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UBS Predicts Severe Drop In Airbus Production  
User currently offlineArt From United Kingdom, joined Feb 2005, 3379 posts, RR: 0
Posted (4 years 10 months 2 weeks 4 hours ago) and read 8320 times:

From Flightglobal:

"Investment bank UBS predicts there will be a surplus of 1,400 airliners at the end of this year, necessitating production cuts at both Airbus and Boeing."

and

"It expects Airbus production rates to fall by about 40% by 2012."

http://www.flightglobal.com/articles...roduction-faces-sharp-axe-ubs.html

Is UBS way off the mark or are Airbus (and Boeing) heading for big trouble? Reducing output by 40% is a very big change in production levels over a short period of time (2-3 years). And presumably revenue will fall by more or less 40% in 2-3 years while costs will not.

I'm curious as to which sector will take the biggest hit in production. Could narrow body production be cut in half while wide bodies are less affected? Any thoughts are welcome.

[Edited 2009-09-14 01:07:11]

28 replies: All unread, showing first 25:
 
User currently offlineAstuteman From United Kingdom, joined Jan 2005, 9976 posts, RR: 96
Reply 1, posted (4 years 10 months 2 weeks 3 hours ago) and read 8261 times:
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Quoting Art (Thread starter):
UBS Predicts Severe Drop In Airbus Production

Just a cautionary note - the article only appears to single out Airbus because it was an analysis of EADS - the problem would appear to be systemic to all airframers.

Quoting Art (Thread starter):
And presumably revenue will fall by more or less 40% in 2-3 years while costs will not.

Obviously fixed costs are difficult to chop (e.g facilities and infrastrusture).
Variable costs - materials are proportional to production I guess. The biggest problem is what to do with skilled labour.
I hold a view that it was cuts like this at the turn of the century that caused competence gaps in Boeing that have contributed to the 787 fiasco.
If they're sensible, both Airframers will realise there is a trade-off between short-term cost-cutting, and long-term growth.

I believe it is this scenario which is causing EADS to do anything it can to stay as cash rich as possible.

40% sounds a lot, I have to say.....

Rgds


User currently offlineGemuser From Australia, joined Nov 2003, 5610 posts, RR: 6
Reply 2, posted (4 years 10 months 2 weeks 3 hours ago) and read 8178 times:



Quoting Art (Thread starter):
"Investment bank UBS predicts there will be a surplus of 1,400 airliners at the end of this year, necessitating production cuts at both Airbus and Boeing."

While that maybe correct, I don't know, that does not invariably mean a production cut. The surplus could be dealt with by retiring older, less efficient airframes and replacing them with more efficient. cheaper to operate new airframes.

Of course this is a complex decision, do the cost savings exceed the costs of new airframes? And it's different for every airline and possibly every aircraft type they have. So I wouldn't assume that this surplus WILL automatically become a production cut.

Gemuser



DC23468910;B72172273373G73873H74374475275376377L77W;A319 320321332333343;BAe146;C402;DHC6;F27;L188;MD80MD85
User currently offlinePellegrine From United States of America, joined Mar 2007, 2350 posts, RR: 8
Reply 3, posted (4 years 10 months 2 weeks 2 hours ago) and read 8063 times:

Will there be an aircraft surplus? There is already. Airlines are parking planes, retiring old B-market widebody aircraft for new, returning leased a/c. This floods the market, airplanes sit on the second/third/fourth...-hand market for a while before they are scrapped. In the narrowbody market, huge numbers of 737NG/A320s have been delivered over the past years. A dip in new-build demand because of economic woes combined with market saturation, it would naturally lead to production cuts at A-B.

Parked aircraft coming back into the active may lessen demand for new build aircraft.

Airlines are going to be on slim margins for a while, lessening their ability or want to pay for new aircraft.

This is notable:

Quote:

In its report, UBS notes that EADS management has been able to deliver on its financial guidance thanks to Airbus's backlog management, in which strong airlines are moved forward in the schedules to take aircraft deferred by weaker ones. However, backlog management is "covering up the need for cuts in production rates", writes the bank.

The industry is headed for trouble. Look at the biz jet industry right now. The business jet manufacturers are economic bellwethers for where the airliner manufacturers are headed.

Enders said Airbus could cope with 1,000 cancellations, they may have to.



oh boy!!!
User currently offlineBurkhard From Germany, joined Nov 2006, 4384 posts, RR: 2
Reply 4, posted (4 years 10 months 2 weeks 2 hours ago) and read 8066 times:

Investment banks have a long tradition of completely wrong predictions. 2012 is expected to be the year where economy is going up again. I would understand a prediction of 50 less in 2010 and 100 less in 2011.

It strongly depends on the oil prize. If this goes up again, effcient aircraft are needed soon - and the effiency leaders are A321 and A333, and even an A346 beets the 747s by far, so may be needed case not enough 77W can be available.

What is the purpose of this statement. Does somebody want to place a large order and put pressure on Airbus to be afraid to sit on 15 monthly A320 nobody takes? Who wants 400 A320 soon? What did he pay UBS for this analysis?


User currently offlineUshermittwoch From Germany, joined Jan 2004, 2964 posts, RR: 16
Reply 5, posted (4 years 10 months 2 weeks 2 hours ago) and read 8021 times:

It would be interesting to look a UBS' aerospace portfolio...
Or their intentions.
Maybe they want the price of EADS stock to go down so they can buy a big chunk and then pretend to be surprised when their prediction does not come true...



Where have all the tri-jets gone...
User currently offlineBongodog1964 From United Kingdom, joined Oct 2006, 3535 posts, RR: 3
Reply 6, posted (4 years 10 months 2 weeks 1 hour ago) and read 7921 times:

This article seems to be extremely pessemistic towards Airbus to say the least.

We all know that many of the laid up aircraft will never re enter service, this has been proven out each time the desert parks have filled up in the past. UBS however seems to give the impression that these aircraft are good assets just waiting for passengers, whereas in the main they are older, thirsty, and maintenance intensive.


User currently offlineRheinwaldner From Switzerland, joined Jan 2008, 2213 posts, RR: 5
Reply 7, posted (4 years 10 months 2 weeks 1 hour ago) and read 7877 times:

The UBS is not an investment bank and the "investment bank department" of UBS does not deserve this name neither.

They failed so miserably in predicting markets that I wonder how trustworthy this report is.

Funny (or sad?) that the finance industry today writes crisis reports about other industries that can be traced back to their own failure.


User currently offlineEBJ1248650 From United States of America, joined Jun 2005, 1932 posts, RR: 1
Reply 8, posted (4 years 10 months 2 weeks 1 hour ago) and read 7855 times:

If the economy continues its present trend, airlines would (I'd think) continue to park their older airplanes and would, as best they're able, order newer ones. Sales of 787s, A350s and other new airplanes will increase.


Dare to dream; dream big!
User currently offlineMEA-707 From Netherlands, joined Nov 1999, 4302 posts, RR: 36
Reply 9, posted (4 years 10 months 2 weeks 1 hour ago) and read 7848 times:

I also don't take these reports too seriously.
The A-320/330/350 and Boeings 737/777/787 orderbooks are still packed. Even if a quarter of the orders get delayed or cancelled there still remains tons of airplane to make. If finished airplanes are not taken up, the more popular ones are taken by others. Look at the 737NGs; the production is still stable at about 30 a month, and 2nd hand ones are still very popular.
Maybe some economies are slowing down but it's picking up already in parts of Europe, China and the rest of Asia. I think they'll both do fine and only have to slightly trim their output but still turn out nice numbers.



nobody has ever died from hard work, but why take the risk?
User currently offlineFcogafa From United Kingdom, joined May 2008, 769 posts, RR: 0
Reply 10, posted (4 years 10 months 2 weeks 1 hour ago) and read 7836 times:

It is a bit of a given, surely. Aircraft orders are down by about 70 percent this year, so the manufacturers will catch up the backlog in a couple of years and have to react to this significant reduction by slashing production, at least until the market is restored.

User currently offlineBurkhard From Germany, joined Nov 2006, 4384 posts, RR: 2
Reply 11, posted (4 years 10 months 1 week 6 days 23 hours ago) and read 7658 times:



Quoting Bongodog1964 (Reply 6):
UBS however seems to give the impression that these aircraft are good assets just waiting for passengers, whereas in the main they are older, thirsty, and maintenance intensive

How much money do they have invested in aircraft that are in the desert now? Maybe they are afraid of loosing money there?


User currently offlineLH452 From United States of America, joined Mar 2007, 42 posts, RR: 0
Reply 12, posted (4 years 10 months 1 week 6 days 23 hours ago) and read 7605 times:

Assume that 1% traffic growth requires about 150 aircraft of average size in added capacity, and 2009 ends up in the -4% range. With about 950 aircraft to be delivered you end up with an overcapacity for the year of about 1550 aircraft. That level of overcapacity with high output during 2008 and zero traffic growth does create a problem that has to be corrected by reduced output in the future. To assume that traffic will rebound sharply during 2010 seems at this point in time very optimistic.

Brgs,


User currently offlinePlaneAdmirer From United States of America, joined Jul 2009, 560 posts, RR: 0
Reply 13, posted (4 years 10 months 1 week 6 days 23 hours ago) and read 7590 times:

One thing not mentioned in the article in the contraction in global credit markets which makes financing an individual plane or airline substantially harder. The global lessors are struggling with their debt issues right now so they can't be as aggressive as they had been. Banks, as reported in Barrons this weekend, continue to tighten their credit standards. This is ultimately going to affect deliveries.

User currently offlineManfredj From United States of America, joined Mar 2007, 1132 posts, RR: 0
Reply 14, posted (4 years 10 months 1 week 6 days 21 hours ago) and read 7023 times:



Quoting Rheinwaldner (Reply 7):
The UBS is not an investment bank and the "investment bank department" of UBS does not deserve this name neither.

They failed so miserably in predicting markets that I wonder how trustworthy this report is.

I'm afraid the problem at UBS was much more complex than that. Their "incompetence" in one area of the market does not deem them unworthy at predicting another. Take their predictions seriously.

The real question is: Who has the financial might to ride the storm that they predict.

Quoting Astuteman (Reply 1):
The biggest problem is what to do with skilled labour.
I hold a view that it was cuts like this at the turn of the century that caused competence gaps in Boeing that have contributed to the 787 fiasco.

Although there may be an iota  Wink of truth to this, their problem with skilled labour was an ATTEMPT to thwart a downturn in production should one occur. The competence gap, however, was a small contributor in the overal success of the 787.

Ultimately, I think the Governments will have a big part in the success of these companies. With our (current) administration I think Boeing has the advantage. Airlines are safer under this administration (whether I like it or not) because of their need and history of saving companies who otherwise don't deserve being saved.



757: The last of the best
User currently onlineRoseflyer From United States of America, joined Feb 2004, 9489 posts, RR: 52
Reply 15, posted (4 years 10 months 1 week 6 days 21 hours ago) and read 6939 times:



Quoting Art (Thread starter):
I'm curious as to which sector will take the biggest hit in production. Could narrow body production be cut in half while wide bodies are less affected? Any thoughts are welcome.

Rates are already going down on widebodies at Boeing. 777 is going from 7 to 5 a month and 787 ramp up rates have been postponed. That's about 30% cut already.



If you have never designed an airplane part before, let the real designers do the work!
User currently offlineFrancoflier From France, joined Oct 2001, 3736 posts, RR: 11
Reply 16, posted (4 years 10 months 1 week 6 days 21 hours ago) and read 6825 times:

I have learnt about a year ago not to listen to anybody's prediction when it comes to the development or outcome of this crisis, especially when it comes from a bank...

That said, given the difference in time between orders and actual deliveries, it is true that manufacturers are still working overtime to deliver on 2007's (and earlier) order frenzies...

If orders don't pick up soon, the backlog will eventually catch up the order count.



Looks like I picked the wrong week to quit posting...
User currently offlineBongodog1964 From United Kingdom, joined Oct 2006, 3535 posts, RR: 3
Reply 17, posted (4 years 10 months 1 week 6 days 20 hours ago) and read 6692 times:



Quoting Burkhard (Reply 11):
Quoting Bongodog1964 (Reply 6):
UBS however seems to give the impression that these aircraft are good assets just waiting for passengers, whereas in the main they are older, thirsty, and maintenance intensive

How much money do they have invested in aircraft that are in the desert now? Maybe they are afraid of loosing money there?

IMO the finance companies won't have too much money tied up sitting in the desert, as the majority of the laid up aircraft will be older ones either with no mortgages attached, or in the case of lease aircraft, with low residual value.
The danger comes, if the airlines exhaust those in these categories, and start defaulting on loans, or handing back younger aircraft at the end of their lease, with no prospect of getting a new user.


User currently offlineUAL747DEN From United States of America, joined Dec 2003, 2392 posts, RR: 11
Reply 18, posted (4 years 10 months 1 week 6 days 20 hours ago) and read 6596 times:

Too many people are trying to discount the article because it uses "Airbus" rather than "Boeing" but I think that you would find about the same if it was about Boeing. To anyone that follows this industry it shouldn't come as that big of a surprise. Orders are way down so deliveries will also go way down to match the orders and economic times. I think that Airbus is a little bit more at risk because they made sales that were a little more risky however that is not to say that Boeing won't feel it just as hard. When you are talking about cutting production by 50+% a few more frames aren't really going to matter.
As far as the overall effect of this goes, I think Airbus is in a far better position to handle this downturn. The more social ways of Europe and in particular France and Germany make it so that Airbus should be able to live through this downturn and when things start picking up again they will still have the same highly skilled workforce to help ramp things back up.
On the other hand Boeing will be forced to make cuts and those workers will not have the choice to wait around until things pick back up. Boeing will have to find and retrain a new workforce when things pick up again. There are both advantages and disadvantages for both manufactures in this kind of market but I think both will adapt and make it through.

There is another part of this story that is not explored by UBS because it is just too much of an unknown to really get into and that is airlines with large fleets using this downturn to update their fleet with new more efficient aircraft. There are a great deal of legacy carriers with aging fleets that need to be replaced at some point. These airlines could place massive orders that would fill a lot of the places of otherwise canceled slots and could keep the manufactures busy until there is growth in the industry again. Manufactures have to decide if filling slots to keep production up is worth the massive discounts that would be needed to win these orders from the mega airlines at a time when things are uncertain. Without these major discounts I don't really see airlines taking the chance or being able to find the financing needed to secure these large orders. I guess it comes down to deciding if you want to take that gamble that things will come back soon enough or if you want to sacrifice large profits for stability.



Below are some of the comments I found to be pretty good.

Quoting Fcogafa (Reply 10):
It is a bit of a given, surely. Aircraft orders are down by about 70 percent this year, so the manufacturers will catch up the backlog in a couple of years and have to react to this significant reduction by slashing production, at least until the market is restored.



Quoting LH452 (Reply 12):
Assume that 1% traffic growth requires about 150 aircraft of average size in added capacity, and 2009 ends up in the -4% range. With about 950 aircraft to be delivered you end up with an overcapacity for the year of about 1550 aircraft. That level of overcapacity with high output during 2008 and zero traffic growth does create a problem that has to be corrected by reduced output in the future. To assume that traffic will rebound sharply during 2010 seems at this point in time very optimistic.



Quoting PlaneAdmirer (Reply 13):
One thing not mentioned in the article in the contraction in global credit markets which makes financing an individual plane or airline substantially harder. The global lessors are struggling with their debt issues right now so they can't be as aggressive as they had been. Banks, as reported in Barrons this weekend, continue to tighten their credit standards. This is ultimately going to affect deliveries.




/// UNITED AIRLINES
User currently offlineDBCC From Switzerland, joined Nov 2007, 65 posts, RR: 0
Reply 19, posted (4 years 10 months 1 week 6 days 18 hours ago) and read 5599 times:

The armchair pilots, armchair CEO's and armchair analysts on A.NET have a better chance of getting it right than a bunch of bankers that could not even figure out they were investing for the last 5 years in junk that they personally talked up. The only thing they have in common with the aerospace industry is that they get government bailouts.

If a bank analyst predicts something, bet against him. Your odds are much better.

The airlines will not really be the ones in deep trouble, the leasing companies are the ones holding the old and outdated aircraft on their balance sheets. Oh yes, the leasing companies are mostly owned by ....the banks. Are they starting to run scared?


User currently offlineAstuteman From United Kingdom, joined Jan 2005, 9976 posts, RR: 96
Reply 20, posted (4 years 10 months 1 week 6 days 6 hours ago) and read 3133 times:
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Quoting Manfredj (Reply 14):
their problem with skilled labour was an ATTEMPT to thwart a downturn in production should one occur. The competence gap, however, was a small contributor in the overal success of the 787.

I can only go by my own experiences, Manfred. At the end of the Cold War, we were obliged to downsize by a significant amount. This of course required us to use every means to prevent people from being forced out of their jobs.
We found that people left the company in this order...

1. The most experienced people of all, within around 5 - 10 years of retirement, took voluntary redundancy and left, essentially retiring early. This accounted for around 40%-50% of our management experience, measured in man-years
2. The best young go-getting talent took voluntary redundancy because the had the skills, intellect, and courage to know how to get more secure employment in the marketplace (and as we operated, by agreement with the unions, a LIFO policy, these young ones saw themselves at potential risk)

These two sets of volunteers spell disaster when downsizing comes along, and usually it is very difficult to stop them going if you're going to force someone else out of a job in their place. It's only after they've gone that..

3) The dross hanging on gets fired (this one is usually a good thing for the company)
4) If the cuts go deep enough, the good employees at all levels (management down), start to get fired. Again, this one hurts. (As a line manger this one hurt me most of all - interviewing damned good people to tell them their skill were no longer required).

I look around our company today, and I'd go so far as to say that the people who left our company throughout the 1990's took with them more collective domain knowledge, skill, and general competence, than the entire workforce we have left today.

It may be different in the USA, but I'd be reluctant to play down the significance of this the next time a company moves into uncharted waters, as Boeing have with the 787...
Of course, the insiders will know best.

Rgds


User currently offlineBurkhard From Germany, joined Nov 2006, 4384 posts, RR: 2
Reply 21, posted (4 years 10 months 1 week 6 days 3 hours ago) and read 2868 times:

With 35 A32x, 8 A33x and 2 A38x a month, a 40% cut of production rate must be mainly A32x.

Is the information, which airlines have A320 on order to be dilivered in 2012, available somewhere. Maybe there is a candidate who has 100 on order and UBS assumes he isn't around any longer in 2012?


User currently onlineN14AZ From Germany, joined Feb 2007, 2687 posts, RR: 25
Reply 22, posted (4 years 10 months 1 week 6 days 3 hours ago) and read 2826 times:

Recently, there was a family day at Airbus facilities in Finkenwerder and a lot of pictures were taken at that day (usually it's forebidden).

I was shocked to see that at least half of the A380s parts displayed are belonging to airlines, which have decided to postpone their A380 deliveries:
MSN 055 for QF: http://picabload.de/resized/737037-DSC_0110.jpg
MSN 057 for EK: http://picabload.de/resized/975226-DSC_0107.jpg
MSN 062 for QF: http://picabload.de/resized/464146-tonne3.jpg

This must have an influence on the production rate. I mean, even if they could simply switch to another airframe (but to which airframe? except LH all A380 clients have now postponed their deliveries) they would have to start all over again.


User currently offlineDynamicsguy From Australia, joined Jul 2008, 868 posts, RR: 9
Reply 23, posted (4 years 10 months 1 week 6 days 2 hours ago) and read 2806 times:



Quoting Roseflyer (Reply 15):
Rates are already going down on widebodies at Boeing. 777 is going from 7 to 5 a month and 787 ramp up rates have been postponed. That's about 30% cut already.

Boeing also postponed planned rate increases on the 767 and 747-8.


User currently offlineBongodog1964 From United Kingdom, joined Oct 2006, 3535 posts, RR: 3
Reply 24, posted (4 years 10 months 1 week 6 days 2 hours ago) and read 2742 times:



Quoting Astuteman (Reply 20):

1. The most experienced people of all, within around 5 - 10 years of retirement, took voluntary redundancy and left, essentially retiring early. This accounted for around 40%-50% of our management experience, measured in man-years

This was a regular scenario in the 90's, however one influencing factor at the time, was that the pension funds appeared to be awash with money, and were very happy to pay out to early retirees.
Though the pension funds operate at arm length from the employers, they had surpluses, and generally helped the employers by making generous early retirement packages available. Now that the pension funds are generally in defecit, they are in no position to pay early pensions.

Thus the 55 + age group are less likely to volunteer, as its not so good financially as in the past.


25 Burkhard : Airbus has already slowed down the ramp up of A380 productions, that will take care of this. Even a dozen A380 less in 2012 than originally planned,
26 Astuteman : If the A380's current production rate is reduced by 40% they'll be down to around 8 per year... Rgds
27 Post contains links Art : IIRC the backlog on the A32X is 5+ years, on the A330/A340 4+ years and on the A380 5+ years. Of course, there could be cancellations but if so, shou
28 Manfredj : What a terrible turn of events Astute. A scenario like this in the US would likely read front news materal depending on how big the company was. It a
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