Summary
Admission that production cuts could soon be on the way are a bite of reality that Airbus has thus far been reluctant to accept.
Analysis
Airbus’ CEO Tom Enders comments that the company “cannot exclude that we will cut back production even more” shows that the industry still has an uphill battle on its hands.
Boeing’s decision to lop rates on the 777 from next summer now look like a smart move – with carriers across the globe deferring progress payments on new jets, holding back from risky financing with the ongoing “credit crunch”, deferring airplanes has become the norm over the last twelve months.
To that end, if we look at Airbus’ heavily exposed A330 line, we see that AirAsia X is looking to complete a sale/leaseback of its A330s along with the A330 Freighter being delayed until the third quarter of next year – it was inevitable that the most successful Airbus widebody for sales would ultimately becomes the first sacrificial lamb of the Airbus portfolio.
Worryingly, the Chinese A320 production line is another headache.
With Hamburg poised to take the A320 line from Toulouse in the next few years, the German element will be reluctant to force A320 rates lower – particularly as the Tianjin line adds to the complexity of production rates and at what level both sites should be operating at – especially since Chinese carriers are concerned about having to take A320s when traffic yields are eroding faster than could ever have been imagined.
Airbus claims an A320 rate of around 34/month effective October 2009. In contrast to the rolling average of the 737 which is around 29/month, the A320 is still some 15% higher.
Boeing has maintained 737 rates for the time being, but any adjustment in a downward fashion would likely be by that same margin to around 25/month – meaning that there is every possibility that Airbus could enact a steep production adjustment by as much as 25-30% if it feels that next year will be harder than this one.
As I had mentioned before, the most difficult year is next year.
That Enders concurs that the next couple of years will be most daunting the industry has faced serves as a sharp reminder that what goes “up” must come “down”.
The inflated production rates of the boom years have had their fun and now the time has come to make agonising choices about longevity in the business cycle for the next decade.
The metrics of the market equally affect both Airbus and Boeing – the critical difference between the two mindsets appears to be that the US aerospace company made the move first.
While that doesn’t provide any competitive advantage given that revenues will start to go down, coupled with the financial burden of the repeatedly-delayed 787, Airbus too will likely make production adjustments a key priority for 2010.
The A380 has already been rocked this year with a spate of deferrals and the pace of development of the A350XWB as well as the A330 Freighter has been painfully slow with costs across all three programs rising faster than first envisaged.
Enders' smart comments will only prove their worth if they are heeded and a long overdue production adjustment is enacted that better reflects the quagmire of the airline and aerospace industries.
This author consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
