division. That decision will have a strongly German flavor as befits the structural reorganization and change in the balance of power which is still taking place within Airbus and which is hastening the day when 'Airbus' widebodies and narrowbodies are not just built in different countries, they're built by different companies.

That's stage one. Stage two will be when EADS itself breaks with Airbus France, as it will definitely want to do if and when Airbus Germany moves into private hands. It is no cincidence that Airbus is now run by a German with a long-term strategic vision for Germany and EADS first, not for France and Airbus.

Implications: Vietnam Airlines yesterday provisionally ordered 10 Airbus A350XWBs. This will no doubt be hyped as an endorsement of the A350 program. It's not. And the airline readily admits it...

Analysis: Vietnam Airlnes has signed an MoU to buy 10 Airbus A350XWBs, making it only the second airline in the world which will operate both the Boeing 787 and Airbus A350 (Singapore Airlines being the first).

An unexpected endorsement of the A350 from an airline with only 13 widebodies today to its name? No, and the airline freely admits as much.

The A350-900 version is expected to be about 18% longer than the B787-8 (hard to say at the moment, design freeze on the A350 is a year away and a great deal can still happen), roughly 20% heavier (very roughly) and to be able to carry about 45% more pasengers in a two-class layout. The airline's 10 B777s and three A330s currently average about 312 seats in two-class, so the A350 offers reasonable growth potential while the B787 will fit in at the lower end of the fleet spectrum.

The A350 is not "much" bigger than the B787, as some enthusiasts put it. The A380 is "much" bigger than the B747-8i, despite the former's overweight-mandated passenger load restriction, being about 48% heavier although only marketed by Airbus as having 12.5% more capacity ("This 525-seat A380..."). The B747-8i will be a 467-seater.

But size isn't the reason Vietnam chose the A350. With the airline's limited route structure, a common type of airplane is more practical and traditional. Singapore Arilines can get away with the fleet diversity due to its truly global reach and markets, Vietnam is in contrast a smaller carrier but with longer legs here and there.

In the airline's own words yesterday, its decision is purely political. Having already ordered B787s, the carrier has also decided to keep the faith with Airbus (it will order another 20 Airbus narrowbodies -- the high dollar-euro exchange rate that was exercising Airbus management just a few weeks ago doesn't seem to have come into play here, surprise, surprise...).

To round out its political game, Vietnam Airlines will increase its B787 order and the carrier is currently working with the U.S. manufacturer to finalize details.

So why is Vietnam ordering both new types of composite widebody?

Because Vietnam would like to be elected as a non-permanent member of the U.N. Security Council.

You just have to read between the lines...

Implications: BA's decision to buy both Airbus and Boeing planes is an interim one pending another large order, which Boeing quietly awaits while EADS tries to focus attention on the fact the A380 order-book has finally added another airline after more than two years of inertia.

Analysis:

For those who follow EADS, British Airways’ decision to order market-price Boeing 787s and cut-price A380s is enlightening as this one announcement gives several good indications of the status and outlook for the new commercial widebodies EADS Airbus is struggling both technologically and financially to introduce.

One key indicator is that the EADS stock price actually closed the week down on the level reached 24 hours before the BA announcement – another clear sign of a market still unimpressed with EADS as a whole. On the day BA gave its new interim fleet plans (Sep 27) BA shares gained less than 1% -- just a normal day’s trading, in other words.

Despite the first new-customer, non-compensation A380 decision in 27 months, EADS cannot paint a convincing picture that the company outlook is as rosy as either Airbus or BA senior management portrayed last week. You can’t kid kids or stock markets…

The reasons are simple, as the Telegraph article briefly mentions. By ordering the B787, Boeing is wisely allowing competitive market forces to guide future policy. The airline’s British nemesis, Virgin Atlantic Airways, is already a B787 customer and is planning a premium-only airline in 2008 aimed at creaming off a chunk of BA’s renowned and highly profitable North Atlantic traffic.

BA had to follow the Virgin lead, and such is the clout the BA name still carries, Boeing is understood to have guaranteed BA earlier B787 delivery slots than Virgin had already secured. An innovative response from Virgin is on its way – they intend to beat BA onto the North Atlantic with the new composite widebody B787.

Similarly with Airbus and EADS. BA had to follow the long-held lead of its competitors on the London-Australia (especially Singapore Airlines, Qantas, Malaysian and of course Virgin again plus the Middle East’s Emirates) who all intend to fly the A380 on at least portions of the old Silk Route. BA is therefore once again playing follow my leader, hardly an inspiration to EADS which has seen another potential A350 customer disappear in the B787’s slipstream and for whom the word Airbus continues to have nothing but financially troubling connotations.

As the article points out, however, BA is not’t done yet. It must replace a large part of its 57-strong B747 fleet over the coming years. The A380’s too big (despite still being marketed at a reduced-capacity 525 seats due to its latest overweight issues) and both the B787 and planned A350 are too small. So when BA can afford it, it will go back to Boeing for the B747-8i.

Another large order to come, in the Telegraph’s words.

Implications: The B777 has long been a scourge of Airbus' widebody marketing efforts. Aided by the upcoming B787, Boeing is in a strong position to cover with two airplane types what Airbus is hoping to do with one. To optimize its efforts, the European manufacturer has to offer an ultra-long-haul seat-mile competitive top-of-the-range A350-1000 which would challenge Boeing's showcase B777-300ER. And despite what some plane-spotters might think, however, one order doesn't constitute a market.

Analysis: In the 2+2=17 department, a few observers in the aerospace industry are breathlessly hinting Boeing could be caught between a rock and a hard place if it ignores a potential threat from Airbus next decade.

Really? Where's the beef?

The Airbus-Boeing duopoly is one of the more transparent in the international business arena today, despite all the comedy of WTO claims and counter-claims. To even suggest that Boeing Commercial Airplanes could be strategically backed into a corner by an Airbus which is still enmeshed in the marketing and financial horrors of its mistimed A380 and A350 programs is like hinting your local Little League team's going all the way to the Super Bowl this year (regulations notwithstanding).

Not going to happen.

There is no conspiracy, no smoking gun. Airbus is not edging Boeing into a corner with one potential design of an airplane type it still doesn't actually have the money, resources or team to build and which, even if it does get to market, is some eight years away. Boeing's Scott Carson is right, therefore, to say there is plenty of time for Boeing to plan its next strategic moves -- basically, to fine-tune the B777 or launch an all-new carbon-fiber B787 big brother.

Airplane manufacturers have largely gotten out of the habit of launching entire new airplane models to satisfy the particular requirements (usually long-haul) of just a few customers. The Boeing 747SP never did head many of Boeing's marketing campaigns...

Airline bosses are well-known for their bravado in hinting at trouble ahead for the manufacturers if those same OEMs don't do what the airline guys want. But one airline doesn't make a market and it is the OEM's responsibility to ensure its products best serve the broader market as only that way can shareholder return be more diligently leveraged.

Even in a seller's market, airlines traditionally put pressure on OEMs. It's a good, healthy thing. Keeps the latter honest and Airbus could certainly have done with a lot more ILFC- and Singapore Airlines-type "No, that's not right..." pressure over the past few years.

But the tail doesn't wag the dog. Boeing has all along said it will evaluate the most likely competitive A350s once the numbers are out -- and design freeze on the A350XWB is still more than a year away, if nothing else goes wrong.

It is disingenuous to think the A350XWB program is just outselling the B777, despite the technology gap between the two. Airbus is still trying to convert A350 orders and commitments dating back to 2005 and without those, its A350 orderbook would be a short read.

Boeing will watch and wait. An enhanced B777 taking advantage of B787 technology (in the same way the B787 borrowed from the Sonic Cruiser program) is still a far more likely competitive response to Airbus than a knee-jerk super-stretched B787. Airbus knows what happens when you overstretch and thereby de-optimize an airplane -- you end up with something unpalatable like the A340-600.

Far from being "a shot across the bow", Airbus is once again firing blanks while Boeing is just carefully building its business and backlogs. That's the type of care that sees Boeing sitting with 637 confirmed B787 orders today, before the airplane has even made its maiden flight.

Blanks indeed. 2 plus 2 still equals four, ladies and gentlemen.

Implications: Criticism of Airbus is seen from some rose-tinted and lesser-informed observation points as "not the done thing". So when parent company EADS announced on July 16, 2007 Airbus' fourth new ceo in just under 13 months and the fifth in two years, whose eye turns out to have been less blinkered? The rose-tinted one or the realist's? No competition, guys.

Analysis:

Much will be gushingly written over the next month or so about the "new management structure", the "great day for EADS" and "the streamlined decision-making" which characterize the appointment of Louis Gallois as EADS' first sole ceo and that of Tom Enders as Airbus ceo.

But not written here... EADS has been on the go for seven years and finally it has one boss. Whoopee...

In the past two years Airbus has had no fewer than five ceos, one of whom massively enriched himself at the same time as the company ran up enormous delays on the still-undelivered A380 and the long-way-late A350XWB as well as incurring huge financial losses -- a projected 4.8 billion euros ($6.6 billion) reduction in profit at EADS through 2010, according to Bloomberg.

So as the dust settles on yet another political decision at EADS dressed up as a commercial initiative, some points to ponder:

    1)     Louis Gallois refused to stay on as Airbus ceo if Tom Enders was made sole EADS ceo, which the German government and simple business sense demanded. The French govenment insisted Gallois had to have the top EADS job or else he stayed put at Airbus and no restructuring would take place...

    2)    One year ago Enders was parachuted in to Airbus to stop the A380 program unravelling altogether. Now he has to take up permanent residence to rescue the entire deeply troubled Airbus division (A380 and A350XWB production and market problems -- only the 20-year-old narrowbodies are in good shape);

    3)    French infleunce at Airbus has been decreasing steadily since the A380 fiasco began more than two years ago. The pace stepped up with the retirement in April 2007 of French president and Airbus-is-French cheerleader-in-chief Jacques Chirac and was further underlined by the recent agreed shareholding investment from Dubai;

    4)    German influence at Airbus has now never been stronger in a continuing process that has gathered pace since the A380 put a spanner in the corporate works;

    5)    Among guarantees Enders has obtained for agreeing to do what his French counterpart flatly refused to are firstly, that he retains EADS ceo autonomy in respect of defense matters in general but the ongoing USAF tanker contract in particular (he is still the main man on defense, in other words) and secondly, that he will be restored to the top executive's job at EADS if he still wants it on 63-year-old Gallois' anticipated retirement within two-three years;

    6)    Initial reaction in Mobile, AL, center of the EADS tanker effort, to the news that Enders was no longer in place at EADS was one of disappointment as he had long been considered a genuine pro-US industry stalwart who worked well with tanker partners Northrop Grumman. That disappointment has been largely replaced with head-scratching at the political musical chairs which has seen Enders leave the EADS office -- but be allowed to take the tanker files with him;

    7)    European reaction has been somewhat perplexed with several question-marks appearing over just how serious the situation at Airbus might be to require such a change-around -- "the ceo's revolving door needs oiling", as one sceptic put it, and he didn't mean from under-use...

    8)    Market reaction has been less than enthusiastic too, with EADS stock flat -- a sure sign that the hands or pockets of few objective observers have been burned by the EADS and Airbus spin;

    9)    The outlook for Airbus is healthier in prospect today than it has been at any time over the past three years, although the worst is not over yet as severe challenges remain, particularly in the production and credibility areas;

    10)    EADS first-half 2007 results July 26th and the need to deliver the first A380 to Singapore Airlines by Otober are upcoming toughies (Airbus had been talking about delivering the first A380 'early', but the word September has been dropped from the the company lexicon, just as the airplane has 'shrunk' from a baseline 555-seater to a 525-seater in Airbus marketing parlance, due to continuing and unresolved overweight issues).

There is much for Enders to do.

The Airbus problems which have stymied EADS over the past two years and which have been denied by successive managements and numerous plane-spotters too eager to buy into the myth rather than invest in the reality are still there to be solved. Hence Enders, because without Airbus, forget EADS.

The parent-company's shares are currently trading at an unadjusted price that is lower than it was June 6 and 7, 2001. One of Enders' strong points is corporate strategy -- with the full backing of chancellor Merkel's government, he is now expected to play to those strengths at Airbus.

And not before time.

Implications: First-class air travel is not just a luxury. For some airlines offering this level of service is a necesssity -- they need front-end revenue to balance low competition-driven economy fares. But revenues and costs are toally different in the air, and first-class costs an airline dear.

Analysis:
Eliminating first-class travel on long-haul or intercontinental travel is not necessaily a bad move. Delta, Continental, Northwest and USAirways are almost certainly onto a good thing here, at least from the cfo's point of view.

First class is expensive to operate and takes up a disproportionate amount of company time and labor to fulfil. Sure, the rewards are there if the load factors hold up, but limousine service, fast-track check-in, higher baggage allowances, separate well-appointed airport lounges with no-cost everythings on offer, higher-standard onboard amentiies and catering plus start-to-finish preferential treatment all obviously add significantly to the cost of flying the passenger from A to B. Can ticket prices and margins stay high enough to justify the cost?

Is it worth it, in other words? Given that most European flag-carriers still operate First, what do they know that's maybe a secret to the US majors? Well, nothing really.

The trick is in understanding the clientele, both in catchment-area and cultural terms. In Europe, flying the 'national' airline (British Airways, Lufthansa, Iberia or Alitalia, for example) is an expression of soldiarity with your home country.

The cultural, identity element is just under the surface too. There's a comfort factor in flying a carrier where the cabin crew share your first language. This is just not a US-originating issue but in Europe, if you have the money to spend, you spend it in areas that make you more comfortable and language is one of them.

Much the same has long been said of US citizens in far-flung countries who, on boarding a non-stop flight back to the US, often simply said, "At last! Home!". Pan Am did a great deal for its reputation in the 1960s & 70s by playing up this marketing angle.

This historical aspect is important. First class is becoming more and more an anachronism as airline bosses try to wring the maximum guaranteed revenue out of each flight. The more you rely on First, the more your eggs are in one small basket. The days when coat and tie were de rigueur in First are long-since gone.

Markets such as the Middle East where conspicuous consumption is still all the rage are something of an exception here, but once again the big growth area is Business and to a lesser extent Premium Economy. There are times when trying to book a Business flight to Dubai is far from easy.

The fact that European carriers such as BA and Virgin Atlantic as well as several Middle East and Indian airlines, among others, are investing heavily in onboard facilities is testament to the near cut-throat competition for First Class travel in a relatively tight market. And that hurts margins.

Meanwhile, all-Business or all-Premium services have hit the market in recent years, with Eos, Silverjet and MAXjet big names on the North Atlantic. Big names but small operations and they're not all enjoying uniform success. First class is unpredictable -- a real cost multiplier.

But is this the future? Will all-Premium replace front-end traditional operations? Not in the foreseeable.

According to the International Air Transport Association (IATA) in Geneva, global demand for air transport is growing at about 5% per annum, a figure expected to last for the next 20 years or so. That's real volume -- a doubling of demand in roughly 14 years. The biggest financial opportunities will automatically exist where volumes are highest, and that's where airline bean-counters are looking. Not in First...

There will however always be demand for First Class. Whether there's financial reason to justify its continued widespread industry supply is nowhere near as certain. If you fly with 20 empty Economy seats, you're missing out. If those empty seats are in First, however, you're burning serious money.

An industry-wide reduction in First seating availability will occur long before any other sector -- so Continental, Delta, Northwest and USAirways should have little to fear.

Implications: This article started out last week with a draft title, "Alcan struggling with Alcoa bid". Indeed. Alcan struggled, Alcan looks to have failed, Rio Tinto to have succeeded and positive reverberations are being felt across the aerospace industry in particular.

Analysis: