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lightsaber
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The case for more aircraft production cuts/playing chicken

Tue Sep 01, 2020 10:37 pm

The title comes from an Aviation week article.

https://aviationweek.com/aerospace/airc ... ction-cuts
The jist ol the link:
Nonetheless, more tough decisions loom. On the Boeing side, a slower reintroduction of the MAX is inevitable, as is a very slow service-entry process for the 777X. Airbus will have to cut narrowbody output further. If long-haul travel does not return quickly—and no indications suggest it will—Airbus will also have to take another hard look at A350 and A330neo rates, as painful as that may be.

My opinion:
If you look at the delivery threads, you can quickly see both Narrowbody and widebody production exceeds what airlines can accept. Ironically, MAX customers were given a break with them not being available.

The supply chain, including Boeing and Airbus, cannot ramp up instantly. The number of Zodiac us delaying production threads was beyond count, resulting in SAFRAN buying them out:
viewtopic.php?t=1353163

Well, we now face a quandary. If production slows too much, vendors will be unable to manufacture enough spare parts, much less new parts, during the other side. If production isn't cut extensively further, either the airframers or airlines go bankrupt. (They might anyway.)

Hattip to Revelation for noting in the Covid reference thread, we might be past peak demand for the year as the 7-day average is heading diwn:

https://www.tsa.gov/coronavirus/passenger-throughput

This implies we will 'bounce back' to a lower level of demand than the current production is setup for.

While at some point there will be a snap back in demand, I assume each party (airline, airframer, engine companies, sub-vendor, and employees) will do what is in their best interest:
Airlines: Accept few to no aircraft. For years.

Airframer: Their big profit is selling new aircraft. If they are not delivering new, they are in trouble. This group needs to maximize deliveries.

Engine companies: Fate really varies by company, but in general they need to sell new to keep up the workforce. Pratt and RR take a cashflow hit when delivering new engines.
For Pratt this balances out a little (not fully) as they were not financing the engines (nor expecting profit from it).
RR the most dependent on utilization revenue (PBTH and parts). In effect, PBTH is engine financing.

So engine companies will be most interested in getting existing engines flying again. Even GE/CFM; they effectively finance the engines and even some of the airframe on a per flight hour basis. GE/CFM make a profit out the door, so their interest in new deliveries us high.

Sub-Vendor: Current huge drop in their refurbishment revenue means mass layoffs. Since the same workforce builds new parts/sub-assemblies, new build is what is sustaining them until a return to normal.

I think the status of airlines is so bad production must drop further. In particular on widebodies and the A320. The MAX is a problem with the huge undelivered backlog.

Does anyone have a link to undelivered aircraft per vendor?

Busy season has come and gone. Airlines will not have enough funds for years for the current planned
production rates.


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amdiesen
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Re: The case for more aircraft production cuts

Wed Sep 02, 2020 12:20 am

Paraphrasing from a mosaic of your historical posts, the air-framer is at the heart of the ecosystem. It’s in their selfish best interest to sustain the ecosystem. Whiteboard ideas would include; offer discounts if deferred orders are converted to near term deliveries. Expedite freighter solutions; A35?, B78? A solution discovery path may include lamentable decisions A)to inspire A339 order conversions to near term A359 near term deliveries, B)inspire B779 order conversions to near term B787-9/10 deliveries. Smart for airbus to focus on the A321xlr. One has to ask would moving forward with an ovoid, keep-it-simple, NMA be a path for Boeing to get out of its hole. Create a method to convert Max 9/10 orders to NMA?
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MIflyer12
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Re: The case for more aircraft production cuts

Wed Sep 02, 2020 12:46 am

There's nothing wrong with the widebody products. The issue is that carriers don't have any money, nor demand for new planes for growth. Spending money to develop a plane that wouldn't see deliveries for seven years or more doesn't help them get past the next three years. If the NMA business was marginal (and it was - look at how long they dithered) pre-covid, it's toast now.
 
JayinKitsap
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Re: The case for more aircraft production cuts

Wed Sep 02, 2020 2:45 am

The WB products are just fine right now, the problem is the current supply was exceeding demand even in 2019, now fleet utilization is under 20% for months and will stay that way until travel opens up.

B737 - Prior to 2002 the largest production year was 320 ('99) with only 4 years building more than 250 units. Since then, only 3 years were under 250 units. Last 6 years, 5 years were averaging 500/year. If the prior long term rate was covering replacement and growth, this roughly 50% increase in average rate could mean 2,000 units extra were built.

B747 - prior to 2002 averaging 32 per year built, now just 6.

B767 - prior to 2002 averaging 42 per year, 2019 was 43

B777 - prior to 2002 average of 64, 5 years since hit 89-99, averaging 70+, 2019 45

B787 - prior to 2002 - 0 , averaging 145 now.

A300 - prior to 2002 - 10/year, now 0

A330 - prior to 2002 - averaging 40/yr recent average 63/yr.

A340 - prior to 2002 - averaging 20/yr, now 0

A350 - prior to 2002 - 0 now averaging 110/yr.

So average WB production in 2002 and earlier is 208 per year, now 412 per year plus a bonus 250 A380's added in. Almost double the number of widebodies produced in a decade now compared to 20 years ago, this is almost 4,000 added over two decades above the prior replacement plus growth rate.


I am sure there are the green eye shade types that are figuring out the least cost rotation of in service use and frequency, hours of green time, engine rebuild costs per model, aircraft tires, allocation of craft from super active to the final flight to the desert. If a PBTH contract on a plane is idle, it stays in storage, fly the owned metal instead. Fly the lease plane, saving the owned for later. Just look how Delta has been handling their MD's, flown hard right to just before sending away - burning that free green time.
 
2175301
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Re: The case for more aircraft production cuts

Wed Sep 02, 2020 2:47 am

According to the spreadsheets at "All Things 787" Boeing is currently building 10 787 per month, and only delivering an average of 3 per month....For the last 4 months. That cannot go on forever either.

It is my understanding that Boeing has announced going to building either 6 or 7 planes per month in January.... Should they be doing so sooner? or perhaps even go down to building 3-4 B787 per month? What's it going to look like to have 60-75 B787's sitting waiting for delivery...

I have not looked at the specific Airbus numbers... Just note that I've read on this site that they have aircraft sitting all over the place.

Things are going to really hurt for a while.
 
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Re: The case for more aircraft production cuts

Wed Sep 02, 2020 2:48 am

As noted, it isn't the passenger product, there just isn't any money.

amdiesen wrote:
Paraphrasing from a mosaic of your historical posts, the air-framer is at the heart of the ecosystem. It’s in their selfish best interest to sustain the ecosystem. Whiteboard ideas would include; offer discounts if deferred orders are converted to near term deliveries. Expedite freighter solutions; A35?, B78? A solution discovery path may include lamentable decisions A)to inspire A339 order conversions to near term A359 near term deliveries, B)inspire B779 order conversions to near term B787-9/10 deliveries. Smart for airbus to focus on the A321xlr. One has to ask would moving forward with an ovoid, keep-it-simple, NMA be a path for Boeing to get out of its hole. Create a method to convert Max 9/10 orders to NMA?

I agree with expediting freight options. I'm quite bearish on the 777x without a freight option. That is enough to sustain the 777 'ecosystem.'

I'd like to see a 787F. This economy makes a 767 re-engine really tough.

Airbus is looking brilliant on the A321xLR. Boeing must counter with a 737-9ER (e.g., a tail fuel tank). But not a huge volume and this further decreases widebody demand.

I love the idea of the NMA. But where is the billions to setup factories? None of the engine vendors have the cash for a new custom engine and the NMA must have a new engine.

In this environment, the engine vendors will try and sell existing designs for any application they can. Exotic limited markets (supersonic) are dead on arrival unless the customer pays cost+ for R&D.

Pratt and RR are in a good position for new applications. Suddenly, the B-52 re-engine is a must win for all 3 engine vendors (volume to employ the workforce that was working civilian).

I don't want to go into military much, but everyone will try to dual use. e.g., the P-8 has become a necessity on the 737 parts and the CFM-56 supply chain despite being a tiny volume.

Unfortunately, my industry must shrink. :cry2:

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FLALEFTY
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Re: The case for more aircraft production cuts

Wed Sep 02, 2020 2:52 am

For the airliner manufacturers it is a case of production overcapacity. Boeing has FAL's in two Puget Sound locations, along with South Carolina. Airbus has even more FAL's in France, Germany, the PRC, US and Canada. Something has to give...

With Boeing the plan to fix their production capacity problem is to consolidate B787 assembly (their most "profitable" product lines) at their least-productive FAL in Charleston chiefly because SC labor is cheap and non-union. This will leave them with a giant, near-empty facility in Everett, along with the associated loss of skilled labor, technicians and engineers. Once those skills leave, it will be difficult to get them back when demand returns. Convincing those skills to relocate in South Carolina will be tough, finding those skills in South Carolina will be tougher.

Airbus is about to have the A380 FAL at Toulouse empty out, but with demand for all types dropping, they may also be left with even more expensive, empty manufacturing spaces and a loss of skilled labor, technicians and engineers in their European factories. Airbus management will come under pressure from the EU governments of France and Germany to move the A32X and/or A220 assembly lines back from China, Canada and the US to save jobs.

The trick will be for both companies' planners to visualize what the market will be like in 2024-25, which is when demand for new aircraft will start to gradually emerge. Even with a reliable COVID-19 vaccine that is available globally, financially airlines are on "life support" from their governments (or are going bankrupt) and the poor financial health of the surviving airlines will continue for (probably) the next 2-3 years.
 
75driver
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Re: The case for more aircraft production cuts

Wed Sep 02, 2020 3:20 am

The details don’t really matter right now. Bottom line is both manufacturers are stuck in a world of hurt. Producing aeroplanes in a market with little demand is unsustainable. Not sure where they go from here but it will be interesting to see what they can do.
 
iamlucky13
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Re: The case for more aircraft production cuts

Wed Sep 02, 2020 7:44 am

The editorial seems to have a mistaken premise:

Across the industry, leading CEOs have defined “normal” as 2019. But a closer look at earlier market forecasts and planned production rates shows that 2019 is the wrong benchmark.


Production rates are not the benchmark the manufacturers are discussing.

In the 2Q earnings call, which I'm reviewing again now, Boeing only talked about the return of travel volume to the 2019 level. They did not attempt to forecast when aircraft deliveries would reach that level, and only stated their interim production rate goals. The IATA forecast's explicitly discuss RPK's, not aircraft deliveries. I followed Airbus less closely, but believe they have made similar statements.

I do agree that Boeing and Airbus were already above ideal production rates before the pandemic hit. I've made exactly the same point before, using their market forecasts and their front-loading of productions compared to the forecast 20 year growth.

Furthermore, I assume we have not seen the last of the interim rate discussions, especially on the Airbus side. For unfortunate reasons, Boeing is probably a lot closer to where they will want to be - the 737 will only ramp over the next year to a little over 1/2 of their previous rate target, and then monitor the market for further need to change. If I understand right, they're restarting the line at only 14 per month. That's after having cut the rate from 52 to 42 for several months, and then stopping it for 6 months, actions which predated the travel collapse. The 777 is dropping during the transition to the 777X from 5 per month to 2, and will not see as severe inventory problems due to the freigher-heavy nature of the remaining 777 orders.

Even with those cuts, I'm certain Boeing is deliberately building up inventory as a compromise - they will not want to completely eviscerate their production worker ranks and destroy their suppliers who are financially weaker than Boeing itself is, so they will continue to convert the money going into salaries and supplier contracts into inventory, rather than waste it. The same logic applies to Airbus.

As passenger traffic gradually climbs back towards 2019 levels combined with retirements of older aircraft, airlines will at some point before that time have the flight rates and load factors to accept deliveries at a faster rate than the reduced production rates. Obviously, that's when the excess inventory starts to go away. Production rates then stay below demand until that inventory is cleared.

In the meantime, airlines will accept some aircraft as their own compromise to renegotiate payment penalties with the manufacturers, and offset that with more retirements and temporary parking older aircraft or those approaching heavy maintenance intervals.

Note also that recovery to 2019 passenger levels is not recovery to where we were before. Where we were before forecast 120% of 2019 travel demand by 2024. When people talk about the prospects of a permanent decrease in travel, that's already at least partially accounted for in the years of missing growth.

Again, I've followed Boeing more closely than Airbus, but Boeing and Airbus believe they can weather this. Boeing forecast recovering to breakeven by the end of 2021. That means, if the commercial side is not profitable at the target for that time of 31 x 737, 6 x 787, and 2 x 777, they're at least close enough that the defense side closes the gap. They took on enough debt to cover them until that time. They're going to burn a lot of cash again in the 3rd quarter, but should start to cash burn meaningfully decline by the 4th quarter.
 
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Re: The case for more aircraft production cuts

Wed Sep 02, 2020 8:03 am

We all know by now that aviation is a cyclical business with up and downs. Although on the way up on the very long run.
Why not buffer and protect the industry better? It's not a trap now it is what had to be expected. During fat years structures need to better be prepared for tough times. This stupid alternating between party and doom doesn't make sense to me.

For a while aircraft manufacturing remained cautious and avoided building white tails. Then it all began to be a race for the non sustainable highest rates. Plane stupid so to say.
 
Sokes
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Re: The case for more aircraft production cuts

Wed Sep 02, 2020 10:01 am

Noshow wrote:
Why not buffer and protect the industry better? It's not a trap now it is what had to be expected. During fat years structures need to better be prepared for tough times. This stupid alternating between party and doom doesn't make sense to me.

For a while aircraft manufacturing remained cautious and avoided building white tails. Then it all began to be a race for the non sustainable highest rates. Plane stupid so to say.

That would require both players to moderate production, otherwise the risk loving one will take away business from the careful one.

Central banks create bubbles. I believe one can't blame Boeing or Airbus for it. This statement is only true for the time of maybe two years back. But then which manager could have proposed a few years back to not increase production further.

I wonder if one shouldn't rather blame airlines.

All planes are extreme capable now. In future I expect the industry to be less cyclical. However I'm not very confident in this last sentence.

Add the years in which a model sells well before a better model becomes available.
Sell as much and as fast as you can.
Why can't the world be a little bit more autistic?
 
smartplane
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Re: The case for more aircraft production cuts

Wed Sep 02, 2020 10:14 am

2175301 wrote:
According to the spreadsheets at "All Things 787" Boeing is currently building 10 787 per month, and only delivering an average of 3 per month....For the last 4 months. That cannot go on forever either.

It is my understanding that Boeing has announced going to building either 6 or 7 planes per month in January.... Should they be doing so sooner? or perhaps even go down to building 3-4 B787 per month? What's it going to look like to have 60-75 B787's sitting waiting for delivery...

I have not looked at the specific Airbus numbers... Just note that I've read on this site that they have aircraft sitting all over the place.

There are three numbers of interest for each model - built, delivered and payments.

Most aircraft still being delivered (Boeing and Airbus) are end of tranche / orders, with customers applying credits accrued on earlier deliveries, so little or no money changing hands in favour of the OEM's.
 
oldJoe
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Re: The case for more aircraft production cuts

Wed Sep 02, 2020 7:01 pm

Does anyone have a link to undelivered aircraft per vendor?

In the link below they mention that Airbus has about 150 undelivered and stored aircraft until July.
Sorry, link in german only
https://www.wiwo.de/wirtschaft-von-oben/wirtschaft-von-oben-62-airbus-hier-lagert-airbus-neu-gebaute-langstreckenflieger-ein/26050846.html
 
ltbewr
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Re: The case for more aircraft production cuts

Wed Sep 02, 2020 7:20 pm

Maybe time for a revival of the famous 1971 billboard 'Will the last person leaving Seattle turn off the lights'.
https://mynorthwest.com/25015/turn-out- ... billboard/
 
tomcat
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Re: The case for more aircraft production cuts

Wed Sep 02, 2020 9:08 pm

At some point, consolidation will become an option if not the logical way forward. The lineup of a potential Transatlantic Aircraft Company joint venture could be simplified to the A320 family on one side of the pond and to the 787 (including a freighter option) in SC. Boeing and Airbus would remain independent and any profit they would take out of the TAC would be invested in a new aircraft model of their own, re-establishing some competition on the market.
 
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Re: The case for more aircraft production cuts

Wed Sep 02, 2020 9:15 pm

oldJoe wrote:
Does anyone have a link to undelivered aircraft per vendor?

In the link below they mention that Airbus has about 150 undelivered and stored aircraft until July.
Sorry, link in german only
https://www.wiwo.de/wirtschaft-von-oben/wirtschaft-von-oben-62-airbus-hier-lagert-airbus-neu-gebaute-langstreckenflieger-ein/26050846.html

Running the link through Google Translate gives:

Satellite images show why: (Airbus) had to park more than 100 finished machines worldwide that airlines and leasing companies can no longer afford in view of the crisis.

Apparently Châteauroux is the hot spot for Airbus wide body storage:

Image

The aircraft outside the red box are parked BA A380s, the widebodies inside the red box are said to be Airbus A350 and A330.

As for the future:

And the prospects are not good. Faury indicated that he could increase the delivery figures a little in July. But in doing so, he let it be known that the group itself will not reach the target figures for a while. "We do not expect an increase this year and early 2021," says the Airbus boss. And the old delivery numbers are even further away. "We could possibly do that with the medium-haul jets in 2022, possibly later," said the manager. "With the long-haul aircraft it will probably take even longer."

Sounds like he's saying longhaul recovery is 2023 or later, and he's not saying it with much conviction.

I'd love to see satellite photos of where Boeing is stashing their 787s.
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Re: The case for more aircraft production cuts

Wed Sep 09, 2020 2:54 pm

Aviation week has an update:

https://aviationweek.com/air-transport/ ... ction-more

In my own words, aviation growth is exponential, say 3.5% per year. So in a 20 year forcast, production in year 20 should be about double year 1.

Planned production, per year if no MAX grounding: 1900

Average over 20 years estimated needed 1970.

We were in overproduction unless demand was going to grow by 6%+.

Revelation wrote:
oldJoe wrote:
Does anyone have a link to undelivered aircraft per vendor?

In the link below they mention that Airbus has about 150 undelivered and stored aircraft until July.
Sorry, link in german only
https://www.wiwo.de/wirtschaft-von-oben/wirtschaft-von-oben-62-airbus-hier-lagert-airbus-neu-gebaute-langstreckenflieger-ein/26050846.html

Running the link through Google Translate gives:

Satellite images show why: (Airbus) had to park more than 100 finished machines worldwide that airlines and leasing companies can no longer afford in view of the crisis.

Apparently Châteauroux is the hot spot for Airbus wide body storage:

Image

The aircraft outside the red box are parked BA A380s, the widebodies inside the red box are said to be Airbus A350 and A330.

As for the future:

And the prospects are not good. Faury indicated that he could increase the delivery figures a little in July. But in doing so, he let it be known that the group itself will not reach the target figures for a while. "We do not expect an increase this year and early 2021," says the Airbus boss. And the old delivery numbers are even further away. "We could possibly do that with the medium-haul jets in 2022, possibly later," said the manager. "With the long-haul aircraft it will probably take even longer."

Sounds like he's saying longhaul recovery is 2023 or later, and he's not saying it with much conviction.

I'd love to see satellite photos of where Boeing is stashing their 787s.

WoW. We will soon have over year of demand in storage at the airframers.

Production must slow. 777 and A330 production is on life support.

While there will be a recovery, it won't be to 2019 levels (walk a major city and look at all the empty storefronts, until the mortgage can be paid, some people won't fly, or until cruise ships are back to normal). So that means quite a surplus. How much?

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morrisond
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Re: The case for more aircraft production cuts

Wed Sep 09, 2020 3:31 pm

Good article - 24 per month production for the NEO series and 14 per month for the MAX seems about right and I can see 787 at 5, 777 at 2, 330 at 2 and 350 at 3.

It's going to be a long while before we see rates where they were.
 
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Re: The case for more aircraft production cuts

Wed Sep 09, 2020 3:37 pm

lightsaber wrote:
WoW. We will soon have over year of demand in storage at the airframers.

Production must slow. 777 and A330 production is on life support.

While there will be a recovery, it won't be to 2019 levels (walk a major city and look at all the empty storefronts, until the mortgage can be paid, some people won't fly, or until cruise ships are back to normal). So that means quite a surplus. How much?

Lightsaber

ST ( https://www.seattletimes.com/business/b ... ellations/ ) reports:

The net result is 433 outright MAX cancellations or conversions to other models this year and 522 orders now removed from the official backlog as too dubious to count.

That is a lot of business to just disappear.

Since B and A are pulling from the same customer pool, we probably have more "dubious" orders to work their way through the system.

The AvWeek article says:

“Even with high replacement demand, which we expect, production rate plans at Airbus and Boeing through 2023 are too high relative to deliveries,” they said. “This is particularly an issue for Airbus, which intends to produce 40 A320neos per month through 2021. Airbus was able to deliver those in July, but we do not believe that rate can be sustained. It is an issue for Boeing and Airbus on widebodies, [as both] are already delivering far fewer airplanes than they are producing. If one expects a global resolution of COVID issues in 2021 that could change the outlook. But we see the odds as against that.”

On the other hand, another analyst suggests Airbus is going to use low interest loans to keep production high, forcing a game of "chicken" between the OEMs. I think such a strategy will backfire. Demand will return gradually but it'll be met by airlines fetching the airplanes they've parked. There won't be enough positive cash flow to pay for new airplanes. Forcing airlines to take planes they can't pay for will trigger collapses which will put even more airplanes on the market. It seems unrealistic for the OEMs to not only gain enough financing to keep building at a high rate, but also for the airlines to get the financing needed to take the aircraft.
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Re: The case for more aircraft production cuts

Wed Sep 09, 2020 5:52 pm

If flying number do not more or less fully recover until 2024, and if as a respected poster suggested, up tick in orders will not occur for another two years considerable pessimism for the entire industry is in order. There are a lot of good planes that were in service, and are now parked. Oil is not likely to go up much in price. Already bought 320/737 family member, 330,ceos and neos, 787s, 350s, 777s could possibly fill the expansion for the next 4(!?) years. Where is the cash for creating a flow going to come from for the duopoly? The larger or more capable versions of NBs are already eating into wide bodies, and what little optimism exists may be there.
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9Patch
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Airbus and Boeing playing chicken with production rates?

Wed Sep 09, 2020 6:49 pm

Aviation Week takes a deep dive into Boeing and Airbus production rates in an article as analysts are beginning to better understand what the near- and long-term outlooks are for commercial aircraft production.

The article is titled Why Airbus And Boeing May Need To Cut Production More

A couple of paragraphs I found particularly interesting.

Agency Partners analyst Sash Tusa wrote to clients: “We remain very surprised that, given an arguably weakening COVID-19 backdrop, and impending oversupply as Boeing restarts 737 MAX deliveries, Airbus should even be talking about raising production rates, let alone from as early as the second half of 2021. We suspect that Airbus and Boeing are now playing a potentially damaging game of chicken: Neither will cut rates until airlines agree to pay the costs of the deferrals, especially since premature cuts might cede deliveries share to the competitor.”

However, Charles Armitage, European Aerospace and Defence analyst at Citi Research, has a different view. “What [Airbus] is doing is not stupid,” he says. “If you believe that 2,400 aircraft is the demand over the next four years, then it is a sensible thing to do.” He argues that it is not very painful to build up inventory in a low-interest-rate environment because it saves Airbus the difficulty of cutting back and then rebuilding in a few years and does not disrupt production unduly. The question is whether the market will recover to the expected level and when it will do so. “There are huge uncertainties,” Armitage says.
https://aviationweek.com/air-transport/ ... ction-more

So, cut production or build white tails and hope demand returns? What should Airbus do, given that Boeing already has a large inventory of MAX produced?
 
Antarius
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Re: Airbus and Boeing playing chicken with production rates?

Wed Sep 09, 2020 7:09 pm

9Patch wrote:
So, cut production or build white tails and hope demand returns? What should Airbus do, given that Boeing already has a large inventory of MAX produced?


Interesting juxtaposition of thoughts there.

My opinion is that Airbus should stay the course. They have a very healthy backlog and have struggled to ramp to meet the demand in the past. Given the neo is the hot-commodity in the NB market, Airbus has two advantages
1. They have sustained long term demand
2. Airlines aren't likely to cancel due to delays as a result of COVID and look elsewhere.

If Airbus can float the capital to build and white tail, IMO, it sets them up even better a couple of years down the line.
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tomcat
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Re: Airbus and Boeing playing chicken with production rates?

Wed Sep 09, 2020 7:14 pm

Their challenge is to cut the production without killing their supply chain otherwise they would pretty much suffer the same fate in the short term. Building white tails now gives them a chance to still be viable when the demand will return if it's not too far in the future.
 
Waterbomber2
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Re: Airbus and Boeing playing chicken with production rates?

Wed Sep 09, 2020 7:14 pm

As I've been saying from before the pandemic, the OEM's should have all lines at full production, even if it means building white tails.
They need to move away from outdated and unproductive built-to-order production methods to high efficiency standardised off-the-shelf production where airlines can get what they need when they need it.

No airline in a growth stage wants to wait 5 years for a A321neo. Ordering aircraft has become a speculation on its own, and airline executives can only rely on a crystal ball to place orders that they can't know they need.

If this crisis illustrates anything, it's that when the offer tails the demand by many years, if the demand suddenly vanishes, the backlog becomes a pile of missed opportunities for both the airline and the OEM.

Jets cost a fraction of their sales price to build and OEM's can de-risk by paying suppliers upon completing a sale.
Last edited by Waterbomber2 on Wed Sep 09, 2020 7:28 pm, edited 2 times in total.
 
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Re: Airbus and Boeing playing chicken with production rates?

Wed Sep 09, 2020 7:20 pm

Antarius wrote:
9Patch wrote:
So, cut production or build white tails and hope demand returns? What should Airbus do, given that Boeing already has a large inventory of MAX produced?


Interesting juxtaposition of thoughts there.

My opinion is that Airbus should stay the course. They have a very healthy backlog and have struggled to ramp to meet the demand in the past. Given the neo is the hot-commodity in the NB market, Airbus has two advantages
1. They have sustained long term demand
2. Airlines aren't likely to cancel due to delays as a result of COVID and look elsewhere.

If Airbus can float the capital to build and white tail, IMO, it sets them up even better a couple of years down the line.


Airbus and Boeing's current backlogs are toilet paper now. The healthy backlog no longer exists as most of their customers are technically bankrupt or on their way there.
Post crisis, the OEM's will have to rebuild their backlogs from scratch, so why not avoid backlogs in the first place?

New airlines will pop up and give heavily indebted survivors a run for their money.
The industry is going to go through a reset, so Airbus and Boeing better prepare to court new friends.
The new entrants and the few healthy survivors would want to grow fast and take market share, they will want jets ready to go a few months after placing their orders, not years.
 
dagKentWA
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Re: Airbus and Boeing playing chicken with production rates?

Wed Sep 09, 2020 7:33 pm

Waterbomber2 wrote:
...Jets cost a fraction of their sales price to build and OEM's can de-risk by paying suppliers upon completing a sale.


I take it you have never managed a business. I am in management at a Boeing supplier. It is crazy enough when the OEM wants to stretch payment terms to Net 90 days. In our particular business, labor is the largest component of the work we do. Shall I ask employees to let us pay them for the work they do when we finally get paid, many years later when Boeing finally delivers/sells a plane and we get paid? Try that, and find out just how quickly the US Dept of Labor shuts you down for not paying wages in accordance with federal law. If the OEM tried that, their supply chain would vanish quicker than you can say "Bob's your uncle:"
 
Weatherwatcher1
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Re: Airbus and Boeing playing chicken with production rates?

Wed Sep 09, 2020 7:35 pm

Waterbomber2 wrote:
As I've been saying from before the pandemic, the OEM's should have all lines at full production, even if it means building white tails.
They need to move away from outdated and unproductive built-to-order production methods to high efficiency standardised off-the-shelf production where airlines can get what they need when they need it.

No airline in a growth stage wants to wait 5 years for a A321neo. Ordering aircraft has become a speculation on its own, and airline executives can only rely on a crystal ball to place orders that they can't know they need.

If this crisis illustrates anything, it's that when the offer tails the demand by many years, if the demand suddenly vanishes, the backlog becomes a pile of missed opportunities for both the airline and the OEM.

Jets cost a fraction of their sales price to build and OEM's can de-risk by paying suppliers upon completing a sale.


When you say Fraction, do you realize that manufacturing costs are a really big fraction of actual (not list) sales price? Airlines make progress payments as airplanes get built.

There is also a significant amount of custom equipment such as avionics and interiors. I agree lead items got long, but the 6-12 months required to configure and build an airplane are needed. Interiors certification takes a significant amount of time.
 
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Re: Airbus and Boeing playing chicken with production rates?

Wed Sep 09, 2020 7:38 pm

dagKentWA wrote:
Waterbomber2 wrote:
...Jets cost a fraction of their sales price to build and OEM's can de-risk by paying suppliers upon completing a sale.


I take it you have never managed a business. I am in management at a Boeing supplier. It is crazy enough when the OEM wants to stretch payment terms to Net 90 days. In our particular business, labor is the largest component of the work we do. Shall I ask employees to let us pay them for the work they do when we finally get paid, many years later when Boeing finally delivers/sells a plane and we get paid? Try that, and find out just how quickly the US Dept of Labor shuts you down for not paying wages in accordance with federal law. If the OEM tried that, their supply chain would vanish quicker than you can say "Bob's your uncle:"


Good point. Airplanes are not something that can be built “off the shelf”. There’s millions of dollars in customization for each airplane and on top of that the long lead parts need to be paid for well before delivery otherwise the suppliers will go out of business
 
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Re: Airbus and Boeing playing chicken with production rates?

Wed Sep 09, 2020 7:48 pm

dagKentWA wrote:
Waterbomber2 wrote:
...Jets cost a fraction of their sales price to build and OEM's can de-risk by paying suppliers upon completing a sale.


I take it you have never managed a business. I am in management at a Boeing supplier. It is crazy enough when the OEM wants to stretch payment terms to Net 90 days. In our particular business, labor is the largest component of the work we do. Shall I ask employees to let us pay them for the work they do when we finally get paid, many years later when Boeing finally delivers/sells a plane and we get paid? Try that, and find out just how quickly the US Dept of Labor shuts you down for not paying wages in accordance with federal law. If the OEM tried that, their supply chain would vanish quicker than you can say "Bob's your uncle:"


So a question for you: who is paying your company's labor force now? If they are getting paid anyway, might as well have them do some work, no?

Also, let's say that a supplier builds a part today that goes on a plane that will only be sold in 12 months.
Well, the good news is, the supplier gets money today for the airplane part they built 12 months ago, so the risk on production cost is only in the initial phase of production.
So no, your argument does not hold water.

By the way, it doesn't change a thing because in a bavklog production most suppliers of larger components were also only paid upon delivery of the finished aircraft.
 
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Re: The case for more aircraft production cuts/playing chicken

Wed Sep 09, 2020 7:50 pm

I merged the playing chicken with production with the prior thread (same link).
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Re: Airbus and Boeing playing chicken with production rates?

Wed Sep 09, 2020 7:54 pm

Weatherwatcher1 wrote:
dagKentWA wrote:
Waterbomber2 wrote:
...Jets cost a fraction of their sales price to build and OEM's can de-risk by paying suppliers upon completing a sale.


I take it you have never managed a business. I am in management at a Boeing supplier. It is crazy enough when the OEM wants to stretch payment terms to Net 90 days. In our particular business, labor is the largest component of the work we do. Shall I ask employees to let us pay them for the work they do when we finally get paid, many years later when Boeing finally delivers/sells a plane and we get paid? Try that, and find out just how quickly the US Dept of Labor shuts you down for not paying wages in accordance with federal law. If the OEM tried that, their supply chain would vanish quicker than you can say "Bob's your uncle:"


Good point. Airplanes are not something that can be built “off the shelf”. There’s millions of dollars in customization for each airplane and on top of that the long lead parts need to be paid for well before delivery otherwise the suppliers will go out of business


Airlines would rather have a cheaper price through a standardised production method than pay more for a custom-built unit.

And guess what, just because you have white tails sitting on the ramp doesn't mean you can't build to order.
If you only build to order, you can't offer off-the-shelf.
The beauty of off-the-shelf is that you can also squeeze in custom builds for a premium and a longer wait time. The second beauty is that those custom builds will also be ready much sooner than if they were all built to order by default.

For example, wouldn't Fedex and UPS love to be able to get their hands on some B777F's asap? If they place their orders today, by the time they are delivered, covid is over and gone and demand for air freight may slump.

If the inventory of white tails is well managed, why not? I think that keeping 6 months worth of production available off the shelf is a nice inventory to have. Build and test them, then take off the engines, APU and avionics and rotate those high value components in a pool. Upon completing a sale, install the definitive high value components, install the cabin to order, re-test and fly away in 2 months.

Airlines' needs change constantly.
"We'll take 41 x A3XY-Z 6 years from now". We have been used tonreading such PR but if you think about it, it's ridiculous. How can they know? Between mergers, downturns, bankrupcties, abrupt cancellations of orders, new competition, design faults, so much can change in a few years' time.
Do you also order you underwear 3 years ahead of delivery?
 
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Re: Airbus and Boeing playing chicken with production rates?

Wed Sep 09, 2020 8:54 pm

dagKentWA wrote:
I take it you have never managed a business. I am in management at a Boeing supplier. It is crazy enough when the OEM wants to stretch payment terms to Net 90 days. In our particular business, labor is the largest component of the work we do. Shall I ask employees to let us pay them for the work they do when we finally get paid, many years later when Boeing finally delivers/sells a plane and we get paid? Try that, and find out just how quickly the US Dept of Labor shuts you down for not paying wages in accordance with federal law. If the OEM tried that, their supply chain would vanish quicker than you can say "Bob's your uncle:"

The article is saying interest rates are low, so your business should just get a bunch of low interest loans and pay the workers with that cash.

I'm not a fan of the idea. We've seen IATA saying they don't expect demand to return to 2019 levels till 2024 and on average it takes airlines another two years to accept new planes after a recession. We're seeing 75% of the 787s produced over the last five months aren't being accepted. I'm having a hard time seeing that improve any time soon.
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Re: Airbus and Boeing playing chicken with production rates?

Wed Sep 09, 2020 9:13 pm

Waterbomber2 wrote:
Weatherwatcher1 wrote:
dagKentWA wrote:

I take it you have never managed a business. I am in management at a Boeing supplier. It is crazy enough when the OEM wants to stretch payment terms to Net 90 days. In our particular business, labor is the largest component of the work we do. Shall I ask employees to let us pay them for the work they do when we finally get paid, many years later when Boeing finally delivers/sells a plane and we get paid? Try that, and find out just how quickly the US Dept of Labor shuts you down for not paying wages in accordance with federal law. If the OEM tried that, their supply chain would vanish quicker than you can say "Bob's your uncle:"


Good point. Airplanes are not something that can be built “off the shelf”. There’s millions of dollars in customization for each airplane and on top of that the long lead parts need to be paid for well before delivery otherwise the suppliers will go out of business


Airlines would rather have a cheaper price through a standardised production method than pay more for a custom-built unit.

And guess what, just because you have white tails sitting on the ramp doesn't mean you can't build to order.
If you only build to order, you can't offer off-the-shelf.
The beauty of off-the-shelf is that you can also squeeze in custom builds for a premium and a longer wait time. The second beauty is that those custom builds will also be ready much sooner than if they were all built to order by default.

For example, wouldn't Fedex and UPS love to be able to get their hands on some B777F's asap? If they place their orders today, by the time they are delivered, covid is over and gone and demand for air freight may slump.

If the inventory of white tails is well managed, why not? I think that keeping 6 months worth of production available off the shelf is a nice inventory to have. Build and test them, then take off the engines, APU and avionics and rotate those high value components in a pool. Upon completing a sale, install the definitive high value components, install the cabin to order, re-test and fly away in 2 months.

Airlines' needs change constantly.
"We'll take 41 x A3XY-Z 6 years from now". We have been used tonreading such PR but if you think about it, it's ridiculous. How can they know? Between mergers, downturns, bankrupcties, abrupt cancellations of orders, new competition, design faults, so much can change in a few years' time.
Do you also order you underwear 3 years ahead of delivery?


Airplanes aren’t underwear.

Standardization is good. The 777 has something like 18 coffee pots certified that airlines can choose from. The 787 simplified that to like 3. Simplification speeds up production, however we can’t easily get to one coffee pot since there will be a few premium airlines wanting to offer espresso in business class that the majority of airlines won’t want to pay for the more expensive, heavier and larger coffee maker.

Good luck getting FedEx pilots to take off the shelf airplanes. There’s avionics configurations necessary to fit their operation. Airlines choose what features are configured for their operation. English vs Metric units, Continuous descent profile, vertical path deviation, etc are all customized navigation for each airline based on their network. MTOW and payload options come at significantly different prices, so why would an airline want to pay for more expensive heavy weight landing gear? This doesn’t even touch seats, galleys, furnishings, IFE, etc.

I respect efficiency with making standardized planes, yet the airline industry isn’t standard. There are local regulatory requirements as well as flight deck software that all take time to customize. You could have off the shelf airplanes that then require 6 months and a couple million to customize to the airline’s operation. All the while there is a massive inventory cost.
Last edited by Weatherwatcher1 on Wed Sep 09, 2020 9:16 pm, edited 1 time in total.
 
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Re: Airbus and Boeing playing chicken with production rates?

Wed Sep 09, 2020 9:16 pm

Waterbomber2 wrote:
dagKentWA wrote:
Waterbomber2 wrote:
...Jets cost a fraction of their sales price to build and OEM's can de-risk by paying suppliers upon completing a sale.


I take it you have never managed a business. I am in management at a Boeing supplier. It is crazy enough when the OEM wants to stretch payment terms to Net 90 days. In our particular business, labor is the largest component of the work we do. Shall I ask employees to let us pay them for the work they do when we finally get paid, many years later when Boeing finally delivers/sells a plane and we get paid? Try that, and find out just how quickly the US Dept of Labor shuts you down for not paying wages in accordance with federal law. If the OEM tried that, their supply chain would vanish quicker than you can say "Bob's your uncle:"


So a question for you: who is paying your company's labor force now? If they are getting paid anyway, might as well have them do some work, no?

Also, let's say that a supplier builds a part today that goes on a plane that will only be sold in 12 months.
Well, the good news is, the supplier gets money today for the airplane part they built 12 months ago, so the risk on production cost is only in the initial phase of production.
So no, your argument does not hold water.

By the way, it doesn't change a thing because in a bavklog production most suppliers of larger components were also only paid upon delivery of the finished aircraft.

Vendors are low margin. Boeing and Airbus cut costs by taking on risk and now want to push risk back on vendors.

Risk sharing partners gain more long term profit, but only get paid at delivery. Were talking about vendors who do not have the funds to be risk sharing partners.

So this is changing the terms. Many vendors agreed to razor thin margins because Boeing, Pratt, GE, CFM, Airbus, and RR agreed to take the risk. For example, RR buys the machine tools and pays rent for the space the tool occupies for the Txwb. The material is even bought by RR. RR already paid for the R&D and now the vendors just charge machinist labor (elevated rate to pay for employees and profit), but the profit is low based on 30 day net.

In fact, the vendors might only break even until overhaul. Asking a vendor to lose a year of float late in the terms will not happen.

CFM tried to pull this on the CFM-56 for a production ramp at 100% vendor risk and almost universally, the vendors said they would stick with the prior contract (no ramp in production).

Lightsaber
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Re: Airbus and Boeing playing chicken with production rates?

Wed Sep 09, 2020 9:21 pm

Waterbomber2 wrote:
Do you also order you underwear 3 years ahead of delivery?


I don't, but I don't expect the manufacturer to sit on $ tens of Billion in inventory, either.

Start here: https://www.nytimes.com/1996/01/20/busi ... -pink.html

What you don't understand about manufacturing operations or business finance fills books and PhD theses. You don't tie up huge amounts of money and hope somebody eventually shows up to buy something, not even fully standard products.

The existence of the supply chains of Apple and Toyota just mock you.
 
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Re: Airbus and Boeing playing chicken with production rates?

Wed Sep 09, 2020 10:13 pm

Weatherwatcher1 wrote:
Waterbomber2 wrote:
Weatherwatcher1 wrote:

Good point. Airplanes are not something that can be built “off the shelf”. There’s millions of dollars in customization for each airplane and on top of that the long lead parts need to be paid for well before delivery otherwise the suppliers will go out of business


Airlines would rather have a cheaper price through a standardised production method than pay more for a custom-built unit.

And guess what, just because you have white tails sitting on the ramp doesn't mean you can't build to order.
If you only build to order, you can't offer off-the-shelf.
The beauty of off-the-shelf is that you can also squeeze in custom builds for a premium and a longer wait time. The second beauty is that those custom builds will also be ready much sooner than if they were all built to order by default.

For example, wouldn't Fedex and UPS love to be able to get their hands on some B777F's asap? If they place their orders today, by the time they are delivered, covid is over and gone and demand for air freight may slump.

If the inventory of white tails is well managed, why not? I think that keeping 6 months worth of production available off the shelf is a nice inventory to have. Build and test them, then take off the engines, APU and avionics and rotate those high value components in a pool. Upon completing a sale, install the definitive high value components, install the cabin to order, re-test and fly away in 2 months.

Airlines' needs change constantly.
"We'll take 41 x A3XY-Z 6 years from now". We have been used tonreading such PR but if you think about it, it's ridiculous. How can they know? Between mergers, downturns, bankrupcties, abrupt cancellations of orders, new competition, design faults, so much can change in a few years' time.
Do you also order you underwear 3 years ahead of delivery?


Airplanes aren’t underwear.

Standardization is good. The 777 has something like 18 coffee pots certified that airlines can choose from. The 787 simplified that to like 3. Simplification speeds up production, however we can’t easily get to one coffee pot since there will be a few premium airlines wanting to offer espresso in business class that the majority of airlines won’t want to pay for the more expensive, heavier and larger coffee maker.

Good luck getting FedEx pilots to take off the shelf airplanes. There’s avionics configurations necessary to fit their operation. Airlines choose what features are configured for their operation. English vs Metric units, Continuous descent profile, vertical path deviation, etc are all customized navigation for each airline based on their network. MTOW and payload options come at significantly different prices, so why would an airline want to pay for more expensive heavy weight landing gear? This doesn’t even touch seats, galleys, furnishings, IFE, etc.

I respect efficiency with making standardized planes, yet the airline industry isn’t standard. There are local regulatory requirements as well as flight deck software that all take time to customize. You could have off the shelf airplanes that then require 6 months and a couple million to customize to the airline’s operation. All the while there is a massive inventory cost.


The inventory cost is not big at all and in fact it's negative.

Example:
Assumptions: Covid hadn't happened. Start-up Paradise Airlines needs 12 x A320neo to launch ASAP.

-Built to order: Place an order with Airbus, first delivery in 2025, then more units in 2026, 2027.> Not an option so buy used for now + place order with Airbus.
-Off-the shelf system: Place an order today, first delivery in December 2020, AOC, registration, crew training, ready for launch next spring.

Inventory cost is dwarfed by lost opportunity cost.


Imagine all the orders that Airbus and Boeing have lost because they couldn't deliver aircraft quickly enough.

I don't see what off-the shelf has anything to do with customised software.
You can customise interiors, software, LRU's. That's where most of the customisation is anyway.
Airframe-wise, you can offer a few versions of exit and window arrangements to choose from.

Also, even built-to-order inventory costs are happening as we speak.

Now is the opportunity to transition to off-the shelf.
But my guess is that the big brass at A & B are sitting in their lazy armchair and playing golf.
 
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Re: Airbus and Boeing playing chicken with production rates?

Wed Sep 09, 2020 10:43 pm

Waterbomber2 wrote:

Example:
Assumptions: Covid hadn't happened. Start-up Paradise Airlines needs 12 x A320neo to launch ASAP.

-Built to order: Place an order with Airbus, first delivery in 2025, then more units in 2026, 2027.> Not an option so buy used for now + place order with Airbus.
-Off-the shelf system: Place an order today, first delivery in December 2020, AOC, registration, crew training, ready for launch next spring.

Inventory cost is dwarfed by lost opportunity cost.


Imagine all the orders that Airbus and Boeing have lost because they couldn't deliver aircraft quickly enough.

I don't see what off-the shelf has anything to do with customised software.
You can customise interiors, software, LRU's. That's where most of the customisation is anyway.
Airframe-wise, you can offer a few versions of exit and window arrangements to choose from.

Also, even built-to-order inventory costs are happening as we speak.

Now is the opportunity to transition to off-the shelf.
But my guess is that the big brass at A & B are sitting in their lazy armchair and playing golf.


Please provide a list of start up airlines in the last 2 decades that have used brand new aircraft. I can't think of any.

Start-up airlines used USED aircraft... and right now the world is awash with more high quality and low usage aircraft that at any other time.

I do in fact see some start-up airlines coming out of this and challenging the industry. But they will do it with used aircraft.

Given the current situation... they could very likely get a dozen of the same type of aircraft with the same seating. Change the signs and a few accessory fittings while painting the aircraft and they are set. If they wanted to be fancy, change the seat covers.

Likely half the cost of new aircraft. I'm sure that the leasing companies would be glad to talk to any well funded startup... and that the leasing companies will be willing to cut real deals.

Neither Airbus or Boeing can count on a single order from a quick startup.

Have a great day,
 
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Re: The case for more aircraft production cuts

Wed Sep 09, 2020 11:23 pm

There are interesting bits of analysis but there are also missing fundamentals points like the specificities of the aviation industry and the recognition that the global economy went bankrupt, which means everything is possible from now on.

Put yourself in the shoes of the OEMs : do you kill your supply chain today based on anticipations nobody can predict ? can we imagine the cost of bailing out thousands of suppliers ? versus the cost of incentivizing airlines to take deliveries ?
That part is a bit missing in the above analysis. Literally tens of thousands of companies are involved in manufacturing aircraft. And it's not only the US and Europe. Even COMAC would not survive a destabilized aviation supply chain.

Analysis above also do not take into consideration we have now entered into a world where states are governing the economy, and not stock markets. Central banks are creating money for a reason. Money is given to consumers to spend. Money is and will be given to airlines to survive and invest if this is what governments want. You can be certain many governments are working on plans to make their national carriers not only to survive, but also see the crisis as the opportunity to create national champions. The WTO is dead. A lot of jobs are at stake. Entire economies are at stake and airlines play a key role in many economies. Take the example of China : Chinese airlines were forced to fly and stimulate the traffic. It was not airline decisions it was government decision.

Airlines are also adapting like never we would have imagined. We are all LCCs now !, more efficient and exploring new markets. Profits could eventually come back before the traffic, in particular on the short / medium haul markets. There are also some new interesting trends : we see more remote workers taking flights every week now. We see business travelers who can't wait to travel oversea as "everything needs to be rebuilt or renegociated". When a market opens up, the traditional demand is not necessarily there yet, but some new demand is definitely there.

So nobody knows how the traffic will evolve, how airlines revenues will evolve, and how governments will support the industry. So based on that do we expect OEMs to take the decision today to suicide themselves ?
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Re: The case for more aircraft production cuts

Thu Sep 10, 2020 7:31 am

lightsaber wrote:
...walk a major city and look at all the empty storefronts, until the mortgage can be paid, some people won't fly...

Lightsaber

Funny, two years back I argued production is too much. You argued production was mostly for growth. I got a feeling that I'm wrong when airlines started retiring A380s. That was before Covid19.

At today's interest rate it apparently just makes sense to retire last generation planes.
B747-400s are gone, but all B777 beside 300 ER, A340s, low MTOW A330-300s and apparently even A380s seem to be worth replacing if interest is low enough.

Overall economic sentiment is more concerning. Every bubble depends on optimism.
Once Covid19 is defeated helicopter money may or may not bring back growth.
With helicopter money I don't mean cheap credit that just inflates balance sheets. I mean money to be spent by government or consumers.

Without it I assume the bubble is burst.

However my argument can only delay production cuts. Two years from now only age related retirements may be left.
Last edited by Sokes on Thu Sep 10, 2020 7:51 am, edited 1 time in total.
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Re: The case for more aircraft production cuts

Thu Sep 10, 2020 7:44 am

Aither wrote:
Put yourself in the shoes of the OEMs : do you kill your supply chain today based on anticipations nobody can predict ? can we imagine the cost of bailing out thousands of suppliers ? versus the cost of incentivizing airlines to take deliveries ?
...
So nobody knows how the traffic will evolve, how airlines revenues will evolve, and how governments will support the industry. So based on that do we expect OEMs to take the decision today to suicide themselves ?

You ask the right questions.
Why can't the world be a little bit more autistic?
 
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Re: Airbus and Boeing playing chicken with production rates?

Thu Sep 10, 2020 7:48 am

MIflyer12 wrote:
What you don't understand about manufacturing operations or business finance fills books and PhD theses. You don't tie up huge amounts of money and hope somebody eventually shows up to buy something, not even fully standard products.

The existence of the supply chains of Apple and Toyota just mock you.

Maybe.
But if I had to choose between Waterbomber and the Boeing management I choose Waterbomber any day.
Why can't the world be a little bit more autistic?
 
Waterbomber2
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Re: Airbus and Boeing playing chicken with production rates?

Thu Sep 10, 2020 10:55 am

2175301 wrote:
Waterbomber2 wrote:

Example:
Assumptions: Covid hadn't happened. Start-up Paradise Airlines needs 12 x A320neo to launch ASAP.

-Built to order: Place an order with Airbus, first delivery in 2025, then more units in 2026, 2027.> Not an option so buy used for now + place order with Airbus.
-Off-the shelf system: Place an order today, first delivery in December 2020, AOC, registration, crew training, ready for launch next spring.

Inventory cost is dwarfed by lost opportunity cost.


Imagine all the orders that Airbus and Boeing have lost because they couldn't deliver aircraft quickly enough.

I don't see what off-the shelf has anything to do with customised software.
You can customise interiors, software, LRU's. That's where most of the customisation is anyway.
Airframe-wise, you can offer a few versions of exit and window arrangements to choose from.

Also, even built-to-order inventory costs are happening as we speak.

Now is the opportunity to transition to off-the shelf.
But my guess is that the big brass at A & B are sitting in their lazy armchair and playing golf.


Please provide a list of start up airlines in the last 2 decades that have used brand new aircraft. I can't think of any.

Start-up airlines used USED aircraft... and right now the world is awash with more high quality and low usage aircraft that at any other time.

I do in fact see some start-up airlines coming out of this and challenging the industry. But they will do it with used aircraft.

Given the current situation... they could very likely get a dozen of the same type of aircraft with the same seating. Change the signs and a few accessory fittings while painting the aircraft and they are set. If they wanted to be fancy, change the seat covers.

Likely half the cost of new aircraft. I'm sure that the leasing companies would be glad to talk to any well funded startup... and that the leasing companies will be willing to cut real deals.

Neither Airbus or Boeing can count on a single order from a quick startup.

Have a great day,


You are exactly proving my point.
Start-up airlines have seldom been able to start with new aircraft because the wait for new aircraft was too long in the first place.

As for the market being flooded with used aircraft, that's a reality.
But that means that Airbus and Boeing now have the unique opportunity to build an inventory of off-the-shelf aircraft, so that once most used aircraft are taken out of the market, airlines can still get a new aircraft quickly instead of being queued in a backlog that will again take X years to fulfill. Think missed opportunities.
If I were them, I would go a step further and even get involved in the used "Airbus/Boeing Certified" market, buying up young used aircraft of less than 5 years and cash in on resale margins while maintaining aircraft valuations high. This practice is common in the auto industry.
 
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Polot
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Re: Airbus and Boeing playing chicken with production rates?

Thu Sep 10, 2020 11:08 am

Waterbomber2 wrote:
2175301 wrote:
Waterbomber2 wrote:

Example:
Assumptions: Covid hadn't happened. Start-up Paradise Airlines needs 12 x A320neo to launch ASAP.

-Built to order: Place an order with Airbus, first delivery in 2025, then more units in 2026, 2027.> Not an option so buy used for now + place order with Airbus.
-Off-the shelf system: Place an order today, first delivery in December 2020, AOC, registration, crew training, ready for launch next spring.

Inventory cost is dwarfed by lost opportunity cost.


Imagine all the orders that Airbus and Boeing have lost because they couldn't deliver aircraft quickly enough.

I don't see what off-the shelf has anything to do with customised software.
You can customise interiors, software, LRU's. That's where most of the customisation is anyway.
Airframe-wise, you can offer a few versions of exit and window arrangements to choose from.

Also, even built-to-order inventory costs are happening as we speak.

Now is the opportunity to transition to off-the shelf.
But my guess is that the big brass at A & B are sitting in their lazy armchair and playing golf.


Please provide a list of start up airlines in the last 2 decades that have used brand new aircraft. I can't think of any.

Start-up airlines used USED aircraft... and right now the world is awash with more high quality and low usage aircraft that at any other time.

I do in fact see some start-up airlines coming out of this and challenging the industry. But they will do it with used aircraft.

Given the current situation... they could very likely get a dozen of the same type of aircraft with the same seating. Change the signs and a few accessory fittings while painting the aircraft and they are set. If they wanted to be fancy, change the seat covers.

Likely half the cost of new aircraft. I'm sure that the leasing companies would be glad to talk to any well funded startup... and that the leasing companies will be willing to cut real deals.

Neither Airbus or Boeing can count on a single order from a quick startup.

Have a great day,


You are exactly proving my point.
Start-up airlines have seldom been able to start with new aircraft because the wait for new aircraft was too long in the first place.

As for the market being flooded with used aircraft, that's a reality.
But that means that Airbus and Boeing now have the unique opportunity to build an inventory of off-the-shelf aircraft, so that once most used aircraft are taken out of the market, airlines can still get a new aircraft quickly instead of being queued in a backlog that will again take X years to fulfill. Think missed opportunities.
If I were them, I would go a step further and even get involved in the used "Airbus/Boeing Certified" market, buying up young used aircraft of less than 5 years and cash in on resale margins while maintaining aircraft valuations high. This practice is common in the auto industry.


Start ups often start with used because it is cheaper and they usually don’t know when they quite need aircraft- it is very easy to quickly overwhelm yourself with too many aircraft too early.

Startups don’t want new planes months before they have authority to operate commercial ops. That means they are wasting money paying for a paperweight while they have zero revenue coming in.

Your “Boeing/Airbus certified” idea doesn’t make sense. Airplanes are not analogous to cars. Because there are only two vendors, and only say hundreds of users versus 100s of millions of users, Airbus/Boeing fully support all their used planes and will gladly help secondhand customers with making their plane safe and fully operational if necessary. Aircraft maintenance records are much more intensive and available for used planes unlike used cars. Maintenance is followed, and documented, much more rigorously by airlines than a random person with a car. Potential customers don’t need Airbus/Boeing to do an inspection to tell them it is all up to date and fully compliant and airworthy. They can look at the plane’s records. It’s only an issue when the originally operator was incredibly shoddy/corrupt/etc, which are also the planes that Airbus/Boeing would skip in your “certified” idea because they would require the most work and result in the lowest margin (Auto manufacturer would also not certify those cars under their program either for the same reason).
 
astuteman
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Re: Airbus and Boeing playing chicken with production rates?

Thu Sep 10, 2020 3:31 pm

2175301 wrote:
Please provide a list of start up airlines in the last 2 decades that have used brand new aircraft. I can't think of any.


Indigo? Pretty sure they started with an order for 100 new A320's

https://en.wikipedia.org/wiki/IndiGo

IndiGo was founded in 2006 as a private company by Rahul Bhatia of InterGlobe Enterprises and Rakesh Gangwal.[11] InterGlobe had a 51.12% stake in IndiGo and 47.88% was held by Gangwal's Virginia-based company Caelum Investments.[12][13] IndiGo placed a firm order for 100 Airbus A320-200 aircraft in June 2005 with plans to begin operations in mid-2006.[14] IndiGo took delivery of its first aircraft on 28 July 2006


Rgds
 
jeffrey0032j
Posts: 832
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Re: The case for more aircraft production cuts

Thu Sep 10, 2020 3:59 pm

ltbewr wrote:
Maybe time for a revival of the famous 1971 billboard 'Will the last person leaving Seattle turn off the lights'.
https://mynorthwest.com/25015/turn-out- ... billboard/

Seattle has grown a lot more diverse since then, there is Starbucks, Microsoft and Amazon now based in Seattle. Even if all things fail, they still have fellow Renton company Kenworth to fall back on.

Toulouse on the other hand is so Airbus centric that if a 1970 Boeing downturn happened to the industry, its going to hurt Toulouse more than Seattle.

IMO, the Airbus order book needs to be reviewed, it looks bloated given the current situation, they have had very few cancellations as compared to Boeing, but thats not a good thing considering some of their loyal customers are marked as "in doubt" or in financial troubles (eg Air Asia X as per news reports over the past months).

Ironically, the 737 Max production shutdown and cancellations have allowed Boeing a clearer view of the market and allows them to adjust and ramp up to a suitable level instead of having to wind down from a production rate that is too high.
 
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lightsaber
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Re: Airbus and Boeing playing chicken with production rates?

Thu Sep 10, 2020 4:16 pm

Polot wrote:
Waterbomber2 wrote:
2175301 wrote:

Please provide a list of start up airlines in the last 2 decades that have used brand new aircraft. I can't think of any.

Start-up airlines used USED aircraft... and right now the world is awash with more high quality and low usage aircraft that at any other time.

I do in fact see some start-up airlines coming out of this and challenging the industry. But they will do it with used aircraft.

Given the current situation... they could very likely get a dozen of the same type of aircraft with the same seating. Change the signs and a few accessory fittings while painting the aircraft and they are set. If they wanted to be fancy, change the seat covers.

Likely half the cost of new aircraft. I'm sure that the leasing companies would be glad to talk to any well funded startup... and that the leasing companies will be willing to cut real deals.

Neither Airbus or Boeing can count on a single order from a quick startup.

Have a great day,


You are exactly proving my point.
Start-up airlines have seldom been able to start with new aircraft because the wait for new aircraft was too long in the first place.

As for the market being flooded with used aircraft, that's a reality.
But that means that Airbus and Boeing now have the unique opportunity to build an inventory of off-the-shelf aircraft, so that once most used aircraft are taken out of the market, airlines can still get a new aircraft quickly instead of being queued in a backlog that will again take X years to fulfill. Think missed opportunities.
If I were them, I would go a step further and even get involved in the used "Airbus/Boeing Certified" market, buying up young used aircraft of less than 5 years and cash in on resale margins while maintaining aircraft valuations high. This practice is common in the auto industry.


Start ups often start with used because it is cheaper and they usually don’t know when they quite need aircraft- it is very easy to quickly overwhelm yourself with too many aircraft too early.

Startups don’t want new planes months before they have authority to operate commercial ops. That means they are wasting money paying for a paperweight while they have zero revenue coming in.

Your “Boeing/Airbus certified” idea doesn’t make sense. Airplanes are not analogous to cars. Because there are only two vendors, and only say hundreds of users versus 100s of millions of users, Airbus/Boeing fully support all their used planes and will gladly help secondhand customers with making their plane safe and fully operational if necessary. Aircraft maintenance records are much more intensive and available for used planes unlike used cars. Maintenance is followed, and documented, much more rigorously by airlines than a random person with a car. Potential customers don’t need Airbus/Boeing to do an inspection to tell them it is all up to date and fully compliant and airworthy. They can look at the plane’s records. It’s only an issue when the originally operator was incredibly shoddy/corrupt/etc, which are also the planes that Airbus/Boeing would skip in your “certified” idea because they would require the most work and result in the lowest margin (Auto manufacturer would also not certify those cars under their program either for the same reason).

Aircraft records are required to transfer any aircraft.

The only time, as noted, is shody or corrupt recird keeping (counterfeit parts). Only Allegiant has been willing to buy these aircraft and only if the engines were clean (good paper).

The analogy is my Honda. All service, except for tires, has been done at a certified Honda service center. If it didn't have so many miles on it, an easy sale.

Engines are the most critical part. With GE, RR, Pratt, Lufthansa, Delta, American, and others providing the certified care, not a problem.

For what is proposed, Boeing Gold Care is the closest and only one airline, Norwegian, signed up for it.

The issue is there are so many Aircraft for sale.

When buying an aircraft you get the full history. The remaining part life is put in to calculate how much to deduct from the nominal value.

Buying an aircraft is more analogous to buying a home. The buyer performs an inspection (c-check). Anything found is deducted from the escrow from the purchase.

Buyers do not want to pay Boeing or Airbus for inspections, they want to supervise the inspections.

The issue is the aircraft market hasn't found the market clearing price. It cannot until the buyers return in volume. Then there is a whole MRO industry with lower costs that will continue to process used

There are hundreds of aircraft looking for buyers, new and used.

There are so many white tails piling up. I was a child the last time it was this bad, in the 1970s. But this is worse.

It is my opinion production must drop further. Everyone is playing chicken hoping the competitor will cut more.

We lost the peak season of 2020 already.

Stock analysts are making their bearish scenarios bleak:
https://leehamnews.com/2020/09/09/hotr- ... 2020-2025/

Do not celebrate, this is industry wide. Excluding the 747, CRJ, and A380, we are on track to probably see another 2 or 3 commercial aircraft lines halt production. Too many are not at 25+ per year.

With the discounting required on the other side (to compete with the tsunami of used aircraft) this will become more interesting.

Lightsaber
Winter is coming.
 
Waterbomber2
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Re: The case for more aircraft production cuts/playing chicken

Thu Sep 10, 2020 4:30 pm

Flash forward to 2027.

Virus long gone, record traffic numbers.
Backlogs in the thousands but limited output means years to fulfill orders.
Airbus and Boeing challenged by new manufacturers offering new, disruptive technologies into the 2030's.
A & B: "back during Covid, we had government backing, if only we had invested and kept building them, we would have sold them all by now and would have had cash to invest in the next big thing."

We can all remain hang up on the now and on how the stock market is going to crash next week.
Or we can make the best of the situation, convert resources that can't be cut into products that can be sold at a later date. The buildings, machines and people are there and costing money, so might as well produce aircraft and parts therefor.
In accounting terms, you are burning cash anyway, might as well convert that cash burn into inventory, and a at a later date sell that inventory again to convert into cash and equity.
Last edited by Waterbomber2 on Thu Sep 10, 2020 4:33 pm, edited 2 times in total.
 
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lightsaber
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Re: The case for more aircraft production cuts

Thu Sep 10, 2020 4:31 pm

jeffrey0032j wrote:
Toulouse on the other hand is so Airbus centric that if a 1970 Boeing downturn happened to the industry, its going to hurt Toulouse more than Seattle.

IMO, the Airbus order book needs to be reviewed, it looks bloated given the current situation, they have had very few cancellations as compared to Boeing, but thats not a good thing considering some of their loyal customers are marked as "in doubt" or in financial troubles (eg Air Asia X as per news reports over the past months).

Ironically, the 737 Max production shutdown and cancellations have allowed Boeing a clearer view of the market and allows them to adjust and ramp up to a suitable level instead of having to wind down from a production rate that is too high.

Boeing, ironically, has a better position due to restarting from zero, but whoa to the supply chain, including Spirit. But they must either develop more freighters (777x) or cut production more. 787 production must be cut more.

Airbus is in a pickle. Every product line needs a further production cut.

Wichita will be hurt.

The pain at the vendors will make the ramp back up far slower than what the airframers want.

In a way, this slowdown helps Mitsubishi. There is just no RJ demand and I'd bet not for 3 to 5 years.

Embraer needs orders. With so much of the backlog leasors and Azul (who pushed off deliveries), they will be interesting to watch.

While business jets have a slump, it isn't nearly as bad as commercial aircraft. With the PW800, pratt and their vendors get some relief (e.g., same high spool and LPC as PW1500, helping the supply chain). For RR and GE, less commonality (except it really helps the 717).

There needs to be a plan. Certified used is just rearranging deck chairs on the Titanic. The vendors are in trouble. MROs are in trouble. Both Boeing and Airbus have tens of billions usd of inventory piling up. Worse, airlines need cash and aircraft are now worth less than the debt on them (except at Allegiant, Delta, Southwest, and Lufthansa).

I'd love to know more about the leasing industry health.

Lightsaber
Winter is coming.
 
Waterbomber2
Posts: 1343
Joined: Mon Feb 04, 2019 3:44 am

Re: The case for more aircraft production cuts/playing chicken

Thu Sep 10, 2020 4:40 pm

The vendors and OEM's are in trouble, but the OEM's have government backing and record low interests.
Brussels and Washington are not going to let Airbus and Boeing fail even if it takes longer to resolve this crisis.
Larger vendors in the supply chains are getting their own government support.

You can sit on the cash burn, book the losses and cry about it; or you can increase it marginally and convert it into inventory and actually reduce balance sheet losses.
Then, when you sell that inventory, you make profits. If you don't have inventory to sell, you can't make profits on it and you can only look back at Covid as a terrible period and be sad about it.
Keeping that inventory is going to cost you only interests and they are close to zero, so it's utterly idiotic to reduce production rates now, especially on airframes that you know that you will be able to sell someday.

A320's, B787's and A350's should be going at full rate, as allowable while respecting safe distancing and worker safety with respect to Covid.
The other aircraft types, meh, there I can agree that there is room for debate on whether or not they should reduce or stop output. I would say that they should keep churning out A380's and I will probably be wrong (barring projections of exploding travel numbers late into the decade come true), while others will say that the B737Max should be abandoned and they will be wrong to suggest that.

The big problem is that this is temporary in nature.
2-3 years at best.
By 2025 people are going to be flying like never before again, and then a slowing or stoppage in the current crisis will actually result in a bottleneck then and come back to bite OEM's and airlines.

Work hard to prepare for the future or stay home to play with the Playstation and complain about the bad economy.
 
2175301
Posts: 1898
Joined: Wed May 16, 2007 11:19 am

Re: Airbus and Boeing playing chicken with production rates?

Thu Sep 10, 2020 6:10 pm

lightsaber wrote:
Excluding the 747, CRJ, and A380, we are on track to probably see another 2 or 3 commercial aircraft lines halt production.Lightsaber


Overall great post above from which I extracted the quoted statement: You left the 767 off of your list. Its production line is humming along at pre-covid levels and will continue. I believe that the 767 and 747 lines are an advantage for Boeing at this time.

Have a great day,

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